I completely agree with your analysis of networks and institutions. While I generally respect Balaji, I find his Network State concept as not intrinsically compelling for the reasons you articulate. But I forgive him because he is an investor in Pronomos Capital, which is investing in new jurisdictions in the real world. The Network State concept is thus a form of marketing for the more fundamental work of developing new jurisdictions.

It may be time for you to visit Prospera, institutionally the most advanced new jurisdiction in the world. Their team includes Oliver Porter, who developed the government services outsourcing model that was successful in Sandy Springs, GA; Tom Murcott, who developed New Songdo City, a new development less than 20 years old with several hundred thousand residents; Jeffrey Singer, former CEO of the Dubai International Financial Centre; Shanker Singham, one of the most experienced and knowledgeable experts in international trade law; and so forth. These are serious people with serious experience developing and managing real world institutions.

The entire Special Economic Zone (SEZ) movement has seen explosive growth in the past few decades, from a few dozen in the 70s to thousands today. SEZs are a proven technology. SEZs with distinctive common law legal systems, which differ from local law, have been developed in Dubai, Abu Dhabi, Kazakhstan, Honduras, and Rwanda, with another one forthcoming in Colombia. Thus while not yet a "mature" institutional technology, inserting a common law zone within a nation is no longer a frontier institutional technology.

Moreover, it is based in part on the international arbitration framework. International arbitration is a very mature institutional technology. I recommend Ribstein and O'Hara's The Law Market,


as a very pragmatic approach to how we already have a well-developed, mature international market in legal systems, with dozens of concrete examples.

One of the distortions of the chattering on this movement is it is dominated by people who are fascinated with libertarian ideas, either for or against. When one becomes more deeply involved, it quickly becomes a matter of more mundane institutional details, most of which are mature.

And yet what is exciting is integrating institutional innovation with mature, experienced institutional norms and practitioners already in place, yet with far more flexibility than is available within most other nation-state institutions.

The Adrianople Group is another interesting development along these lines,


Founded by people who were inspired by the vision of free cities, but are now becoming a leading nuts-and-bolts consultancy for the SEZ industry, including creating the first global map of zones and aggregating commercially valuable information which had not previously been available from one source.

Balaji's Network State is inspiring virtual communities to become excited about possibly moving to one or another of these new jurisdictions in the future. But the real work is being done by institution builders on the ground working within well established industries with long, proven track records of building new institutions using mature institutional technologies.

And, yes, the government of Honduras is trying to remove Prospera's legal autonomy, but whether or not they succeed, this is a global movement that is well beyond the particulars of what happens there. Moreover, the dispute between Prospera and the government of Honduras is taking place within well established international legal frameworks. Prospera recently sued the government of Honduras for $10.775 billion within the CAFTA-DR framework,


The world of new jurisdictions and institutional innovation is a dynamic, exciting realm that has far more depth than is apparent in Balaji's Network State concept.

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I’m not quickly finding it, but I recall that you have written one or twice on an approach to replacing university education with something more like a network. How do you apply the ideas in this article to that idea?

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The physical and virtual worlds, however different they may be, are inextricably intertwined. My phone and computers are gateways to the virtual world, yet they exist and are manufactured in the physical world. The production of iPhones requires an entire Chinese city. People have to be physically transported into and out of the factories. Likewise, as I sit here reading Mr. Kling's articles in the virtual world, I am SITTING HERE in a physical chair at a physical desk typing on a physical keyboard, munching on physical nuts that some physical organization has grown on a parcel of physical land, and drinking water from a community well. The collapse of the network would cause great hardship which most people would survive. But the collapse of human operations in the physical world and the institutions that support them would be death to us all.

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Re: "Institutions, including the government, are reasonably well adapted to the world of the physical. Networks, on the other hand, may be better suited to the world of the virtual."

The world of the physical, too, rests on interaction between institutions and networks (as you define them). A core example is the relationship between organizations and markets.

Colleges, which traditionally operated cafeterias, began -- before the advent of the internet -- to outsource food service to specialized firms. This is an instance of unbundling in the physical world.

Since the advent of the internet, colleges have internalized production of some IT services and governance. This is an instance of new bundling by orgs, across the physical and virtual worlds.

If colleges proceed to outsource instruction in the Calculus, will online instruction be performed by networks of math teachers? Or will online instruction be produced by other orgs who employ math teachers (perhaps for-profit firms)? The latter would be an instance of evolution of specialization among organizations, coordinated by markets -- the dynamic of "the boundaries of the firm," which always shapes a market economy.

Arnold's scenario is that new networks of faculty/professionals, employers, and highly motivated students will bypass the elite university system.

I am confident that various new institutions (practices) will emerge, evolve, and become established and regulated in the virtual world. I am also confident that elite organizations will adapt to the virtual world. I am agnostic about networks replacing organizations in education and in other major institutions.

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What a lucid, incisive essay!

You seem to use the terms, "institution" and "organization," interchangeably. My intuition is that these are distinct concepts. Organizations are collective actors, constituted by membership and authority (hierarchical decision-making). Institutions are established practices. They may be informal or formal. They emerge, evolve, and sometimes become codified or regulated. Marriage, vendetta in cultures of honor, and the market economy are examples of institutions.

Organizations may be instances of institutions; for example, Swarthmore College is an instance of the institution, "education." Conversely, institutions may emerge and become entrenched within organizations; for example, students at many selective colleges adhere to a code of silence about academic dishonesty, whereas students at Washington & Lee University practice an honor code, which enforces, among other things, academic honesty (exams aren't proctored by faculty):

"The Honor System is one of Washington and Lee University's most important traditions and traces its roots to the mid-1840s at Washington College (W&L's name from 1813-1870). [... .] Each new generation of students defines the Honor System by its actions and the behavior it deems dishonorable. At Washington and Lee, dishonorable conduct is not codified; rather, the Honor System is based upon the principle that any action deemed a breach of the community's trust will be considered an Honor Violation."


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The rot at universities is less due to publications counting than to favoring activism over scholarship. Regardless, I'm skeptical that relying on letters of recommendations and introductions would improve things. Letters of recommendation are practically worthless in my long experience writing and reading them for graduate school admission.

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