The economist Paul Romer walked away from a tenured position at Stanford to promote his idea of charter cities. He was recently interviewed by Freakonomics Blog:
A well-run city lets millions of people come together and enjoy the benefit they can get from working together and trading with each other. The benefits per person increase with the total number of people; this is why big cities are more productive than small cities or villages. Of course, none of this is new. Adam Smith was referring to the power of exchange and the importance of increasing returns when he wrote that, “the division of labor is limited by the extent of the market.”
There are many signs of the value created by all the exchange that takes place in a city. We see it in productivity and wage data. We also see it in the increase in the value of the land. Millions of people are willing to pay high rents just to live and work around millions of other people who are also paying high rents. Why? To get the benefits that come from exchange and interaction with so many others.
In the developing world, most people don’t yet live in big well-run cities. Given the chance to move to one, hundreds of millions of people would go there to get a job, get an education for their children, and live in a place that is clean, safe, and healthy. Other people will make a profit by hiring them or supplying them with infrastructure and other services. If the rules let this happen, everyone can be better off. It doesn’t take any charity to build well-run cities.
Romer might put it this way: People are being attracted to big poorly-run cities because of the economic benefits. Just think of what could happen if they were well run.
So why not just change the rules?
Moving from bad rules to better ones may be much harder than most economists have allowed. The construct of a charter city is a suggestion about how we can change the dynamics of rules. It is a way to speed up the rate of improvement in the rules.
What’s the obstacle, corrupt government?
Narratives about good guys and bad guys are always entertaining, but there is a deeper reason why people get stuck under bad rules.
This is the most accessible presentation of Romer’s ideas I’ve seen. If you’re interested in charter cities, read it all.