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July 19, 2009
David Warsh, Proprietor


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Learning By Doing

In the aftermath of war, the old city was a wreck. Carl Bildt, the former prime minister of Sweden, who served as co-chairman of the peace conference that effectively ended the bitter conflicts that followed the break-up of the former Yugoslavia, described the shock of his first visit this way (in Peace Journey):  

The southern parts of town made it look as if the world had come to an end. Snow covered the ruins, which stretched as far as the eye could see. .But what made the greatest impression was not what could be seen, but what the ear could not hear. There was absolute silence. Life always involves sounds: — a dog, a child, traffic on a distant road. But here there is nothing, just silence and ruins. There was nothing left at all.  

Brčko, in northeast Bosnia at a crossroads of the Balkans, had been the first big flashpoint of the Bosnian war – the scene of much ethnic cleansing and worse when its Serbs rose against their Muslim and Croatian neighbors. The city’s significance lies in the fact that, just south of the Croatian border, it dominates a narrow corridor along the Sava River that links two large areas of Serbian power within the Bosnian-Herzegovinian state that are today the unofficial Republika Srpska. By the time the Dayton Peace Accord brought an uneasy truce to the region, in 1995, Brčko was a smoldering ruin. 

  

A couple of years later, however, an improvised mall along a highway fifteen miles south of town was booming, a cross between a Home Depot, a flea-market and a truck-stop, open to all comers, Serbs, Muslims and Croats, gradually infusing life back into the city that lay just over the rolling hills. Once established, it continued to grow. In “Guns, Girls, Drugs, Fake Track Suits: It’s All Here in the Wildest Market in the World,” Phillip Serwell told readers of the Sunday London Telegraph in 2000 that the Arizona market (the named attached to the north-south highway in American code books) would have gladdened the hearts of American pioneers, with its contempt for taxes and regulation. He described its incongruous location:  

Sitting amid cabbage and potato fields, about 2,000 ramshackle plywood and corrugated metal shacks sprawl across an estimated 35 acres. It has the frenetic feel of a bustling shanty town, with its tightly packed alleyways, open sewers and mazes of cables stealing electricity from the local grid. To call it a firetrap would be an understatement.  

And a couple of years after that, all two thousand Arizona market vendors were registered and paying taxes. The sin trade was mostly gone. An Italian consortium was building sales halls and parking lots where the shacks and alleys had been. Construction cranes dominated the downtown skyline, and most of the 85,000 residents paid their taxes. Wrote Mark Lander, of The New York Times, in 2003, “Ethnic tension, while not gone, seems to have been relegated to status of distraction for which the busy people have no time.” What started as a coffee stand in a meadow had become a metaphor for successful economic development.  

  

How did it happen? The answer seems to have been fairly simple. The Arizona Market sprung up in a matter of days after American forces set up a checkpoint on the north-south highway. As American commanders on the ground gradually overcame their fear of “mission-creep” – the disasters in Mogadishu and Haiti were still fresh in their Pentagon masters’ minds — they responded to the urgent requests directed to them by the various local ethnic communities: repair a highway, rebuild a bridge, fix the water system and, above all, enforce the law. Stop car-jackings, claim-jumpings and shakedowns in the market; protect people in their daily lives, especially from the rival governments. When the Bosnian government dispatched thirty policemen to take control, the Americans met them with some tanks and sent them back to Sarajevo .And when the various ethnic groups still couldn’t agree as to who would govern the city, the International Tribunal overseeing the treaty extended the principle, creating a special governmental district for Brčko and the nearby countryside. 

  

For four years, the city was governed by a series of American diplomats, in what was described as a “benign pro-consulship.” They opened schools, integrated the police department, supervised the courts, until elections were finally held in 2004.  

   

The story is relevant today for a couple of reasons.  

   

For one thing, Bruce Scott, a long-time dissenter and at the Harvard Business School, is preparing to publish a little book that has some direct relevance to the financial crisis. Scott is among those who turned the saga of Brčko and the Arizona Market into a famous story of the Balkan wars. (The details here are taken from a Harvard Business School case study he and casewriter Edward N. Murphy put together in 2005.) In The Concept of Capitalism, Scott argues with simplicity and clarity that government alone can make the rules and enforce limits on acceptable behavior that are the necessary preconditions for markets to work, everywhere and always, in New York as in that Bosnian meadow.  

   

For another, a celebrated iconoclast, Paul Romer, of Stanford University’s Center for Economic Policy Research, is expected to make much the same point when he rolls out his latest venture this week at the TED Global Conference, a new-age Davos knock-off from California (Technology, Entertainment, Design) whose Website extols its “famous 18 minute talks.”  

   

Neither Scott nor Romer is operating in anything like the normal chain of contention for expert authorities seeking to influence public opinion. For a clear view of what is going on in the economics profession with respect to appropriate architecture for the public and private realms, at least in economics, you can’t do better than Avinash Dixit’s presidential address last winter to the American Economic Association, “Governance Institutions and Economic Activity.” Dixit, 65, of Princeton University, co-author of The Art of Strategy (with Barry Nalebuff), is among the most accomplished figures in contemporary economics. But both Scott and Romer deserve more attention than they are likely to get, at least at first, for reasons I will explain.  

   

Take Scott. A 1954 graduate of Swarthmore College, having studied French industrial planning with John D. McArthur and US industrial competitiveness with George Lodge, he devised the course known as Business, Government and the International Economy (BGIE), which quickly became a staple of the MBA curriculum, at Harvard and elsewhere. He then watched, with mounting alarm, as his own gospel of national strategic economic planning was eclipsed, first by two better known figures at the business school, Michael Porter and Alfred Chandler, and, in the wider world, by the classical liberal doctrines of Milton Friedman and neoclassical economics generally. The belated recognition of Nobel laureate Douglass North in 1993, for his work on the institutional foundations of capitalism, was small comfort. Human agency was required to make North’s evolutionary processes work.  

   

So Scott set out to make the case for enlightened oversight with a giant history, Capitalism: Its Origins and Evolution as a System of Governance. At 700 pages, that book is still growing. The little volume that is forthcoming, The Concept of Capitalism, was carved out of the introduction by its German editor, Niels Peter Thomas, of Springer Verlag. Scott writes,  

My conception of capitalism is an attempt to address the above oversights in Friedman, North and their colleagues’ theories of capitalism. In conceiving capitalism to be a system of governance, I mean to move beyond neoclassical theory, where markets spontaneously coordinate the activities of economic actors through the price mechanism, to the broader form of political economy. Where North adds a second level of analysis involving the institutions that shape those markets with incentives and constraints, I am adding a third level where a political authority governs how those incentives are designed or shaped through a political process, and eventually administered.  

Scott’s book is not likely to persuade many economists. There are none of the mathematics on which economists depend to make their arguments tightly reasoned, in even so relatively popular a vernacular as, say, Avinash Dixit’s presidential address. Instead there are some telling comparisons of levels of authority within economies to those of organized sports – league authorities, their rule and referees, and the games themselves. The book jacket depicts a ball nestled in the corner of a soccer goal. But the Brcko story, which is widely associated with Scott, and which today informs a good deal of military thinking about Afghanistan and Iraq, is an even better illustration of what he means about the foundations of successful development. “Limited monarchy is what you need to make it work,” he says. And his views on the crisis – euphoric deregulation was a grave mistake, effective regulation must be co-extensive with the market – seem likely to finally bring him to the attention of a wider audience.  

   

Romer is something different, for he long ago won his tournament. One of a generation of technical economists that includes Ben Bernanke, Lawrence Summers, Jeffrey Sachs and Paul Krugman, he startled colleagues last year when he resigned a Stanford professorship in order to pursue “other interests” in the Bay Area. At 53, Romer had written a series of papers that reoriented the profession’s view of economic growth as he moved from the Massachusetts Institute of Technology to the University of Rochester to the University of Chicago to the University of California at Berkeley to Stanford’s Graduate School of Business, devised the economic rationale for the Justice Department’s (ultimately unsuccessful) proposal to break up Microsoft, and started and sold a Web-based homework company, Aplia, that changed in some degree the way much undergraduate economics teaching is done. (EP wrote a book about all this, Knowledge and the Wealth of Nations: A Story of Economic Discovery, but now covers Romer and the rest of growth theory mainly at long distance.)  

   

It turns out those “other interests” mainly entail a scheme to persuade nations around the world to adopt “special administrative zones,” managed in many cases by foreign governments, based on the model of Hong Kong, which, for 150 years, was administered from afar by Britain. “Hong Kong was the most successful economic development in history,” says Romer. The rules developed there over time were codified, copied and installed by the Chinese government in four special zones along the coast in the 1980s; the experiment worked so well that the system was adopted country wide.  

   

Romer presented a rehearsal version of his ideas at a seminar in May at San Francisco’s Long Now Foundation. You can watch Romer’s A Theory of History, With an Application online (or just this five-minute snippet), or read Long Now co-founder Stewart Brand’s summary of the talk. It costs $995 to watch in real-time, along with all the rest of the proceedings, the 18-minute version that Romer plans to deliver this week in England. But presumably the talk will be available online soon enough; the TED forum bills itself as offering “riveting talks by remarkable people, free to the world.” And, according to Brand, Romer plans to open an Institute with a website this summer.  

   

Meanwhile, Charles I. Jones, of Stanford’s Graduate School of Business, has posted a version of the talk that he and Romer gave at last winter’s economics meetings: The New Kaldor Facts: Ideas, Institutions, Population, and Human Capital. (Nicholas Kaldor in 1961 set out a list of six “stylized facts” which a convincing growth theory must explain.) The world according to Romer and Jones is closer in certain crucial details to the one envisaged by Bruce Scott than to the current research consensus that Dixit describes.  

   

Nobody who has watched Romer in action will be quick to sell him short. He built a highly successful company and sold it for a lot of money. In the fall of 2007, he turned down the job of chief economist of the World Bank in order to enter on this project. And nobody who remembers Stewart Brand, and the success of his Whole Earth Catalog in changing consciousness in the ’70s, will doubt the efficacy of imaginative discourse in persuading a lot of people fast – especially in this multimedia age. In fact, Brand has some ideas of his own about the way ahead.  

   

The situation, like these two videos, bears watching.  

 

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