"Liberty," Hayek argues in The Constitution of Liberty (1960, 29), "is essential in order to leave room for the unforeseeable and unpredictable ..." As he goes on in the next paragraph to argue: "Humiliating to human pride as it may be, we must recognize that the advance and even the preservation of civilization are dependent upon a maximum of opportunity for accidents to happen. These accidents occur in the combination of knowledge and attitudes, skills, and habits, acquired by individual men and also when qualified men are confronted with the particular circumstances which they are equipped to deal with. Our necessary ignorance of so much means that we have to deal largely with probabilities and chances."
Right before these passages, Hayek makes reference to the work of his former student and fellow Nobel Prize winner, A. W. Lewis who argued in The Theory of Economic Growth that innovators are always in the minority, and that collective judgment of new ideas is so often wrong that progress depends on individuals possessing the freedom to go with their own judgement against collective disapproval. And the worse outcome would be to give a monopoly of decision of authority to a government committee concerning economic progress and development. (see Hayek 1960, 427, fn. 9; and Lewis 1955, 148).
So what is Hayek arguing? I would suggest he is arguing for competition and experimentation, and an institutional infrastructure that not only permits but encourages such social experimentation. We have learned that polycentric systems of governance provide such an infrastructure for competition and experimentation. But much of the world lingering in poverty is trapped due to monopolistic governance structures that do not permit such experimentation. What is the answer?
The most innovative answer -- not new to this audience -- is actually the "charter cities" intellectual innovation that Paul Romer initiated. Romer is one of the most innovative economic thinkers of his generation. And in my opinion, this judgement is not deterred by his recent difficulties at the World Bank, but in fact, like his critique of Mathiness in Economics, make him even more interesting and in many ways courageous. I certainly do not agree with every nuanced twist in his argument, but I am fully in agreement with the general thrust and overwhelmingly impressed with his courage of conviction in speaking truth to a very powerful profession and the elites in positions of power.
So Professor Romer returns to his position at NYU and his Urbanization project. His idea on "new" cities combines the insights and wisdom from mainline economics from Adam Smith to Vernon Smith as discussed in my Living Economics, but also Mainline Economics and Applied Mainline Economics. What Romer does in my mind is combine his work on endogenous growth theory, with a more general framework and appreciation for entrepreneurship, and a deep understanding of how the structural rules of the game influence the nature and direction of knowledge creation and knowledge dissemination, and thus either the source of the wealth or poverty of nations. Charter cities, as Romer explains in this talk, enable poverty stricken countries to experiment and to learn from that experimentation how to escape from poverty, and improve the lives of multitudes. This idea, along with open borders, is in my opinion the most important ideas in development economics. I have nothing in principle against the fashionable randomized controlled trial -- though I do think questions of scalability and sustainability should always be on the table. But the development improvements that could be achieved through charter cities and free movement of people in my humble opinion are simply on a different scale in terms of the magnitude of the impact on the lives of citizens in those regions of the world.
Let liberty reign in those cities and let the accidents happen -- social experimentation is a pre-requisite for social progress.