The Administrative Apocalypse and the Prospects of Charter Cities

“For at that time the world was altogether home-bred, every nation looked little beyond their own confines or territories, and the world had no through lights then, as it hath had since by commerce and navigation, whereby there could neither be that contribution of wits one to help another, nor that variety of particulars for the correcting of customary conceits.” – Sir Francis Bacon, On the Interpretation of Nature

Bacon’s words harken back to a time before any comprehensive globalizing projects were underway, citizens of one jurisdiction were mostly stuck under the jurisdiction in which they initially found themselves, regardless of how oppressive or tyrannical their government. As a result, there was very little competition between governments. Unfortunately for citizens in those days, if they have no exit rights their governments will be less likely to promulgate good laws.

Bacon recognized this and envisioned the Enlightenment, a futuristic scenario in which the world would be illuminated by globalizing “through lights” capable of liberating man through “commerce and navigation”: mobility from jurisdictions with bad laws to jurisdictions with good ones. Because the United States has been at the frontier of governance since its founding, it may serve as a proxy for Bacon’s proverbial “through lights”.

But, while Bacon’s vision was upon us for some time, any reasonable individual will note that the United States’ productivity growth rates have recently plateaued and, therefore, the revolution described in Bacon’s oeuvre halted. Insofar as our problem is institutional in nature, as Bacon might suggest, a brief investigation of jurisdictions is due.

Today, if we take our bearings from the history of productivity growth rates, most of Earth’s land is captured by regimes from one of two categories: (1) technologically advanced but decadent nations whose institutions experienced over three centuries of Enlightenment before subsequently forgetting their purpose, and (2) less technologically advanced nations with institutions not yet shaped by the Enlightenment.

Moreover, citizens are once again trapped in a world of tyranny much like the world before Bacon’s time: regimes of the first category are “post-rule of law”—in that all industrialized nations are now run by unaccountable, economically oppressive administrative states—and regimes of the second category are “pre-rule of law” in that they are often run by outright tyrannical actors. In both kinds of jurisdiction, however, the rule of law necessary for real growth is severely lacking.

This global dynamic is much worse than it may first appear. In the years since the Enlightenment’s onset, the West has forgotten its purpose: to create a global civilization on the basis of commerce and “ingenuity”. On the one hand, this implies that the creative and rational forces unlocked during Early modernity will cease, causing a decline in growth rates.  However, this “no-growth” scenario has implications beyond declining productivity rates.

The West’s decline obfuscates a more existential challenge associated with the no-growth scenario. Early Modern thinkers from Montesquieu to Locke to Kant to Bastiat recognized the truth of Doux Commerce, which supposes that commercial activity halts societies’ irrational and violent behaviors. This doctrine implies that the no-growth scenario will entail not just stagnation but also, in our post-1945 context, global violence.

CHARTER CITIES AND REGULATORY ARBITRAGE

Taken together, today’s regimes are essentially apocalyptic. Either they themselves will perish and give way to new forms, or, mankind as a whole will perish alongside them. However, we mustn’t despair over the no-growth apocalypse: as of late, the economics of our reality have undergone a transformation. Charter cities—privately owned, managed, and operated urban jurisdictions—have opened a portal back to the enlightenment’s promise of progress.

Charter cities are capable of solving problems inherent to both of the world’s regime categories, a dynamic which may be termed regulatory arbitrage. Some might be familiar with the notion of arbitrage in the strictly financial context: the exploitation of gaps in the pricing of assets or commodities between two exchanges.

The notion of regulatory arbitrage is perhaps less widely known but more important. Regulatory arbitrage is an avoidance strategy in which the gaps between the regulatory burdens (time, cost, etc.) of multiple regimes is exploited.

REGULATORY ARBITRAGE IN CONTEXT

It’s worth demarcating regulatory arbitrage into a dichotomy of sorts. The first and most well-known kind of regulatory arbitrage is known as categorical arbitrage.

Categorical arbitrage involves profiting off of legal discrepancies in one jurisdiction’s laws through “loopholes”. Within the financial technologies industry, shadow banks do just these.

These are complex legal entities which, according to the “law on the books”, do not constitute banks but do provide services identical to those offered by traditional banks. Due to their status as non-bank entities, shadow banks avoid capital reserve requirements and retain relatively higher-risk assets. In 2007, shadow banks accounted for approximately 30% of the mortgage origination market. By 2015, they came to account for over 50%.

The second kind of regulatory arbitrage is denoted as jurisdictional arbitrage. This kind of arbitrage involves profiting off legal discrepancies between two or more jurisdictions, as seen in medical tourism for stem cell therapies. For quite some time, the FDA never formally required stem cell clinics to abide by its standard regulations for “biologics”. However, since United States v. Regenerative Sciences, LLC, the FDA has treated stem cell therapies utilizing “more than minimally manipulated stem cells” as drugs. Consequently, it has taken action against several clinics for marketing stem cell therapies without its approval.

As a result, jurisdictions without burdensome regulations, like Thailand or the Caribbean, have become strongholds of medical tourism. In the Caribbean, the Cayman Islands holds both a “health city” and Regenexx Cayman, an outpost of Regenerative operations whose site promises “higher cell dose” and “conditioning protocols” that are unavailable in the United States.

Charter cities provide an opportunity for jurisdictional arbitrage on a more intentional basis. If a law in one jurisdiction is unsound, however, intentionally correcting it in another jurisdiction may be preferable. For this reason, charter cities will play an important role in the future of the world insofar as they can be used to intentionally create jurisdictional arbitrage opportunities to stir the growth necessary for a good future.

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