This talk was the first public launch of an idea that Romer has been working on for two years.
His economic theory of history explains phenomena such as the constant improvement of the human standard of living by looking primarily at just two forms of innovative ideas: technology and rules.
Technologies rearrange materials with ingenious recipes and formulas. More people create more technologies, which in turn generates more people. In recent decades technology has enabled the “demographic transition” which lowers birthrates and raises income per person even higher as population levels off.
Rules structure the interactions between people. As population density increased, the idea of ownership became an important rule. A supporting rule for managing violations replaced the old idea of deadly vengeance with awarding damages instead: simply shifting value replaced destroying value. For the idea of open science, recognition replaced ownership as the main event, which means that whoever publishes first is most rewarded, and that accelerates science.
Rules can amplify or stifle technological progress. China was the world leader in inventing new technologies until about a thousand years ago, when centralized dynastic rules slowed innovation almost to a stop.
Romer notes that business keeps evolving as new companies introduce new rule sets. The good ideas are copied, and workers migrate from failing companies to the new and old ones where the new rules are working well. The same goes for countries. Starting about 1970, China took some of the effective rules of Hong Kong (which was managed from afar by England) and set up four special economic zones along the coast operating as imitation Hong Kongs. They worked so well that China rolled out the scheme for the whole country, and its Gross Domestic Product took off. “Hong Kong was the most successful economic development program in history.”
Romer suggests that we rethink sovereignty (respect borders, but maybe import administrative control); rethink citizenship (support residency, but maybe import voice in political affairs); and rethink scale (instead of focusing on nations, focus on cities—on city states like Hong Kong and Singapore.)
Paul Romer proposes that developing countries could invite instant Hong Kongs—new cities in new locations run by experienced governments such as Canada or Finland. They would enrich the country where they are built as special economic zones while also rewarding the distant government that makes the investment of building the new city state and installing a set of fair and productive rules. Over time, as with Hong Kong, the new city is turned over to the host country.
The idea is getting some traction in the developing world. This summer Romer is going public with a Bridge Cities Institute website for further exploration and eventual application of the idea.
One miracle of cities is that they sometimes renew themselves brilliantly. This could be a whole new form of that.
Originally published at Economist’s View and reproduced here with the author’s permission.