Charter cities don’t work very often, probably because top-down design is antithetical to human nature, trial-and-error needing to be a more gradual and granular process. The stately pleasure-dome may work for Kubla Khan but not so much for you and I. Some academics love placing these planned utopias at the heart of bull sessions, building this city or tearing down that one in their heads. It can be disquieting to listen to, even if the intentions are good. In a new EconTalk episode, host Russ Roberts and NYU economist Paul Romer had such a talk. Two excerpts follow.

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Paul Romer:

You can think of a charter city as a kind of a zone, but a big one, big enough to encompass an entire city. One of the questions that you confront when you propose new zones is: What fraction of existing zones have succeeded, in any sense? Most zones fail. And so we have to ask, Why is that? It could be that starting a zone is kind of like starting a startup firm: even if you do it right there’s a high probability that it won’t succeed. But you keep doing it because the ones that do succeed are worth enough. But I think there’s another problem with zones around the world, which is that they fail in ways that you could have predicted when you started them, because they took this form that I’m calling a ‘concession zone.’ So, what’s the difference? A concession zone is a zone where you do something differently as a kind of a concession, a gift to some favored party. So, you give a tax holiday or some other kind of favored treatment to people who get those favors through mechanisms that are pretty easy to forecast. The test of whether something is a reform, or reform zone, is: Do you want it to extend to the rest of the country, and, do you want it to last forever? So, for example, a tax holiday, which is just for firms in a zone and just for a finite amount of time is clearly a concession. There’s no sense that this is something you’d want to extend to every firm in the country and extend forever, because typically they have no plan for how they would recover the tax revenue that they’d give up that way. So the thing to ask in small or big zones all over the world, is: Are governments using these to try out reforms that they want to spread throughout the rest of the country and have last forever, or are they just using them to give some concessions? And if they are to give some concessions, the probability that it won’t do anything good for the country, the ex ante probability, is very low.

Russ Roberts: 

Now, the way I originally understood the idea of a charter city is you have a system–you have a country, excuse me–where the governance of the country is failing in some dimension and it’s very difficult under that scenario, under that situation, for the government to credibly commit to reforming itself. And what a charter city would do is import essentially the institutions of a different country which they are more likely and more credibly able to promise about property rights, the rule of law, say, crime. And in this way you could encourage foreign investment, or any kind of investment, in that city, that you wouldn’t be able to attract if you were stuck under the governance of the host country. That idea is only one kind of charter city or one kind of reform, correct? Because you’re really talking about something more like a laboratory where trial and error could be used to assess effectiveness. 

Paul Romer: 

Yeah. I think the general concept here is that you use the decision to opt in to a new geographic area as an opportunity to implement reforms of any sort, any type of reform, that might be controversial if you tried to implement it on a group of people who were already in a particular location. Think of it as a way to avoid–is to try something new without any coercion. Try something new where the people who live under this new regime choose voluntarily to be part of that. And the thing that you try to do differently or try to do new can take many different forms; and different countries at different stages of development might try many different kinds of reforms or just innovations in their systems of rules. So, the one you were describing where the reform you want to undertake is one where you import government services from outside, I think that’s in practice a very important possible type of reform for poor countries. But the more general concept would allow many different types of reforms. You can even consider a new reform zone/city in the United States where you might do something like say, well, every vehicle in this city has to have autonomous control, instead of driver control. Or you might say, we’re going to ban any use of gasoline and diesel and just rely on natural gas and build the infrastructure for that. So, there’s things you can try in the new setting that would be very difficult from a technical point of view and a political point of view to try in an existing setting; and we might learn a lot that generalizes from running an experiment like that.

Russ Roberts: 

Well, what’s exhilarating about it is it allows the choice of a city to be similar to my choice of, say, music player. Right? Nobody sticks me with a music player. I go out and choose the one I want. I choose the phone I want. I choose the kind of house I want to live in, and I choose the books I want to read. I can choose the government I want but the costs of that choice are very different, right? 

Paul Romer: 

Yeah.

Russ Roberts: 

Because I can move.

Paul Romer: 

Yeah. When I teach about cities these days I tell students to think of cities as intermediate entities between the nation and a business. So, I don’t think a city is identical to a business. And I think there are some city functions that we couldn’t privatize to a corporate governance accountability kind of model. Policing is the test case on this. I think very few people would actually voluntarily choose to go someplace where there’s a police force and a judicial system that could lock you up that’s run by a corporate entity. And I think that doesn’t change whether it’s a nonprofit or a for-profit corporate entity. So, what we’re doing is using some of the same mechanisms for cities, like choice by consumers or users–we’re using choice, but it’s on an entity which is still likely to have some form of government that’s subject to some form of political accountability. And what this reform-zone idea does is more fully exploit the possibilities of this thing that lies between the nation and the business.•

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Russ Roberts:

So, if you say to me, ‘Hey, we’re starting this new town. It’s fabulous. It’s going to have driverless–this is the town that me and 17 other people would want to live in. It’s got driverless cars, natural gas fuel, no minimum wage laws–whole range of, say, attractive things. So, it’s clean air; it’s fabulous. But they you say: ‘But where is it?’ ‘Well, it’s in the middle of Nebraska.’ ‘But I don’t want to live in the middle of Nebraska.’ So in a way, all the good spots have been taken in the United States. That’s why there are cities there already. So, one of the challenges I think of thinking about Shenzhen and India and China, where their population is growing so fast: It’s going to be very appealing sometimes to leave a city for a new place. It’s a little more challenging in a country like the United States–imagine where this magical city of Oz would be.

Paul Romer:

Yeah. Well, I think we have to use a little bit of imagination. This is mostly being facetious, but one thing I tell people, having visited Long Beach, California just once, is that we should think about Long Beach as a tear down. You know, it’s a really ugly city, but in a beautiful location.

Russ Roberts:

Uuuh, uhhh, yeah–

Paul Romer:

We ought to just tell them to tear down the whole city. And then if you build like a Manhattan in Long Beach–if you could get like Manhattan densities and street activity and excitement, with California weather, man, that would be a successful real estate project.•