Today’s guest, Patri Friedman, is the founder of Pronomos Capital, the Seasteading Institute, and is a veteran in the charter cities and competitive governance spaces. We kick off the show by learning more about Pronomos Capital, and why Patri decided to start a venture fund dedicated to charter cities. With his Silicon Valley experience, Patri brings a unique approach to charter city thinking.
From there, we discuss some of the factors that have led to the charter city movement gaining traction, including shifts in government and investor mindsets. After this, we dive into the Seasteading Institute and what spurred Patri to establish the organization. We then delve into founding a charter city. While there are capital constraints, Patri believes that the shortage of capable founders is one of the biggest obstacles in the space. Founders need to have a unique skill set, where they are visionaries along with some on-the-ground, embedded local knowledge.
Next, we look at how charter cities overlap with and diverge from Western governance models and how they can apply lessons as best practice. We round the show off by discussing some of the opportunities that COVID-19 has created in the charter cities space, what’s in store for charter cities in the next five years, and what Patri’s most excited about. Links mentioned in today’s episode can be found below the transcript.
Transcript (edited for clarity):
Mark: Hello and welcome to the Charter Cities Podcast. I’m your host, Mark Lutter, the founder and executive director of the Charter Cities Institute. On the Charter Cities Podcast, we illuminate the various aspects of building a charter city from governance to urban planning, politics to finance. We hope listeners to the Charter Cities Podcast will come away with a deep understanding of Charter Cities as well as the steps necessary to build them. You can subscribe and learn more about charter cities at chartercitiesinstitute.org. Follow us on social media, @CCIdotCity on Twitter and Charter Cities Institute on Facebook. Thank you for listening.
Today I’m joined by Patri Friedman. He is the founder and general partner at Pronomos Capital, a venture capital firm that does early stage investments in charter cities. He’s also the founder of the Seasteading Institute. He’s a veteran of the charter cities and competitive governance space. We chat about the history of seasteading, the history of competitive governance, what to expect from charter cities in the future, and why this is such an exciting time to be in the charter cities movement.
Welcome to the show, Patri.
Patri: Hey, Mark. Thanks for having me.
Mark: To start, talk a little bit about Pronomos. What is Pronomos and what do you do?
Patri: Sure. Pronomos Capital is the first venture fund dedicated to charter cities. What we do is we invest in early stage projects that are aiming to get land, to rezone that land with different rules and institutions that will drive economic growth, and then capture some of the economic growth they create via taxes or lease prices.
Mark: Cool. So why venture capital? You’re getting land and doing a little bit of real estate, and venture capital tends to be associated with tech where it’s a zero additional marginal cost business. Why is the venture capital model applicable to charter cities?
Patri: A couple of things. I think that what we’re doing is somewhere in between venture capital and real estate and that balance really shifts as the investment matures. At the very beginning, if we’re investing in just a team of people who maybe have some connections with a country, interest from the government, and nothing else, it really is a high-risk early stage project that we think is a somewhat similar return profile to venture. But if these projects succeed as they get approval, or they get land and they build, and once they get to be an operating project, it looks much more like high-growth real estate.
At this early stage, we think that the venture approach makes the most sense, but the projects will quickly raise financing from normal development banks and family offices that want real estate holdings. There is one sense in which I think there’s some software connection or zero marginal cost, which is part of my whole lens, is viewing governance from the paradigm of software entrepreneurship. The legal system in a sense is like a low marginal cost product.
If you create a good, simplified set of rules and institutions and tech for arbitrating decisions and then roll that out someplace and show that you can govern effectively and give people better jobs and create GDP, you can then, with permission of that government or other countries, roll that platform out to more places at relatively low marginal cost.
Part of what I’m trying to get people to change in their thinking is people viewing government through these old models, whether of morality, or representing the will of the people, or some kind of national identity, and get them to think of it as a product. As a product, because the laws that apply to a given region, that’s not hard infrastructure that takes a long time to build. That’s just stroke of a pen. We can just agree to have different laws. I think there is this very software-like nature to it that people miss.
Mark: Sure. There’s two interesting points that I want to tease out there, one regarding governance, viewing it through a lens of a product. Let’s focus on that first. Actually, I think I have just a slight disagreement with you on that. I think it’s good on some margin to focus on governance as a product. But if you look at the country in the world that most views it like a product, which is probably Dubai, there’s basically no social safety net. If you lose your house or if you try to be a street musician or whatever, they’ll just put you on a plane and ship you home.
This works in a limited sense if there’s one Dubai, or maybe five Dubais, but if the whole world is Dubais, then there’s probably a class of people who are going to see a very serious downside from the widespread Dubais.
If you look at the evolution of social programs, before the early 20th century, they tended to be private. People would form lodges and mutual insurance companies, etc., to be able to take care of people if they were down on their luck or something happened. Then there are two narratives, one being you have the state come in and provide you insurance. So, you didn’t need these social insurance programs anymore.
The libertarian narrative is that the state came in and offer this free service. Nobody wanted to pay for it, and this was a successful service that would have continued. The other, slightly more statist, narrative is that modern accounting allowed for the identification of the winners and the losers from these mutual insurance programs much more easily. The mutual insurance programs work when you’re unable to identify who the unproductive people are. But as soon as you’re able to identify who the unproductive people are, they basically fall through the cracks.
I’m inclined to think it’s a little bit more of that statist explanation than the libertarian explanation. To me, my general worry as a second order effect for the governance as a service model, governance as a product model, is it leads to a lot of these people potentially falling through the cracks.
Patri: I think that’s a great point. As a sort of a complete product, I look more to Singapore than Dubai. And I think in Singapore they do treat governance as a product, but have well-constructed social safety nets. To me, what it partly exemplifies is that it matters a lot more if programs are well-designed and well-operated than what they are. Even though I might prefer personally, for myself, a society with fewer safety nets, that in societies with well-run safety nets it costs so little that I don’t have a problem with it. It really becomes an issue when they’re run poorly.
In the city as a product model, if a social safety net is demanded, then the city should have it. I just had a conversation with someone this week about designing insurance programs for social safety nets. You could have a city choose that when you come to the city, you begin paying into an insurance program. It’s not privately run. It’s run by the city, but it’s not taking other funds. You’re charging people an annual safety net insurance. I think a few countries do this, and then you’re paying for them out of the program and then you get that kind of social pressure of, “Look, if somebody is not working, we’re kind of all paying for it.” If they genuinely can’t work, say, they’re disabled or something, then we all understand. That was the deal, but there’s that social pressure if people are shirking. I think it’s addressable with well-designed institutions.
Mark: Yeah, I certainly hope so. To me, even if it’s not 100 percent addressable, any system is going to have some people that fall through the cracks. Just that enormous upside of charter cities is that it sort of pays for itself. People falling through cracks when per capita GDP is $50,000 a year is much better than people falling through cracks when per capita GDP is around $1,000.
Patri: That’s right. I think there’s this nirvana fallacy that people have where they’re like, “Is it perfect for everyone?” And like nothing is ever perfect for everyone and charter cities look to be such a powerful tool for development for raising people’s incomes, with China as the kind of incredible example of that. I think it’s really harmful for people to worry that a few people won’t get helped when they’re helping so many people.
Mark: Yeah. I want to touch on that point again, but before going into that, I want to go back to another point. You argued that the governance as a service model is a little bit closer to software as far as zero marginal cost per additional user. But I actually want to make a slightly stronger argument in that case. I tend to think the city is almost zero-marginal cost per additional user. What’s the cost of putting one more person in Manhattan, riding on the Metro? The Metro can handle an increased capacity of one. Maybe the roads are too full of cars, but the sidewalk can handle an increased capacity of one. Obviously that person needs housing, but that housing can be privately supplied. It’s not necessarily a cost of the city.
So, if you think about a city, there is this big upfront fixed cost for the basic infrastructure and then the marginal cost of an additional user is effectively zero until you hit or get close to carrying capacity.
Patri: Or even if it is not zero, if you look at Jeffrey West’s work, like we know that there’s this cubic economy of scale in cities because you’re building in 3D. And so, there is this clear economy of scale where the bigger the city gets, the cheaper each additional person is. Even if it’s not zero, we have very hard evidence that it diminishes with scale and that’s more software-like.
Mark: Let’s go back to that point you made in the previous comment. One of the questions that is common for venture capitalists in software companies is, “Why now?” With charter cities, there was Paul Romer about 11 years ago. I think seasteading was 12 years ago. If you go back even further, you had Republic of Minerva, Operation Atlantis. The sort of crazy libertarian projects in the late 60s or early 70s, and obviously free cities go back for almost all of human history.
I sometimes struggle with this question myself. It’s like, “Okay. Look, maybe Paul Romer has a little bit more luck. He’s a little bit more politically adept and things take off quicker. Maybe that’s even possible a few years earlier than that.” The movement is just sort of starting to build. I sometimes think like, “Shit! I’m too late. A lot of people urbanized over the last decade and we could have helped.” How do you think about the timing of that?
Patri: That’s a great question and is something I’ve been meaning to write up research on, is, “Why now?” My view of this is I’ve been working on this stuff for about 20 years, since 2000, and I know that the level of interest has increased greatly. I have some theories about why, but I’m not really sure. But what I know is that when I started working in 2000, countries did not really get or agree with this idea of governance as a software stack.
They looked to Dubai as an exception. That China was partway through increasing GDP, but it hadn’t really been proven yet. They said, “Oh! Dubai and Hong Kong are exceptions,” and they were still trying older methods of economic development. And this idea was relegated to these sort of crazy libertarian projects. People were literally trying to fund coups in Pacific island nations and we had all these fascinating things happening. That was a part of why I started working on seasteading, was that countries were just not interested in this method of development for improving their governance. That’s something that I think that I helped change in the entrepreneur community and that various global changes have just changed governments’ interest in it.
I think seeing that other methods of economic development are failing and that a lot of classic aid and development approaches just don’t work, and then kind of growing understanding. I think Paul Romer and his Nobel have helped a lot with this, growing understanding of the importance of institutions and economic growth and a hunger for new models.
I think also that increased competition as the number of countries continues to grow, the small countries are really looking for ways to innovate. I think there’s a piece of it with cryptocurrency where we’re seeing these competing private alternatives to something traditionally done by the nation state. Silicon Valley’s success and the rise of entrepreneurship. There’s been an incredible change, and I’d say Honduras was a watershed moment when they created the ZEDE program in 2010. It’s taken them a while to implement that program, but they were the first country that said, “Hey, we want to do something like this. We want to make a program for upgrading governance in limited regions.”
I started working on the Pronomos concept in late 2017. Started fundraising in August 2018. Literally, just over that 2-1/2 years that I’ve been working on Pronomos, there’s been a huge, huge change in the space. Normal VCs laugh at me because I’m like, “There was only one or two projects 2-1/2 years ago, but there were some months last year when I got a new company pitch a week.” And VCs say they get a hundred a day, so one a week just seems ridiculous. But for me having seen it go from absolutely nothing—
Mark: It’s a new city! It’s a new city!
Patri: Yeah! It’s a new city. You don’t need that many new cities. Not as many SaaS start ups. I’ve seen it go from absolutely nothing to now, I’ve probably seen maybe 15 to 30 pitches for people who are actually working on new city projects in the last year and a half. It’s an incredible change and there’s tons of people who are working and the government interest had gone up a lot. We’re talking to a number of countries around the world. We get regular inquiries. I mean, our main limitation is great founders right now, and just with my bandwidth, and a little bit with capital. But our limitation is not countries, and it’s a ridiculous place to be in compared to where we were three, five years ago.
Seasteading had to work for years to get an MOU with French Polynesia. That was one indication of a country willing to work on this kind of program. I don’t know, five years of going round the world pitching countries, and now I just get randomly forwarded contacts from interested countries all the time. It’s really amazing that that’s not the barrier. It falls on all of us in this community to start executing well on some of the best opportunities to prove the concept to show that we can lift people out of poverty and to really professionalize the space. That’s why I love what you’re doing with CCI. I think space is absolutely at a point where it needs a leader like you, an organization like this, to help professionalize it and formalize it and build relationships with the development banks and with foundations and all of that. It’s a really exciting time.
I could have said all of that in January, and now with the changes that are happening in the world in 2020 with coronavirus, I think that already I was seeing the kind of hockey stick growth of interest and now it’s just going crazy. It’s going vertical. Because people can see with coronavirus that quality of governance matters and the people who are saying, “Hey, I think a lot of Western countries are just kind of coasting. They’re not run very well. There are better run countries.” We were kind of considered fringe.
And now people are like, “Holy crap! We can look at the numbers and see that this is real. Governance quality differs. Some countries are run better than others, and it matters.” It affects whether your economy is sent into depression. It affects whether people are living and dying. It matters. There’s just more interest than ever in ways of upgrading governance, and that’s what charter cities are, the most promising way of upgrading governance.
Mark: Thank you for the kind words about CCI. I think you touched on a number of interesting points that I think we should tease out individually, from Honduras, to how the space has changed, to the future of this space, the projects that you’re investing in, what you see is most exciting, and the binding constraints.
Let’s break them down. First, one of the points you brought up as to “Why now?” was ideology, and I’m actually somewhat skeptical about ideology as a cause of things. I think that ideology tends to be a cause on one margin, but then on another margin there is some external factor that leads to specific ideologies in specific times. Just to take libertarianism for example. It’s a sort of bastardized version of classical liberalism that grew up in the immediate postwar era to take some of the more strident elements of classical liberalism and combine them with this virulent reaction to communism that was influenced by Ayn Rand. Obviously, the libertarian ideology does have this broader influence, but at the same time, it’s not something that would have arisen in 12th century Europe, for example.
Patri: I want to separate out the different stakeholders. I would say that there’s two places that have really changed. One of them is entrepreneurs and investors, and then the other is countries. With countries, I think it’s not just ideology so much as accumulated evidence from economists that institutions matter and accumulated frustration with traditional methods of development. There, I don’t think it’s ideologically driven at all. Plus, kind of seeing tech progress, and small countries especially, getting hungry for ways of improving themselves.
The place where there is something closer to ideology, but I would say it’s still practical, is that entrepreneurs and investors – I mean, when I started this in 2000, the only association of innovative governance and new city states was with these old crazy projects of the past. People didn’t take it seriously as something that could be done or was possible. On the countryside, I haven’t really contributed at all.
But I think on the Silicon Valley side, I’ve been out there for 15 years talking about these ideas of startup countries and governance as a product, and there’s just the number of competent entrepreneurs and investors, the amount of wealth and talent that now sees this as like, “Yeah, obviously. Of course, we’re going to start new private cities. We’re going to make cities as products. We’re going to make governance a product.” Of course, it’s just completely different, and that means founders and it means capital. I don’t know if you want to call it ideology. To me, it’s not about philosophy. It’s just people becoming convinced that this is like a practical way to make the world more like they are used to operating. More like software with more competition.
Mark: Sure. I don’t mean ideology as a bad thing per se. I just mean it as ideas. I have a fairly mechanistic, deterministic view of the world. Ideas are something that people develop in response to their broader environment, and broadly this can be for immediate on the ground practical application like engineering, but also higher-level sort of social philosophy that I still think is, on some margin, instantiated within the specific context that they live at and space and time.
Patri: My ideas on the space are just a Silicon Valley software engineer applying that lens, right? It’s not like I came up with these things in a void. It was absolutely just that.
Mark: Cool. Let’s run through the history a little bit more. You started talking about this in 2000. 2008, you started the Seasteading Institute. What is that process? You described a little bit about, “Okay, let’s stop trying to do coups and start something that’s a little bit more sane,” and countries don’t want it, so let’s go on the ocean. What was the step by step process? Then at some point, you left Seasteading to go try to do a city, I think Future Cities Inc., in Honduras.
Patri: I started in about 2000. There’s the classic entrepreneur story of, “I wanted this product for myself, and it didn’t exist and I tried to figure out why and how to make it.” Now, it’s going to take decades because that product is a well-run city state, but that’s fine. I was kind of frustrated with the US. I didn’t see much potential for a political change because I had a minority view, and this is a democracy, and I was familiar with public choice arguments, which I think are just incredibly, incredibly underused. The vast majority of all political rhetoric that I see, including libertarians and people who are economically literate, just kind of doesn’t make sense in the public choice lens.
I started looking, “Okay. Well, maybe I should live in a different country,” and I began looking at other countries, researching them and kind of like, “No, actually there’s not really a country that’s run in the way that I want that’s competent, socially liberal, economically conservative. I was like, “Well, this is weird. Why?”
I think another part of the history is being interested in alternative governance systems. My dad is this theorist of market anarchism, which is an idea of how you could completely privatize both the law and institutions, and he’s an economic and legal scholar who researches what’s been done in other countries and draws inspiration from kind of past historical legal systems. And so, I was like, “Okay. Well, my dad had this really interesting theory that tens of thousands of people would love to try. Why can’t we try it?”
These questions of, “Why isn’t there a country that I would want to live in? Why are new political systems not able to be tried?” I just explored those and that led me to this crazy history of nationfounding attempts and floating cities and I just felt like, “Okay. These things have been done really poorly and unprofessionally, but there’s something here to this idea that if we –” and again, this is the Silicon Valley lens coming in. Well, of course, government doesn’t work very well. There’ are no startups. There’re no startups and it’s even very hard just to switch your provider. It’s hard to switch from one country to another. When it’s hard to switch and you don’t have startups, then you get these monopolies that exploit their citizens.
In order to change that, we need to find a way to either make it easier for people to switch countries. Make it easier for people to start countries. Make it easier for countries to copy laws and institutions from each other. Since countries on land weren’t willing to do anything at that time, I started looking at the ocean and researching what are practical ways.
I wrote a book online, Seasteading: A Practical Guide to Homesteading the High Seas, where I looked at everything including infrastructure, law of the sea, politics, etc. It’s kind of frustrating that people still think that my viewpoint is just, “You can just go to the high seas. There are no laws there. You can do whatever you want” when I wrote a book saying that was not true in 2003, and I’ve been saying it ever since. But people hear what they want to hear. There is no high seas, and operating in the ocean, you need to have permission of a government to flag you.
Worked on that for a while. Got funding from Peter Thiel to start the Seasteading Institute and we did a bunch of research for several years and build a community. Then in 2010, Honduras changed their constitution to create the ZEDE program. In 2011, I actually at the time was working on a startup to do a medical tourism cruise ship as a potential first seasteading project, which is something that I think is still doable and viable and is maybe better than ever today. If somebody wants to start that business, talk to me.
Then the ZEDE program came out and we were alike, “Huh! This is really interesting. If a country is willing to create a program like this and allow for copying governance best practices to these small regions, maybe that’s worth trying as well. We started a company and had the first MOU with Honduras in 2011, 2012. But after working with them for about a year, it was kind of clear that it was going to take a long time for the program to get established.
Their Supreme Court ruled it unconstitutional and we are just saying that in terms of kind of staff and budget, we had assumed when we came in that the hard part would be the political will and changing their constitution, and maybe that’s the hardest part, but it’s still to do a first of its kind program like this, it takes a lot of work. And we were busy people, venture-backed, and it just didn’t make sense for us to wait five years.
We wound up the company. Gave the money back to investors, and more recently, the program has gotten operational and some interesting things are coming out of it. I then went back to Google for a while for personal reasons where I’d had the earlier part of my career from 2013 until 2019, last year. And during that period, crypto happened and the set of investors and entrepreneurs grew a lot larger. The ideas went out there. That social and intellectual capital compounded.
When I was kind of looking to do something ambitious again in 2017, it looked like it was really time. I started talking to investors and entrepreneurs in the space, and as I worked on it, the space happened to take off at the same time. Because one of my big worries is, “What if I’m still too early?” Because with seasteading, I think building on the ocean is really difficult, but it does have certain benefits. I think that there is a subset of the seasteading business that could be done now, especially on cruise ships. I think that’s viable. But in 2011 in Honduras, we were just way early. I was worried that we were too early this time, but I think it’s really turning out to be just the right time.
Mark: Sure. So, you’ve mentioned previously the binding constraint is good founders, partially funding, but countries seem to want it. What does that mean? Explain a little bit more.
Patri: Yeah. If you’re wanting to speed things up or have a process, it matters what the binding constraint is. What we’re saying is that we currently have a number of countries that are interested that we are not pursuing, because we don’t have the management bandwidth and the founding teams for them.
Capital-wise, we did 9 million at first close and we’re probably going to end up at 15 to 20 million when we do our second close at the end of this year. It’s a tiny, minuscule amount for building new cities, and one of the common questions we get is, “Isn’t that very small?” That’s where we get back to the seed stage venture.
We’re funding teams when their expenses are mainly just their living expenses, making fundraising decks, flights, fairly modest expenses, when they’re not buying land and building yet. It’s relatively cheap. Where a few hundred thousand dollars of a pre-seed check, maybe $1 million for really large checks for us, to seed a later stage company. That’s enough to work for a couple of years taking something from just a concept with interest from a government to having legislation passed, maybe having land options or land that’s contributed by the government or other stakeholders, to having your potential anchor tenants. Just everything that is to get a project shovel-ready. It doesn’t take that much capital. Immediate capital is not a limitation.
I do have some concerns about there being a series B crunch in terms of the first build. I think that there’s plausible venture financing for a first build. Once you get to operating and profitable, where you’re raising hundreds of millions from traditional real estate financing, there’s lots of that money available. But I think that there is a gap where you’re raising 25 million to go from an operating prototype in a zone to your first substantial infrastructure build to enable it to scale, where it’s not yet proven enough for real estate, but it’s kind of more than our angel community can contribute. We’ll cross that bridge when we come to it. But that’s the issue I see in capital.
It’s really founders, and that’s a great place to be, because it’s kind of standard in the tech world, because good founders are so critical to the success of a project and so rare. You have to have people with kind of a weird talent stack, as Scott Adams would call it, and be at the right place in their lives to work really hard to advance something and understand it well. Be passionate about it. In the case of charter cities, I think that local connections to a country really matter. Generally, in tech, great founders are the bottleneck, and I think it’s incredible that charter cities are at the point in 2020 where that’s the case for us.
Mark: I think that’s accurate. Particularly, I think the challenge you raised about the value of local connections. Because charter cities, for example, when Paul Romer proposed them, he had a high-income country, for example, Canada, acting as the guarantor on a low-income country, for example, Honduras. He was accused of colonialism quite frequently. Us at the Charter Cities Institute frequently get that question, even though we’re proposing public-private partnerships, even though all the projects that we are working with have the founders being local, we still get that criticism.
So, I think that is definitely some of the challenge, or least in SF. You can have somebody who’s 22 move to SF, do three years that Uber, Google, or some startup and they’d be like, “Okay. This is cool if I want to go build my own thing.” Well, with charter cities, you don’t really have that dynamic because the community isn’t as concentrated. There is a community, but just because there’s no in-person stuff, it’s a little bit less strong than if there were constant in-person meetings combined with the fact that in some of the areas that have maybe the most potential for charter cities, they aren’t as well-connected as other areas, because the income is so much lower. There isn’t as good internet penetration. Actually, being able to get that can be tricky.
Patri: Yeah, absolutely. That’s where people like your friend Mwyia are so exceptional, that finding those people who have the founder DNA, but local connections. I think that’s absolutely a critical limited resource. I think that that’s something that organizations like ours can do. As we spread the message and create the educational materials, sample agreements, and handbooks so that people can get up to speed on this concept, we’ll enable those people who are in a country who kind of have that founder DNA to tap into.
People are always asking me, “What do we look for in founders?” and I view it as this combination of what are the things that any Silicon Valley VC firm looks for and then what are the things unique to a charter city? I think we’ve nailed charter city. It’s the local connections and the real estate aspect of the project. Then for the startup side, it’s just like all of the generic start up knowledge about financing an approach and how you build a company culture, all of that. The nice thing is that that stuff super well documented. So, there’s just a ton of material that people can use to get themselves up to speed. A lot of it is really suitable for remote learning and remote work.
I would encourage people who are interested in getting into this space to maybe– We can’t say this anymore. Maybe there’s enough charter city projects and they should just go straight to that. But you can also kind of dabble in standard tech entrepreneurship, start a software company. Join a small software company and learn entrepreneurship from that side.
Mark: I think that’s right. Let me get a little bit more specific, because what I see isn’t founders as the binding constraint. I think that’s part of it, but what I would say my unique skillset is, is having a decent understanding of the step-by-step process by which to start a city. There are a number of very talented founders, but there isn’t a roadmap for the step-by-step process. That causes people to have a lot of indecision and to not know the magnitude of the things that they’re taking.
If you think about SF, SF has its entire startup ecosystem. You can go drop out of MIT, Harvard, whatever, and you can go raise funding, and you will immediately be plugged into this funding network, mentorship network. They can help you hire a COO who can be the parent in the company until you turn 30 and learn how to think for yourself and gain a little bit of maturity.
And the two, there’s also a relatively clearly-defined roadmap. Maybe you go through Y Combinator, but there are people who have done this who are a step or two beyond you. If you’re at series A and you’re running into this problem, like, “Oh, hired the wrong person. What do I do?” Then you have a friend who’s in series B or maybe series C and they just went through that probably a year ago or maybe three years ago and you’re like, “Hey, how’d you solve this?” It’s not really the heroic entrepreneur founder, but it is this broader conversation, broader understanding and capacity in the community, if that makes sense.
Patri: Yeah, I completely agree. I’m out there talking to a lot of would-be founders and answering a lot of the same questions over and over. I totally agree, that I think this is work that you and I have cut out for us working with this community of founders that we know and the people who have gotten a little bit further along in this process. And, look, we’re early enough. There are not successes that we can do that pre-seed-through-IPO roadmap, but we do know enough that I think we can do the early stage, the first few years roadmap.
Forming founder communities and educating people and bringing them up to speed so that knowledge is not the barrier is one of the really important tasks, and it’s just hard for us. It’s like we are trying to set up a VC fund doing all that compliance and operations, doing our first deals, trying to figure out, “What does due diligence on a charter city mean and how does it differ from a normal company?” For me, personally, it’s been really hard for me to make the time to work on these broader educational materials. But I think those are becoming more and more of a bottleneck, as you say.
Mark: Yeah, and that’s what we’re trying to do very much. We have resource guides that are coming out later this month, model legislation, model charter, risk mitigation guide, as well as an introduction to charter cities, as least as we are thinking about it. And we are the Charter Cities Institute, so I kind of want to claim that this is what a charter city is, but everybody has slightly different understandings. I don’t want to argue that ours is the only model. Then we’re also working on, for example, a governance handbook, which will be a step-by-step guide to creating a new governance system from scratch focusing on lower or lower middle-income countries, which might not be applicable if you’re targeting a higher income country or if you’re targeting something like medical tourism.
Then we’re coming up with a draft master plan. There’s a guy named Ebenezer Howard who came out with this book called Garden Cities in 1898, where he has a master plan for a city, and also the financial model, and he gets two of them built. And they’re not actually successful as urban development. All urbanists hate them, but that’s not important. The important point is this is an effective model of social change. The idea is 20,000 acres, which is about 30% bigger than Manhattan. 1 million people in 30 years with $1500 annual income to start, which is approximately like Nigeria per capita, Kenya per capita, and Zambia per capita. Also, building out a financial model with that, and we should publish that probably in about a year or so to really start, “This is a roadmap. I’m not sure it’s the roadmap, but this is a roadmap.”
As well as obviously, and you’re doing this too, but working with the groups on the ground to build out the milestones and make sure that those milestones are properly communicated and shared so there is this learning process for developing a clear roadmap, because I think we have this one shot over the next 30 or 80 years. This is basically the final urbanization in human history.
You’ve seen a number of urbanizations in history, but assuming we don’t throw ourselves back to the Stone Age, once we get urbanized, we are going to remain approximately at the same level of urbanization. The thing is that all of these things are very path-dependent. Once it happens, it’s going to be very hard to make changes after the fact. We need to put the structures in place and we need to do it very quickly and we need a lot of these projects, because otherwise people are moving to places like Lagos, for example, which has a huge amount of slums. There’s a bunch of creativity and a bunch of very smart people. But as a city, it’s just dysfunctional. I think because of that, figuring out how scale up and how to allow for multiple projects at the same time to really get traction is key.
Patri: Yeah, definitely. And I’m so glad you’re doing that work. I suppose one aspect of it that I want to stress, because it is true, it is difficult for people when there isn’t a roadmap and there isn’t– Even if you’re innovating in tech there’s not a clear path to innovate within. But there is a sense in which that makes it really fun. You get to invent things yourself and you have to figure them out yourself. I think for the right kind of on entrepreneurial personality, that’s like a plus and not a minus. Keep charter cities fun.
Mark: I agree, and I think the first movers end up getting social rewards as well as probably financial rewards in a lot of respects if they are able to be successful.
Patri: Yeah, definitely.
Mark: What will the future industrial organization of charter cities look like?
Patri: That’s kind of TBD by the founders. We are in that position where we have guesses about what the right way to organize a charter city is and what the right forms of governance are. Things like using business-friendly, streamlined common law. We’re open to be pitched on whatever. Again, I think what’s important for us as a fund, we work across many projects, but we want those projects to be unique and to make a lot of these decisions themselves.
Mark: The way I think about this, there are two layers, one of them being geographic. My general impression is the geography of charter cities, at least in terms of the companies, is probably going to be somewhat analogous to restaurants where you probably have one or two charter cities companies that are global and then you’ll have a handful of regional ones and then you probably have a handful of one-offs.
The other type of industrial organization is, “How bundled are the charter cities?” Do the infrastructure and the real estate and the governance stack, or then do you cut the governance stack and have a meta-governance stack provider that works with a lot of different charter cities? My guess is that it would probably start out fully bundled just because nobody’s really fully developed an effective governance stack yet. There are some teams that I think are making good strides to it, but it’s still relatively untested.
If you’re planning the city, there are a lot of urban planning firms you can go to help, but there is no governance firm you can go to, to do that. Though the Charter Cities Institute is kind of doing that. If you want, call us. But my guess is that over time, and you saw this with hotels, you have the management company and the actual real estate end up being split.
Patri: It’s undetermined, but I think that the economics of the different components of the bundle will really come into play. I think there are things like city administration software or arbitration software. It’s got software economics, and so there’s going to be some kind of dynamic monopoly where many people plug their rules into the same arbitration platform or the same city administration platform. And there’s other things like actually operating a city in a relatively unique region where the city is truly customized for that region, like you said, where that’s going to be a one-off. And there’s going to be a lot of stuff that’s in between.
I think on the investment side, it’s going to make sense just as there are large investment funds today that invest in hotels all over the world and operators that operate hotels all over the world. I think you’re going to have some of that for charter cities, and I think there will be some plug-and-play models that try to do the same everywhere and that are more consolidated, but it’s different for each component of the stack depending on the economics.
Mark: Sure. How do you think about early-stage valuation for charter city companies?
Patri: I mean, we’re just making it up. Like most early stage valuation?
Mark: We’re all taking cues from you. So, we hope you’re right.
Patri: Yeah, so do I. I think where it gets really tricky is when you get close to the transition point from it being more like a risk venture to it being more like traditional real estate. At the early stage, I tend to follow the Y Combinator and Silicon Valley startup model of when people are raising a few hundred thousand and there tends to be valuations of a few million. When people are raising $1 million, maybe the valuation is $5 million. Just looking at the percentage of ownership and the dilution.
Then the way we think about it is there’s this general stage-dependent range of valuations and then we look at the specific projects, like, “How much traction do they have?” There’s these different traction axes, like traction with the government, with anchor tenants, with potential citizens, with other investors, and with partners who can help you get it done.
The more traction the project has, the higher the valuation. Some of the projects that we’re working with, they’ve established themselves and built relationships without us and there’s other cases we’re working on now where we’re working with a country and some consultants to spec-out a project at an early stage. We’re bringing in potential founders and we are almost doing it in an accelerator model. So, there, because we’re bringing so much to the table, we’ll expect lower valuations, like maybe a couple million dollar valuation.
But if something came in already with an MOU from a country, that brings it much higher, say, $5 to $15 million. If they come in with the commitment of land or with a strong anchor tenant, I think up from there.
Yeah, I think the early-stage concept traction and team, you know your valuation is in the millions. As it gets towards signed MOU, strong interest from tenants, and you put together something, you may get to a valuation in the $8 to $15 million range. And then projects that actually have land, have full approval from a government, and maybe they’re doing their first build raise, expecting about tens of millions, although it can also depend.
I think there are some projects that are looking to start at a larger scale, and obviously if the government is going to put up $100 million in land, then you’re probably going to be valuing your equity raise at hundreds of millions. But those are the rough guidelines, and we’ll kind of see what happens. That’s what makes it fun.
Mark: Yup. It definitely is fun. Briefly go back to Seasteading. Recently, we’ve seen places like Singapore, Hong Kong, probably not so much Hong Kong anymore, but have been proposing these large floating platforms, just off the coast. They’re land constrained, “How do you build new land?” And they don’t want to disrupt the environment, so they just built the floating platforms.
My broad question with seasteading was always, “How do you get the marginal price point of a floating platform down low enough to be competitive?” Because it’s much cheaper in protected waters, but protected waters are almost always in a jurisdiction of a country. So, you could do it there. I see the longer-term hope of seasteading as having something like Singapore invest a lot of money in floating platforms, and then that tech becomes more widely available until it comes cheap enough that you probably maybe start off with some crazy libertarians going into the middle of the ocean. But it’s cheap enough to cascade from there.
Patri: I think that analysis makes sense. I have this metaphor of the ocean tax versus the government tax, and the ocean tax was just the extra cost and complexity of building something on the water, which is an extremely difficult environment to operate in, depending on how sheltered you are and how big the waves are. And then the land tax or the government tax is just how poorly is the government run and how much value are you sacrificing to that?
The difficulty is that the ocean tax is really high. And I have this computer scientist angle where I say, “Well, okay. The ocean tax is really high, but it’s kind of actually decreasing over time as the technology improves. And the land tax, you can model it as like a fraction of GDP that’s being wasted. So, it’s increasing exponentially as GDP increases.”
Whether or not we’re there yet, at some point, a decreasing line and an exponentially increasing line have to intersect, but we don’t know when. The more willing governments are to experiment with these projects on land, that potentially lowers the land tax. I do think there is a subset of seasteading-type activities, like expanding geographically constrained cities, which is going to make economic sense first.
I also think that doing something with cruise ships right now, because they are so cheap, because the cruise industry obviously is suffering from coronavirus and already since the last recession, in 2008, there have been a lot of unused cheap ships.
Now, ships do have high operating costs, and the only condo cruise ship, The World of Residensea, was extremely expensive to operate, a million and a half apartment was $250,000 a year in expenses, but partly that’s because they were going all around the world. They circle the world. Hitting interesting in cities and events and not getting back to, say, New York City, for two years, and that made their logistics much more difficult. If you look at the price of a Carnival Cruise Lines cruise, if you’re doing a single fixed loop where your resupply is easy, I think they could get costs way down.
From an international law perspective, basically, all that matters is that your loop has to include two countries. Anything that you do that’s just a loop within the same country, a cruise to nowhere, that does not actually get you legal advantages. But if you went from LA to Mexico and back and that was your loop, or you anchored offshore for a week and then went through Mexico for a week and then to LA for a week, something like that, you would get the legal advantages of being a flagship. I think there’s something that can be done there.
But in terms of larger, deep ocean seasteads, we need cheaper technology and we also just need a much larger group of people. Some of these charter cities are looking at starting with, say, hundreds or maybe thousands of residents. I think that’s feasible for doing something on land.
But floating cities are so expensive that you really need to have high economies of scale and have much larger groups, like potentially billions of dollars. So, we as an industry are just not there yet to where a group of people could reasonably try to do a city for billions of dollars. We’ll see that cost decrease. We’ll see people’s experience with starting new cities increase and maybe we don’t need to go to the ocean, because governance becomes flexible enough on land that there’s not a benefit to going, or maybe land is the stepping stone and then we go to the oceans and then space. We’ll see.
Mark: I think there are two interesting points in that, the first mover challenge. How do you get people to move to a city? But before that, I want to talk about declining governance in the US and other Western countries. This has been a theme that some of us have been talking about for a while, but it’s become I think apparent to a much broader range of society in the last few months. First, we saw the failure of a regulatory state and now we’re currently seeing the failure of law and order. We’re recording on June 6, by the way, so it’s basically the weekend after the protest for the killing of George Floyd, many of which turned into riots, and also the brutal police response.
How do your thoughts about seasteading, charter cities, and governance fit in with US governance and Western governance. At least in my head, I kind of see them as distinct. They have common themes, the importance of state capacity and the importance of effective governments. But I could have charter cities thoughts without about having US thoughts and US thoughts without having charter cities thoughts per se.
Patri: I think there’s a lot of similarities and a lot of differences. The US was a startup country and there’s a sense in which they did what we would like to do, and that because they had a founding moment, they had a lot of people with these strong philosophical interests influenced by the Enlightenment, and they are able to enact a new political system which people in Europe thought was kind of crazy, but it was considered radical at the time and which succeeded so well that countries around the world copy it and it’s still the industry standard 200 years later.
I think there’s a sense in which charter cities, especially as they grow towards more autonomy, reflect that early US founding moment. But I think that they are quite different from the way that the US and most places in the West think today.
Mark: I think that that’s an interesting point. How do you think about the founding moment, what James Buchanan might call the “constitutional moment,” versus competitive governance? For context, you can think about competitive governance, or just competition, as you have multiple entities and because they all want to beat the other entity either for market share or whatever reason, they end up improving much more rapidly, because competition is good.
Then the dynamic is that the founder matters a lot. You have this moment where you have a very wide range of freedom to make decisions that are very impactful for a very long time. And I tend to fall little bit more on the constitutional moment, the founding moment, tending to be particularly important for charter cities. I think the competitive governance will be important. The competition between them will be important, but probably not for like two decades.
If you look at where competition in government matters, the primary example is basically the late Middle Ages in England, when you had a bunch of small, competing city states. But there wasn’t always the competition between the city states that mattered. If you’re in the Baltic region, you had the Hanseatic League, where they were largely collaborating with each other. Then two, the dynamic between them, at least in northern Italy where it was sort of most pronounced, played out over decades. Because of that and because of that really long time horizon, it’s not something that I spend a lot of time thinking and focusing on right now.
Patri: I don’t so much see a conflict between them, although I guess sometimes there is. There is a question of, “Ultimately, will the character of a charter city be more determined or to what degree more determined by the founders and how they set it up versus the competitive pressures?” I think both are really important.
Mark: Yeah, I don’t think there’s a conflict. I just think there’s a question of emphasis.
Patri: I would say that it’s different at different frames. Zooming out and looking at the world as a whole, or the industry as a whole, I would say that the goal for me is this competitive governance and unbundling of law and institutions from geography, and viewing them like a software stack and just copying best practices in different places in the world. The impact of these charter cities will have by doing this, by rezoning land with different laws, will be to increase competitiveness not just through competition but also just through copying.
Yet, each of these individual businesses will depend a lot in how they’re set up and how well they work on the founding moment, and the nature of the city and of the legal system is going to be based on the culture of the country and of the founders.
I think both matter. We want good founding moments, but if we zoom out and say, “Why are charter cities important? It’s because humanity is like running these incredibly important technologies of governance. How do we make decisions and how do we get along?” It just has a really crappy set up for how to upgrade and innovate those and we’re trying to change that.
Mark: We talked about this a little bit earlier, but how do you think about overcoming the first mover challenge? How do you get the first few hundred, few thousand people in an area that nobody else lives that can then get on to accelerate economic growth?
Patri: I think that what industry is brought in, and creating jobs is kind of the most important way. I also think it really matters where the place is, like how isolated it is. Charter cities, we strongly prefer greenfield for philosophical reasons. We want people who are under a new system of government to have opted in explicitly to that, but it doesn’t need to be super isolated or really far away. There’s lots of greenfield sites are close to existing infrastructure, which makes an easier move. But I think it’s the job of the founders, the charter city developer, to make people want to come there. I think the best way is making jobs.
I think the worst way that people tend to– I won’t say the worst, but people tend to be like, “Oh! It’s just going to be like a tax haven. People are going to go for it for tax breaks.” It’s ridiculous, because why would you go to a brand-new jurisdiction instead of moving to the Cayman Islands, or Monaco, or Liechtenstein, or whatever? We have a world full of tax havens and trying to compete with established, high-infrastructure, high-quality of life tax havens is not a good idea. I do think that charter cities will tend to be lower tax— you’re making a product and tax is the price, and if you’re trying to make a new product to compete with existing products, you want to give people a lot more bang for the buck.
In Silicon Valley, they say, “Your product has to be 10 times better per dollar in order to get something brand-new to be adapted.” We need to make these zones be much, much better and much cheaper. I don’t think the tax haven approach make sense.
Mark: I agree with that. You need a unique value proposition and the world only really needs five tax havens or six tax havens, just because capital is very easy to move. You just get one or two in every geographic area and then you’re competing with people who’ve been doing it 30, 40 years and are really good at it. What can you do that’s really better than them?
Patri: I do think Africa and South America, maybe Latin America, I think there is potential for two new financial centers. Then that’s kind of all.
Mark: To me, there’s like three ways to found a city. One is, you can be a religion, and that’s Salt Lake City. How to overcome the agglomeration affects, get a lot of people to move to a new area? That’s Salt Lake City, or Israel as well, where there is this coordinating mechanism because of a shared believe set.
The second is that you can be a government, where you don’t really face the standard budget constraints. Typically, that’s a new capital, and you can just force all the bureaucrats to work there. That’s Abuja, Astana, Brasilia, a bunch or other examples.
Then the third reason is you have an economic reason. And maybe there’s a fourth, like if there’s a mass migration for refugee reasons, like we might see in Hong Kong. But the third is that there’s an economic reason. Historically, that’s been a port or a mine where people move there. There’s enough economic activity, that then it naturally grows.
I think the sweet spot is to find an airport near a major city, and typically airports are outside the major city, and go two hours in the opposite direction from the city. There, you’re two hours to a major airport, you can get a bunch of land for very cheap. But at the same time, you can piggyback off existing infrastructure. Depending on where you are in Africa, it’s probably going to be part of the main city within 15 or 20 years just because the demographic growth is so rapid.
Patri: Yeah, absolutely, and these are the local research and the local decisions. I think the advantage of this is that it’s true that it may be hard to find good places that are empty and have room to grow, there’s economic potential, existing infrastructure, but we don’t need very many. If we start 20 charter cities in the next four years and each of them starts with a square mile or something, we only need to you find 20 square miles of this earth that meets those requirements. That’s one reason why I’m optimistic. You can have really strict requirements, but each company is only having to start in one place.
Mark: The Charter Cities Institute focuses on charter cities in low-income countries, and seasteading was a little bit more focused on high-income countries. But now with some of the governance failures in low-income countries, there might be more demand for maybe charter cities or maybe just some other form of private community. High-income countries typically face the demographic challenges. All Western countries with the exception of Israel, if it’s even Western country, have below replacement-level births. How do you think about charter cities in high-income countries where they might push the technological frontier and how does the recent possibility of our institutional failure make you, probably, more optimistic about them?
Patri: Yeah, this is something we think about a lot. I think the default for a charter city is in a low-income country. It’s about copying functional laws and institutions and having honest courts and honest judges and bringing economic development, and that’s the default model. But there are downsides to that. For example, often, countries that don’t have the state capacity to run that country well, you don’t necessarily trust them to stick to their agreements. So, you’re concerned about political stability.
There’s a lot of means of addressing this. There’s kind of like a double edge sword there. I think the holy grail would be a country that was stable and high-income and had other reasons for wanting to do a charter city. Could be in French Polynesia, for example, where the MOU with Seasteading happened because they were interested in climate resilience and ocean-related technologies. I think there are countries in Europe that would be interested in socially progressive experimental enclaves. And we are talking to some high-income countries that have interest in innovation and tech.
I think that there is potential. It’s just harder. In terms of getting somebody to move there, the economic basis doesn’t make much sense, if it’s a well-functioning country with a well-functioning economy. I think it gets trickier to identify, “What is the unique thing that you are creating?” But then what you get in return is you’re in a place with much better infrastructure, a much stronger economy, and a much more reliable government. I think it’s worth pursuing those.
Then, there’s the intriguing possibility that you raised, which is like a high-income country that’s failing. And there it’s tricky, because look at the US, which I know best. Legally, it’s very hard to opt out of the existing failing institutions. There are some interesting exceptions to this. There are some strong federal precedents in the US for Native American land having a significant amount of sovereignty when I looked into it. In Seasteading days, 15 years ago, there wasn’t really much that you could do, but there have been a number of court precedents since then where there’re economically viable possibilities. For example, Trump trade tariffs don’t apply. Intellectual property laws don’t apply within the reservations.
There is also the interstate compact mechanism, which requires a majority in Congress, and the agreement of one or more states to opt out of federal laws. I think there are some really interesting possibilities. It’s really tough in the US because I think most of the worst government and the worst institutional failure is at the federal level, which you can’t necessarily opt out of. The indigenous land applies to other places too. There is potential in Canada with First Nations. I really think that if you can appeal, if there is a place in a country’s legal system, and if there is a reason why they’re interested in it, a refugee city is really intriguing.
I’m pretty skeptical of Paul Romer’s model of the guarantor nation. It wasn’t just that it led to accusations of neocolonialism, but that first world countries don’t want to be operating cities in other countries. I mean, even China wants to do it with soft power. Canada does not want to do it at all. Whether or not the charges of neocolonialism are with merit or without merit, it doesn’t matter. Nobody wants to do it. But I think that if you can get a country to want to do this as an experiment within the country, it’s harder. We don’t have this clear path forward, but I think it would be strong.
Mark: Cool. We’ve talked about institutions in the US and COVID’s impact on them. What about COVID’s impact on emerging markets and how that affects our cities?
Patri: Obviously, in the very short-term, it’s hard to get legislation passed. It’s hard to start building. What we’re seeing is that, in the medium-term, these countries were already very interested in economic development. It’s sometimes hard for people in the first world who have good jobs to understand. You get people in the first world who are like, “Hey, what we need to do is like improve the labor laws, improve the environmental law. Stop them from polluting.” It’s like, “No. No. No. No. These people want to go up the economic ladder by building factories and polluting so that they can get better jobs and gets to the point where they can stop polluting.”
This was already urgent for a lot of countries, and I think the coronavirus economic impact, whether it’s like a long-term impact of shaking up trade or leader to countries having stronger trade barriers and trade wars. The potential end of Pax Americana, or whether it’s just a short-term budget hit of all the lost economic activity this year. Countries are even more interested now in anything that will bring in jobs and foreign-direct investment.
Something that I think is really interesting that we’re already seeing happen just within the US, is this whole remote work/failed government combination where there’s this sea change and people being like, “Wait. Why do I live here again? If I can work online, why don’t I live someplace that’s cheaper, maybe nicer, maybe safer, maybe better run? But let me optimize for a different set of constraints than just being close to an economic agglomeration.”
I think that the number of people who are going to move to cheaper areas within the US and the number of people who are going to move out of the US is just going to shoot way, way up. People are just going to be like, “All right. I can work remotely. I’m going to go to a good functioning state and live there.”
I’m generally down on the appeal to global nomads and give them Internet connections and low taxes kind of model that libertarians would propose for new jurisdictions, because you’re competing with all the best places in the world for a tiny pool of people. That objection aside, if there is a good time to appeal to people who are expatriating and work online, 2020 is it.
Mark: Yeah, I think that’s fair. You mentioned potentially ending Pax Americana. This is something I’ve been increasingly thinking about. For example, if you think about Africa, for the last few years, there’s been a discussion about a scramble for Africa. That new scramble for Africa exists because there is this withdrawal of the American presence and other countries are looking to expand their influence. The Middle East has also sort of heating up a little bit, particularly with Iran and Saudi Arabia, again, because there is slow withdrawal of the American presence. Latin America has probably continued to be fine because it’s close enough. We are going to project power there by default. There are no regional challengers to our hegemony and we’ll probably just keep the Chinese out, because we like our little sphere.
I don’t know enough about Asia to really have deep thoughts about how things are going to play out there. You saw China just invaded India. Who knows what’s going to happen? But to a certain extent, I think it worries me beyond the obvious humanitarian disaster that will accompany someone who’s generally anti-US military, but when you withdraw a hegemon, you’re going to get a bunch of regional conflicts. But it’s also going to change the trade patterns and I think can have a broad impact on human organization, spatial organization. I don’t really know what that is or if it’s good or bad for charter cities. But it’s something that’s concerning, and I have started to think about.
Patri: I think it is concerning for the world because it means a lot more uncertainty and disruption. And I’m generally pro-free-trade and there’s good things about Pax Americana— decreasing nuclear proliferation and spreading free-trade and all these things. But the US has its own problems now. The US is clearly just not going to be in a position to continue doing that, and other places like China are growing stronger. I think there’s going to be a lot of disruption and a lot of change. In general, change is good for new things.
On the other hand, if you are trying to create small jurisdictions or you’re allying with small countries in a time when the global hegemon is ending and there’s a bunch of regional powers and conflicts, maybe that’s a tougher time to be a small country, where your sovereignty is more in danger and you have to play power games with which of the great powers you ally with.
I do think it’s a really challenging period, and ideally, we’re able to get to the point where there’s enough of these cities and where small countries are banding together to form a power of their own. But it’s tough, because there’s clearly huge economies of scale in military. I don’t know what’s going to happen, but we live in interesting times.
Mark: There’s this book by Alberto Alesina and Enrico Spolaore, it came out in 2004, 2005 on The Size of Nations, and they basically hypothesized that there’s two advantages to being big countries. You have these large internal free-trade blocks, which are good. Second, you get economies of scale in terms of the provision of governance, primarily with the army. Comparative advantage matters. Absolute advantage is very important when you’re fighting a war. Being able to raise a larger army is quite important.
On the downside, it becomes more difficult to administer public goods the larger the area, because people have different sets of interests. So that becomes more challenging. If we think about the withdrawal of Pax Americana, then there is a demand for larger jurisdictions because these larger jurisdictions then are able to field larger armies and are better able to protect other borders, which is one of the reasons I’m somewhat pessimistic in the short-term. The reason I’m somewhat optimistic, as you mentioned previously, chaos allows for more institutional forms.
Free cities exist on the edge of empires, and if there’s one global hegemon, there isn’t really any edge to exist on. But as the world becomes sort of multipolar, there is more of this edge space that you can see the flourishing of institutional forms that would not exist in a unipolar world.
Patri: I think that’s absolutely right. That’s a great way of looking at it. There’s a lot more edge space, but maybe it’s trickier to survive, because we’re going to see this fragmentation, but then presumably because of the economy of scale of defense, maybe we will see some consolidation, what form does that take? I don’t think we’re going to see a return to an age of empire, but there may be strong regional defense coalitions, for example. We’ll see.
Mark: I think the one big challenge and big question is going to be around international capital flows. For the next few years it’s probably going to be much more difficult to raise a few hundred million dollars to build a small port, to build a power plant, to build roads. If we think of these global public goods, for example, global warming, people are just not going to care about them anymore. The smart conservative critique has always been, “You’re never going get China and India to cut their emissions because they’re so relatively impoverished and they value economic development and richer citizens more than they value this global problem that’s still a long way in the future.”
That was a challenge that could’ve conceivably have been overcome when there was a functioning global system. But with no functioning global system, it’s going to turn to prevention and mitigation and we’ll likely see that to an extent with economic development.
Boris Johnson, when he came to power, thought about putting DFID, the aid organization for the UK, in the State Department. There was strong push back, but I would not be surprised if that happens in five or 10 years.
Let me ask you one final question. Obviously, we’ve just introduced a whole amount of uncertainties, so necessary qualifiers, but what happens in the charter city space over the next five years?
Patri: I think that if you add a bunch of people actually trying to start charter cities in the next few years and starting projects around the world. I think it’s hard to say what’s going to happen with financing, with macroeconomics in the coronavirus days. But at some point, we come out of it. I think that there will be a bunch of charter city projects around the world that have been doing their work during the depression, have kind of got all their ducks in a row, set things up with governments, and are just ready to build once there’s capital available, and we see a bunch of these projects build.
I think within five years, we’ll see some subset of them succeeding and growing. It’s going to be slow. One false thing about the software metaphor is cities grow a lot slower than software, even really successful faster-growing cities. You get rich by growing at above normal rate for decades, not by doubling year on year. I think that these projects will still be relatively small but will be growing rapidly and doing some brain drain of entrepreneurs from their regions, from the rest of the world and to them. Increasingly growing capital and mind share and acceptability.
It’ll start to be seen as a normal method of economic development. This idea of decoupling your local native legal traditions from the land, and so instead of being like, “Oh, yeah. We’re going to use the operating system that our people made some mishmash of maybe what our history is and what colonial powers imposed on us and then who we copied after that will be decomposed a bit,” and the country as being like, “Let’s try copying best practices on to this region.”
If things go really well, we may see some countries like China did with Hong Kong, some amount of countries are beginning to adopt reforms. I think five years is maybe just enough time for the first couple of projects to get built, to have had a few years of growth and success, and get to where the national government either designates the larger geographic region, like a province, to use the new set of laws, or adopts some, not even close to the entire thing, but maybe they’re saying, “Okay, we’re going to reform our mortgage laws, or we’re going to reform our zoning, or our housing codes based on what was tested in this region.” I think you’ll see the first hints of that. It’s hard to say. That’s what’s fun about this stuff being so new. We don’t know what the future looks like. It matters what we do and how we build it.
Mark: Cool. I like that. And I said I was going to end with that question, but I lied. One more. What are projects around the world are you most excited about?
Patri: We’re working at an early stage with a number of countries. In geographic regions, I’m excited about Latin America. We’re working with several countries there. The government of Brazil invited us earlier this year to come talk to them and work with them on designing a program. It’s very early yet, but I think that would be an incredible opportunity working with a couple of smaller Latin American countries.
Getting a lot of interest from Europe, but I think the constraints of the EU make it a problem to work there. Although the EU is kind of disintegrating, but it hasn’t disintegrated yet. I would be really excited about countries that are near Europe or in the European Economic Area, but not within the EU. Anything like Iceland, Switzerland, or nearby countries. Africa absolutely is going to be one of the most exciting spots for charter cities, because they’re urbanizing so rapidly and it’s clearly the continent with the most unrealized potential right now.
Then, in Asia, I’m working on a couple of projects in East Asia that are very early. The challenge in Asia is that they are the professional city builders. They build multibillion-dollar cities. It’s hard to get a huge project to adopt new ideas, but we’re working with a couple much smaller jurisdictions and we look forward to having more things to announce. Follow us @PronomosVC on Twitter and go to our website, pronomos.vc, sign up for our public mailing list and learn about this stuff as it’s happening.
Mark: Well, great. Thanks for coming, Patri.
Patri: Thanks for having me.
Mark: Thank you for listening to the Charter Cites podcast. For more information about this episode and our guest, to subscribe to the show or to connect with the Charter Cities Institute, please visit chartercitiesinstitute.org. Follow us on social media. CCIdotCity on Twitter and Charter Cities Institute on Facebook. I’m your host, Mark Lutter, and thank you for listening to the Charter Cities Podcast.
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