Our precious soil

Top cities became hotbeds of innovative activity against which other places could not easily compete. The people clustered together boosted each others’ employment opportunities and potential income. From Bangalore to Austin, Milan to Paris, land became a scarce and precious resource as a result; the economic potential of a hectare of a rural Kentucky county is dramatically lower than that of a hectare in Silicon Valley’s Santa Clara county. And there is only so much of Santa Clara to go around.
 
Yet more Santa Clara could be built, were it not for the second and more distressing factor behind land’s return: the growing constraint imposed by land-use regulation. The Santa Clara town of Mountain View, for instance, is home to some of the world’s leading technology firms. Yet nearly half of the city’s homes are single-family buildings; the population density is just over 2,300 per square kilometre, three times lower than in none-too-densely populated San Francisco.
 
The spread of land-use regulation is not hard to understand. The clustering that adds to local economic vibrancy has costs, too, as the unregulated urban booms of the 19th century made clear. Crowded slums were fertile soil for crime and epidemics; filthy air and water afflicted rich and poor alike. Officials began imposing new rules on those building in cities and, later, on those extending them: limiting heights and building designs; imposing maximum densities and minimum parking requirements; setting aside “green belts” on which development was prohibited. Such regulations have steadily expanded in scope and spread to cities around the world.
 
As metropolitan economies recovered from their mid-20th-century slump populations began growing again. The numbers of people living in the central parts of London and New York have never been higher. And as demand for quality housing increased the unintended consequences of the thicket of building regulation that had grown up in most cities became apparent.
 

Great piece in the Economist about how land has become a constrained commodity, a brake on our economic growth. A lot of wealth has been made off of rent capture, and most of it accrues to the already wealthy while the middle class are saddled with mortgage debt and the poor, who rent, are just priced out of desirable regions.

This is a nightmarish scenario for the economy. It's bad any time you have any constraint on growth, but when that scarce commodity is land, it seems particularly difficult to remove because it has to be done through a political system that is in thrall to the moneyed, connected, real-estate-owning class.

The ugliest effect of the return of land, though, may be the brake it applies to the economy as a whole. One of the main ways economies increase worker productivity, and thus grow richer, is through the reallocation of people and resources away from low-productivity segments to more efficient ones. In business this means that bad firms go bust and good ones grow to great size. Something similar should hold for cities. Where workers can be put to use at high levels of productivity labour scarcity will lead to fast growing pay packets. Those pay packets will attract workers from other cities. When they migrate and find new, high-paying work, the whole economy benefits.
 
Mediterranean Avenue to Boardwalk
But that process is now breaking down in many economies. For workers to move to the high wages on offer in San Francisco, they must win an auction for a home that provides access to the local labour market. The bidding in that auction pushes up housing costs until there are just enough workers interested in moving in to fill the available housing space. Salaries that should be sending come-hither signals are ending up with rentiers instead, and the unfairness can trigger protest, as it has in San Francisco. Many workers will take lower-paying jobs elsewhere because the income left over after paying for cheaper housing is more attractive. Labour ends up allocating itself toward low-productivity markets, and the whole economy suffers.
 
Chang-Tai Hsieh, of the University of Chicago Booth School of Business, and Enrico Moretti, of the University of California, Berkeley, have made a tentative stab at calculating the size of such effects. But for the tight limits on construction in California’s Bay Area, they reckon, employment there would be about five times larger than it is. In work that has yet to be published they tot up similar distortions across the whole economy from 1964 on and find that American GDP in 2009 was as much as 13.5% lower than it otherwise could have been. At current levels of output that is a cost of more than $2 trillion a year, or nearly $10,000 per person.
 

First and foremost, let's acknowledge that this is all solvable if we just relax land use regulations, build more housing, and increase the population density of our urban centers. Supply and demand still works in this universe. For a variety of reasons, some clear to me, like NIMBYism, some not clear to me, that seems intractable. Does the new David Simon show explain how hopeless it all is? I need to watch it so I find some entertainment value in my despair.

If that's a road to nowhere, can the germ of a solution come from the private sector? Tech companies tend to be creative about trying to solve problems that constrain their growth because they arise from a culture of ignoring accepted impediments. For now, though, they haven't made a ton of progress on this issue. At most they've turned to providing shuttle services with wi-fi that widen the geographic footprint in which their employees can live and still get to work.

But that doesn't work if real estate is expensive everywhere within that radius. What's next? Perhaps a deeper investment in conferencing or virtual reality technology to amplify the sensation of proximity and intimacy of even the furthest flung workers? It's long been a promise of technology, but it has yet to be realized in full.

What about turning office space into living space at night when it lies idle? It's sounds ridiculous, but a company did that with the slack time of cars and seems to raise a billion dollars of capital every other week. I know, it sounds terrible, living at the office, but I'm wary of making paternalistic prescriptions about how a person should spend their free time. Some of my closest friends in life are people I spent a lot of time with at the office at Amazon during my years there.

Maybe tech companies will start their own housing developments? The economic productivity of the average productive tech worker likely still exceeds their compensation, and tech companies, led by Google in particular, have been aggressive in pushing into that gap with increased salary, benefits, stock options, etc. Housing is just another form of investment, and they need not provide it for free, it could just be subsidized. Of course, that means they'd need to acquire land, and that, paired with a thicket of land-use regulations, still restrict the human density achievable with even the most aggressive development.

Finally, solving the problem for just tech workers doesn't feel like a path towards solving it for the rest of the population. Frankly, no one feels much sympathy for tech workers these days (with the exception of some Amazonians who are working long hours, though I'm still suspicious; a lot of it feels secretly like Schadenfreude in disguise). Bay Area complaints about high real estate costs are going to fall on deaf ears, even if it's symptomatic of a dangerous trend for our economy, as noted by the Economist article.

Group all the things I miss the most about NYC, and the root of all of them was the unmatched human density. It's not just the visceral sensation of the people around you (which some dislike), but the diversity of businesses and communities that can sprout and thrive when the potential customer base is so large and tightly packed. The variety of entertainment, like theater and museums, the variety of local cuisine, the ability to find someone to share almost any interest, from curling to revivalist arthouse cinema to hip hop dancing.

I have no answers, only a longing for the Bay Area to experience the liveliness of density in the physical world to match that of the the networks and communities they've built in the virtual space, where real estate is cheap and plentiful.

Protecting heterogeneous activity

Freedom is the ability to allocate your resources differently.  The majority allocates their resources in one direction...and you can choose to allocate your resources in a different direction. 

The perfect example is the story of Noah's ark.  Does it bother you that the story is fictitious?  It really shouldn't.  As the story goes...God informs Noah that he's going to destroy the world with a flood.  This information provides Noah with the incentive to use his resources to build a giant boat.  Even though he shares his partial knowledge with others...he's the only one who acts on it.  Everybody else laughs at him because they really doubt the business model.  The majority believes one thing and an extremely small minority believes another thing.  Both groups can't be right.  And in this case, neither can both groups be wrong.  Either the world will be destroyed by a flood...or it won't be.  Despite the fact that each group is certain that the other is wrong...there's no attempt to restrict each other's freedom.  Each group can allocate their resources differently.  The majority takes one path...and the minority takes another path.  It's a good thing that Noah's freedom was not restricted because it turns out that he chose the right path. 

The moral of the story is that heterogeneous activity is essential.  Because the future is uncertain...we should hedge our bets by protecting individual freedom.  Doing so maximizes the variety of economic activity which maximizes discovery which maximizes progress.
 

More here, interesting throughout. Isn't this a great description of Silicon Valley? Worth remembering the next time someone is ready to publish another piece of outrage when some wacky startup like Yo raises a million dollars in financing or someone raises over $50,000 on Kickstarter to make potato salad (the latter is hilarious to me and not reason for mass outrage; consider it either as a mass Duchampian art installation or as an economic transfer from the gullible to the clever).

Cohen wants you to believe that your immediate intuition, sharing is caring, is the correct one.  But in reality, the correct intuition is that recognizing and respecting ownership results in far greater abundance of the things that we value enough to sacrifice for.  Protecting ownership incentivizes people to choose the paths that others have positively valuated or might positively valuate.  If we, as consumers, want a greater abundance of apples...then we have to reward the producers who've chosen to grow apples.  This ties into the idea of value signals...

Here's a summary...

  1. Sylvia discovers a bunch of apples (risk)
  2. Others are willing to pay for her apples (valuation)
  3. If the value signal is bright enough, others will start supplying apples (incentive)
  4. The result is the optimum supply of apples (abundance)
     

It's a long post that delves into many other topics including a discussion of war and its impact on government spending and whether that's an optimal outcome. But what struck a chord with me was the importance of a lack of centralized funding allocation structure in Silicon Valley, and why that's important to protecting heterogeneous activity within the technology sector. It's one of the secrets to the generative nature of this sector.

Pragmatarianism is one of the blogs I recently discovered that made it into my browser toolbar. I'll point you to one last passage from this same post.

Michael Michaud is the author of Contact with Alien Civilizations.  He's under the impression that chances are pretty good that alien visitors wouldn't have discovered that progress depends on freedom.  It shouldn't be a surprise though given that he himself hasn't made this discovery. 

As I've argued in a few blog entries...

...contrary to Michaud, I believe that it's highly unlikely that extraterrestrial visitors wouldn't have figured out that progress depends on discovery...and discovery depends on doing things differently.  You're really not going to get different results by doing the exact same thing over and over.  Thinking otherwise is, according to Einstein, insane. 

Regarding Michaud's specific example...as history clearly proves...a certain amount of progress can be made without understanding that progress depends on freedom.  This is because it's extremely difficult to completely eradicate freedom.  But if Hitler had successfully managed to conquer the world...would the rate of progress have increased or decreased?  The rate of progress would have plummeted because far fewer people would have been free to allocate their resources differently. 
 

Could it be that the premise of almost every movie about our first encounter with extraterrestrial intelligence is flawed? Could the difficulty of traveling through space be an effective filter on war-mongering alien races, and should we instead presume that any civilization enlightened enough to travel light years across space to reach us would understand more than anyone the value of leaving us humans our freedom?

I'd love to see more utopic science fiction movies that use technology as a source of improvements in life. Not all roads have to lead to Skynet, and most probably don't.

Fundamental attribution error and tech mercenaries

In social psychology, the fundamental attribution error (also known as correspondence bias or attribution effect) describes the tendency to overestimate the effect of disposition or personality and underestimate the effect of the situation in explaining social behavior. The fundamental attribution error is most visible when people explain the behavior of others. It does not explain interpretations of one's own behavior—where situational factors are more easily recognized and can thus be taken into consideration. This discrepancy between attributions for one's own behavior and for that of others is known as the actor–observer bias.

From Wikipedia. I've always heard fundamental attribution error used to describe people. But more and more, I believe it's applicable to companies as well.

That's not to say it isn't also still a problem when applied to people in technology. For example, a common belief is that tech workers in Silicon Valley are more mercenary than in other tech markets like Seattle or New York.

When I moved up to the Bay Area from Los Angeles in mid 2011, I was curious to experience this supposedly venal culture firsthand.

Having worked in all three of those markets over many years now (and also having been at Hulu for three and a half years in Los Angeles), I'm not so sure the people are more mercenary in Silicon Valley. Much of the short tenures in the Bay Area may be explainable by the environment rather than some intrinsic ruthlessness on the part of the people living in the area.

For one thing, the number of tech companies in Silicon Valley just dwarfs that in any of those other tech markets. Sure, fewer people left Amazon than I would have expected , but if you wanted to stay in Seattle, where else would you go? To Microsoft? Real Networks?

The number of startups in the Bay Area also exceeds that of any other tech market by a huge margin. Since startups have such a high failure rate, inevitably it drags down job tenures.

If you control for those two factors, would the Bay Area still rate as having a more mercenary culture? Someone with access to more data would seem to be able to answer this question quite easily (maybe LinkedIn has enough data to run such an analysis). My hypothesis, just based on my personal experience, is that the Bay Area's supposedly mercenary culture is just a technology version of the fundamental attribution error.

If you're operating outside of the Bay Area and feeling fairly secure with your workforce, though, beware. The world is changing, and the fight is coming to your doorstep. For one thing, LinkedIn and other such services have made it easier and easier for other companies all over the place to reach your employees with enticing offers. If you don't think every one of your employees is receiving multiple offers a week, if not per day, from recruiters and headhunters and LinkedIn, you may be living in the 90's.

Think you're safe because your employees don't want to relocate? More and more companies are going to where the people are, opening satellite offices in any market with a good base of talent. Shoppers in many states may not be the only ones lamenting the fact that they now must pay sales tax on Amazon purchases. Competitors are also feeling the hit as Amazon now has free reign to open offices in those states and staff them with abandon. There are three major Amazon offices in the Bay Area already, and they're recruiting aggressively. But the same thing is happening in Seattle, Amazon's home court; Facebook and Google, among others, have opened offices there. 

This is not to mention the fact that some of the best employees can choose to work from wherever they want. It's rare, but not as much as it once was. Almost every company I've worked at in my career now has some employees who work by themselves out of some random place. They're good enough, and the demand for their skills so far outstrips supply, that they spend most of their work year in a remote destination of their choice, maybe a home office in their hometown in North Dakota.

All of this is good news for employees, who now have more options as the liquidity and efficiency of the labor market surges. For employers, it's difficult to say whether it's a positive or negative thing. If you treat it as a zero-sum game versus employees, it must by definition be a negative if employees are gaining.

Within the tech sector, though, one might hypothesize that companies that can offer more cash benefit from being able to compete for employees anywhere. Startups who need compete on the uncertain benefits of stock options more than cash now must contend with the tech giants, if even if the startups locate in more remote markets. However, this might just filter out those who who are risk averse and who'd flee at the first sign of adversity.

I began this post as an examination of the myth of the Bay Area mercenary culture, but the larger theme may really be the reduction of labor arbitrage in the tech industry. By no means has it disappeared entirely, I am not advising you start your next startup in Kansas City. If Jeff Bezos were starting Amazon.com in today's environment, though, it's not a slam dunk that he'd still choose Seattle.

The Uncertainty of Risk

The startup economy is an example of an antifragile system rooted in optionality. Venture capitalists power the tech scene by making investments in nascent firms. These upfront costs are relatively small and capped. VC firms cannot lose more than they put in. But since there is no upper limit to success, the investment’s upside is potentially unbounded. Of course, venture capitalists need to make smart bets, but the business model doesn’t require them to be so good at predicting winners as to pick one every time. The payoffs from their few wildly successful investments more than make up for the capital lost to failures. While each startup is individually fragile, the startup economy as a whole is highly antifragile, and predictive accuracy is less important. Since the losses are finite and the gains are practically limitless, the antifragile startup economy benefits overall from greater variability in the success of new firms.

From a book review of Nate Silver's The Signal and the Noise, Nassim Nicholas Taleb's Antifragile, and James Owen Weatherall's The Physics of Wall Street at n+1.

As the financial crises of the past three decades have painfully demonstrated, the global banking system is dangerously fragile. Financial institutions are so highly leveraged and so opaquely intertwined that the contagion from a wrong prediction (e.g. that housing prices will continue to rise) can quickly foment systemic crisis as debt payments balloon and asset values shrivel. When the credit markets lock up and vaunted banks are suddenly insolvent, the authorities’ solution has been to shore up underwater balance sheets with cheap government loans. While allowing a few Too Big To Fail banks to use their “toxic assets” as collateral for taxpayer-guaranteed loans makes their individual fiscal positions more robust, all this new debt leaves the market as a whole more fragile, since the financial system is more heavily leveraged and fire-sale mergers consolidate capital and risk into even fewer institutions. These “solutions” to past crises transferred fragility from the individual banks to the overall financial system, creating the conditions for future collapse.

Too Big To Fail is an implicit taxpayer guarantee for banks that privatizes profits and socializes losses. Markets have internalized this guarantee. The judgment that Too Big To Fail banks are, perversely, less risky is reflected in the lower interest rates that creditors demand on loans and deposits. Recent studies estimate that this government protection translates into an $83 billion annual subsidy to the ten largest American banks. This moral hazard rewards irresponsible risk taking, which management will rationalize ex post facto by claiming that no model could have predicted whatever crash just happened. Being Too Big To Fail means that predictors have no “skin in the game.” In making large bets, they get to keep the upside when their models work, but taxpayer bailouts protect them from market discipline when losses balloon and their possible failure put the overall economy at risk. To promote an antifragile economic system, bankers must be liable for the complex products they produce, each financial institution must be small enough to safely fail, and the amount of debt-financed leverage in the system overall must be reduced. These are the most urgent stakes obscured by the difficult mathematics of financial risk. Markets will never spontaneously adopt these reforms; only political pressure can force them.

No Hall of Fame for you

No baseball players were elected to the Hall of Fame today. Jonah Keri has one of many refutations of the logic, or lack thereof, of the Hall of Fame voting body. I don't want to get into a debate about the silliness of the BBWAA, but I think it's illustrative, in the lightest way possible, of one of the more pernicious and annoying forces in this country: anti-intellectualism (and the musty moral codes it produces).

Nate Silver did a great job of exposing much of the anti-intellectual punditry that masked for mainstream political reporting this past election. We shall see if it has any lasting effect. The world he left behind, baseball, is still largely dominated by reporters who don't know even the most basic of mathematic or statistical principles. Thankfully the market forces that drive winning have pushed some smarter people into MLB front offices so at least the product on the field is run more rationally, but much of the smartest media coverage of sports still exists on the fringes.

One of the reasons I've gravitated towards the technology sector is that it has always seemed to me to be one of the most intellectual-friendly of industries. When people criticize Silicon Valley for not engaging more in politics, what they fail to understand is that most people in technology study politics and see a rigged and inefficient game, dominated by intellectual hostility. Why would they want to waste their life playing a game that's tilted against them?

The tech world may not be perfect, but it aspires to be a meritocracy, and when companies fail, they just cease to exist. There are no government bailouts (yes, that's you Wall Street) because you're too big to fail. I can't remember who posted a link to this article in my Twitter feed, but the first line is astonishing.

When I worked at high profile companies like Amazon and Hulu, I'd be upset when various reporters covered us in a lazy way. When reporters did not just legwork but critical thinking, it always comforted me, regardless of whether it was positive or negative coverage, because it showed a healthy press at work. A smart, independent, and dogged press is one of the core strengths of this country, like white blood cells against the spread of lies and half-truths. It's one reason I still derive a certain perverse pleasure whenever Gruber at Daring Fireball ridicules some of the silliest of Apple media coverage.

When anti-intellectualism is allowed to clog up our communication channels, it reduces the gains that we could be reaping from the Internet's single greatest strength, it's ability to transmit information cheaply and quickly.

How did I get off on this tangent from the baseball Hall of Fame vote? I think this Mucinex is making me loopy.

American modernism, Silicon Valley style

Jobs went further, however, he managed to create products that were designed like Porsches and made them available to everyone, via High Tech that transcended stylistic elements. An Apple product really was high technology and its form followed function, it went beyond the Porsche analogy by being truly fit for purpose in a way that a Porsche couldn’t, being a car designed for a speed that you weren’t allowed to drive. Silicon Valley capitalism had arguably delivered what the Soviets had dreamed of and failed, modernism for the masses. An iPhone really is the best phone you can buy at any price. To paraphrase Andy Warhol: Lady Gaga uses an iPhone, and just think, you can have an iPhone too. An iPhone is an iPhone and no amount of money can get you a better phone. This was what American modernism was about.

David Galbraith sees Steve Jobs and Donald Norman as kindred design spirirts. Norman has been commisioned to design Apple's new headquarters.

In a broader sense, Silicon Valley has minimized the value of scarcity, and in such a world, elevated the value of curation the retention of such curation. The web and services like YouTube, Spotify, and Google Books have unlocked previously rare and inaccessible content for everyone with an internet connection. It's an overwhelming mountain of content, and that's why microblogs like Twitter or Tumblr do such great business as ways to point a telescope at things we should pay attention to.