Inside Silicon Valley’s dream of capitalism untethered from democracy

Photo illustration of a cityscape in the sky made out of $100 bills coming loose from a series of ropes that are holding it down.
Silicon Valley has a dream: more capitalism, less democracy.
Photo illustration by Victoria Ellis/Fortune; Original photos by Getty Images (4)

In 2009, a Stanford economics professor named Paul Romer gave a talk on what many would see as an attempt to revive colonialism. He asked why some countries had grown rich while some remained poor. It was not just about having the right location or the right natural resources. It was about something more intangible: the right set of rules. Not only the laws that set tax rates, regulated labor, and protected property but also cultural norms, values, and beliefs. The way we were made to behave, but also the way we behaved without thinking. 

By his account, the history of capitalism was a history of struggle among rules–and democracy was not necessarily an advantage. His prime example was Hong Kong–a scrap of coastline organized under different rules than the adjacent mainland since the 19th century. When China imported the Hong Kong model to the Pearl River Delta in the late 1970s, he said, a “process of copying” helped China begin catching up to the West. 

How could such historical accidents be made to happen again? The shortcut to Hong Kong that Romer offered was called the charter city. The formula? Persuade poor nations to surrender patches of uninhabited territory to be managed by richer ones. Pollinate the empty land with rules known to make capitalism work and watch it grow. Though he did not use the language himself, this could be seen as colonialism by consent, occupation by invitation. Using the jargon of Silicon Valley, he called his charter cities “startup political jurisdictions.” Displaying a nighttime map of Africa, he pointed out the “enormous amount of land” unlit by artificial light—or, according to him, “very underutilized.” Leaders just had to face the fact that sovereignty under the conditions of globalization was already moot. Why not go all the way and give over your country to external management? You had nothing to lose—and Hong Kong to gain.

Romer spoke from the heart of Silicon Valley at a time when the tech sector was defined by the relentless search for the next world-changing “killer app.” The way Silicon Valley saw it, the world was full of problems in need of technological fixes. Airbnb set out to solve the hotel. Uber set out to solve the taxi. Theranos set out to solve the blood test. The idea of the charter city borrowed its sheen from the idea of charter schools, the privately backed startup educational institutions that tripled in number from 2000 to 2012. The Wall Street Journal made the connection, comparing Romer’s charter city model to a charter school “free of union contracts and public bureaucracy.” For mainstream America in the 2000s, charter schools were targeting the outmoded institutions of public schools. Charter cities targeted the outmoded institution of nation-states.

The place where Romer’s charter city came closest to realization was the Central American nation of Honduras. An enclave economy in the 19th century, with plantations run by foreign companies, Honduras fell under successive U.S.-supported military dictatorships from the 1960s onward. The most recent coup was carried out by the National Party of Porfirio “Pepe” Lobo in 2009. Among his advisors were graduates of elite U.S. universities. Like Romer, they were seeking solutions and gimmicks. Lobo’s team was primed for Romer’s arguments, and when his charter city talk was posted online, they contacted him. By late 2010, the Honduran leadership had met with Romer and agreed to make their country “the site of an economic experiment.”

The legal form for the charter city in Honduras was the Región Especial de Desarrollo (special development region), or RED, an extraterritorial entity to be managed by a foreign partner country. 

Created by the National Congress of Honduras through a constitutional amendment, REDs would be veritable colonies within the nation. A foreign nation would establish and staff courts, train police, set up schools, health-care systems, and prisons. Policy would come from a nine-member Transparency Commission and governor appointed by the Honduran president in the first instance and internally thereafter. REDs resembled 19th century concessions but, in some ways, went beyond them. Most remarkable was the fact that they would have their own juridical standing: REDs could enter treaties with other nation-states, determine their own immigration policies, and conduct diplomacy alongside the Honduran government. In terms of international law, the REDs would have at least as much autonomy as the Special Administrative Region of Hong Kong.

Romer had managed to secure the necessary domestic conditions in the host country, but he was having trouble finding a patron state, a richer country willing to manage the charter city. One of his dream candidates was Canada. In early presentations of the charter city, he fantasized about Canadians taking over the Cuban enclave of Guantánamo Bay from the United States and turning the notorious prison of the global war on terrorism into a bustling commercial hub for the region. He pitched Canada on a similar role for Honduras. This was no humanitarian mission, he insisted–it was a business proposition. Canada was already one of the primary investors in Honduras, accounting for an average of 28.7% of foreign direct investment in the early 2000s, more than the United States. 

A charter city would be a captive market and a client for Canadian services. Canada could offer education, health care, environmental management, and tax administration on a fee-for-service basis. Romer even imagined a Caribbean contingent of the Royal Canadian Mounted Police patrolling the zones with wages drawn from land revenues. He repeated a popular slogan: “The world wants more Canada.” But Canada demurred.

The charter city connected to the dreams of Silicon Valley, but also to the context of larger geopolitics. Romer talked about the need to “rethink sovereignty” as if this were a new idea. But the United States had been rethinking sovereignty in earnest since its invasion and occupation of Afghanistan in 2001 and Iraq in 2003. When Romer gave his first charter cities lecture, the United States still had 130,000 troops in Iraq.

With the failures of American “nation building” a constant thrum in the daily news, the press was happy to showcase Romer’s dreams for a less militarized version of imperialism with economic freedom as its goal.

U.S. foreign policy and Romer’s charter city proposals worked in tandem to shift the Overton window on the idea of alien rule. If the world’s most prestigious publications could get behind a project of colonialism by invitation, what else might be possible? 

Those who became most excited about Romer’s plan for Honduras were not existing states like Canada but entrepreneurial libertarians who thought it might be nice to have a mini-state of their own. Why shouldn’t private citizens get in on the act of government, the most lucrative line of business yet created? 

Erstwhile Google employee and “startup society” booster Patri Friedman pointed out that government services accounted for 30% of global GDP. “People talk about disrupting medicine or energy or education,” Friedman said. “Those are small potatoes. This is the big one.” Government was the biggest cartel in the world. “Let’s think of countries as firms and citizens as customers,” he proposed. If there was such a thing as state failure, then “can we cash in on it as entrepreneurs?” As a pure enterprise, startup cities looked like a field waiting for an investor with enough guts to enter. “If laws were software,” Friedman asked, then why was “America’s operating system . . . written in 1787?”

Friedman gathered people from the circle of investor Peter Thiel to back an investment group called Future Cities Development, which announced plans to bring the “Silicon Valley spirit of innovation to Honduras.”

Yet another investor, Erick Brimen, referred to his métier as “countrypreneurship,” and started a venture capital fund offering seed capital for creating new societies “from scratch.” Proponents of the startup society insisted that the 21st century city was not made of concrete and glass so much as out of laws. 

True to Romer’s vision, the most important thing about a place was its rules. While earlier settlers once sought wealth in gold, crops, or railroads, the treasure of zones in the 21st century was their status as a jurisdiction–their potential as a new place to pick and choose among regulations and licensing requirements. 

Such zones offered vivid examples of what had become standard practice in the conduct of global capitalism. When people form a business contract anywhere in the world, they already have the choice of which law they elect to use. Most commercial contracts are written in either New York State or English law. For roving capital, laws are selected and combined à la carte.

A watered-down version of the RED that ended up being implemented in Honduras under the name of ZEDE–following a template from the small Baltic state of Estonia. In the 2000s, the birthplace of Skype strove to become what one journalist called a “digital republic,” allowing you to vote, dispute parking tickets, and even give testimony in a criminal case online. After 2014, Estonia launched an e-residency program, which allowed people to become “virtual residents” for a small fee, registering their business in the country and gaining access to its range of online services as well as entry to the European Union’s Digital Single Market. The architect of that program became an advisor to the startup city of Prosperá.

Prosperá was the same fantasy that had drawn libertarians and neoliberals to Hong Kong in the 1970s, Singapore in the 1990s, and Dubai in the 2000s: the dream of capitalism without democracy. They sometimes described this as “shrinking the state,” but a Honduran fisherman offered a better metaphor: the project, he said, allowed investors to “kidnap the state.” 

Late in 2021, the old-fashioned mechanism of popular elections creaked its levers and democracy took its revenge. A new government came to power in Honduras. The election was won by Xiamaro Castro, the wife of the president deposed in Pepe Lobo’s 2009 coup. She put the ZEDEs at the top of her list of targets, seeking to revise the constitutional amendment that allowed for the creation of these zones, or to put their continued existence to a popular vote. 

The mounting opposition put the longstanding model of the enclave under scrutiny. In April 2022, Xiomara Castro’s predecessor, who had overseen the creation of foreign-controlled zones, was extradited to the United States on charges of trafficking tons of cocaine and using the proceeds to fund his political operations. The same month, the Honduran congress voted unanimously to overturn the ZEDE law as unconstitutional. 

Despite the legal limbo Prosperá now finds itself in, it is forging on with expansion plans, seeking out regulatory loopholes to practice gene therapy and digital banking, and setting up a “Bitcoin Education Center.” 

The champions of start-up cities hope that their foothold will be defended by treaties such as the Dominican Republic– Central America–United States Free Trade Agreement, which permit investors to sue host governments if their investments are negatively affected by legal changes. 

Prosperá is currently doing just that, for damages of “at least several billion U.S. dollars, and as high as US$10.775 billion,” as their filing puts it. 

“Libertarians don’t like international trade law,” one former investor put it without irony, “but it turns out international trade law is tremendously helpful.” 

In his 2009 talk, Romer differentiated the charter city from old-fashioned empire. The thing that was bad about colonialism,” he said, is that “it involved elements of coercion and condescension.” His model, by contrast, was “all about choices.” Though the people of Honduras have chosen to reject the charter city, the coercive power of international investment law may have the final say.

Excerpted from CRACK-UP CAPITALISM: Market Radicals and the Dream of a World Without Democracy. Published by Metropolitan Books, an imprint of Henry Holt and Company. Copyright Copyright © 2023 by Quinn Slobodian. All Rights Reserved.

Learn how to navigate and strengthen trust in your business with The Trust Factor, a weekly newsletter examining what leaders need to succeed. Sign up here.

Read More

CryptocurrencyInvestingBanksReal Estate