Governmental Innovation and the Wisdom of Crowds

I've been reading James Surowiecki's The Wisdom of Crowds, and I think it must be really good, because I've already encountered a section supporting my political ideas. Discussing the early automobile industry, he writes:

In the first decade of the twentieth century, there were literally hundreds of companies trying to make automobiles. And because there was no firm definition of what a car should look like, or what kind of engine it should have, those companies offered a bewildering variety of vehicles, including the aforementioned steamers and battery-powered cars...At one point, a third of all cars on the road in the US were electric-powered. Similarly, steam-powered engines were seen by many as the most logical way to propel a vehicle, since steam obviously worked so well in propelling trains and boats...As the decade wore on, though, the contenders began to fade...By the time of WWI, there were still more than a hundred automakers in America. But more than four hundred car companies had gone out of business or been acquired.

He also explains how the best innovations from this wide variety were eventually taken up by the winners, and goes on to generalize:

The story of the early days of the US auto industry is not an unusual one. In fact, if you look at the histories of most new industries in America, from the railroads to television to personal computers to, most recently, the Internet, you'll see a similar pattern. In all these cases, the early days of the business are characterized by a profusion of alternatives, many of them dramatically different from each other in design and technology. As time passes, the market winnows out the winners and losers, effectively choosing which technologies will flourish and which will disappear. Most of the companies fail, going bankrupt or getting acquired by other firms. At the end of the day, a few players are left standing and control most of the market.

Why do things this way? Isn't it inefficient to have so much failure? Surowiecki explains that this process is a response to a situation when you not only have to choose between many possibilities, but you don't even know what the possibilities are! So you can't just compare and choose, you have to first explore to determine your choices, which requires diversity and experimentation. He says:

One key to this approach is a system that encourages, and funds, speculative ideas even though they have only slim possibilities of success. Even more important, though, is diversity, not in a sociological sense, but rather in a conceptual and cognitive sense. You want diversity among the entrepreneurs who are coming up with the ideas, so you end up with meaningful differences among those ideas rather than minor variations on the same concept.

Because of the high barrier to entry in the governing industry, such an explosion of innovative and diverse firms has passed us by. And because the cost of switching countries is so high, the current large firms don't even do much innovation to compete with each other. (And what competition there is is to attract businesses, not people, since businesses are more mobile). Without experimentation, how can we find more effective means of organizing and governing societies?

Dynamic geography and market anarchy both offer the potential to transform the industry by crushing the entry barrier down to size. Dynamic geography is what you get in places like the ocean or space where its so cheap to move things that you can just take your house or town and move it to another political district. Market anarchy is a system of competing arbitrators, enforcers, and definers of legal systems. On the ocean, or within such a polycentric legal system, a new competitor doesn't have to win an election or a revolution to enter the market, just have a new and appealing product.

Which isn't just great news for libertarians, but for all minority views. It would be a great shame, in fact, if the new systems were restricted to constitutional or contractual law, as we libertarians might advise. Instead, they should be the product of diverse viewpoints about what makes a good, just society.

Now, its not clear that either of these approaches will ever become reality - they are clearly speculative ideas. But slim though the possibilities are, the potential payoff is gigantic. If either of them comes into being, government will finally have its Cambrian explosion, a dot-gov boom of experimentation and exploration, and the world will be a different and better place.

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But, Gavin, what of the wage

But, Gavin, what of the wage savings in Vietnam vs. Germany,
for example?

Dave, I think you may be

I think you may be overstating the case for off-shoring. There are some tax advantages but they are not that big. Most income is pretty clearly defined for tax purposes. You might be able to shift 10 or 20% to a different jurisdiction but no more (legally). Origin rules and residency rules and citizenship rules are not all that easy to evade. Unless you can off-shore totally and tell the IRS to shove it. But you can't do that if a large portion of your income originates inside the US.
Some people seem to believe you can pay zero US tax just by changing the address of your company HQ. This is not the case. The advantages are marginal.
The same applies to regulations. Microsoft, for example, can't simply avoid monopoly regulations just by moving their offices to India.

Humm. a Very different take

Humm. a Very different take on Crowds from Bill Bonner's "Financial Reckoning Day." I suspect the differences are largely semantic though.

Thanks for the review.


Re: dynamic

Re: dynamic geography

Fascinating. Your notion of the 'cost of switching firms' makes one want to compare telephony when such cost was prohibitive and the level of innovation we had then was minimal. But as millions of Americans add second homes in other states and countries the cost of switching firms in governance is getting reasonable for many-they just rearrange which home is the abode of record! We now see capital fleeing to low tax, low regulation, low wage provinces of China and understand that we may be experiencing just the first wave of serious off-shoring. May we be approaching a remarkable tipping point here in a decade or so?:beatnik:

The Wisdom of Crowds is

The Wisdom of Crowds is great for its first two-thirds or so, then Surowiecki seems to lose his way. Although he seems to understand how unregulated markets make people better off, in the end he succumbs to the notion that we can regulate our way to "the common good" through majority rule. That's my take. Enjoy the good parts, while they last.

I was going to mention

I was going to mention evolution and the Burgess Shales but I guess 'Cambrian explosion' beat me to it.