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shminux comments on Natural Selection of Government Systems - Less Wrong
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This experiment has been tried several times, most recently in Yugoslavia and the former Soviet Union, with rather mixed results.
As a different example: The federal government in Belgium is increasingly ceding its power in favor of the (smaller) regions. On the other hand, the provinces (even smaller than the regions) have recently lost some power to the regions.
Yugoslavia and the former Soviet Union did not simply cede most powers to smaller territorial units – they split into different nation states. People cannot freely migrate between the new republics due to linguistic and ethnic barriers as well as political borders.
There were no or very few linguistic issues to begin with, and people could migrate easily, for a while, until the internal and external tensions grew, which happened in most cases within a few years. But yes, the experiment is not as clean as one would hope for. Still, being able to experimentally test political and social ideas is a luxury, and this is one of them.
There was almost no private housing in the soviet cities, and to move to another city you needed government authorization. After the collapse of the USSR there was a huge unemployment, and finding a job in the new place was nearly impossible. Ethnic tensions were also extremely high.