Saturday, February 03, 2018

Networks or supply chains for ideas?

Ferguson is a prominent historian who is readable.  Here he dramatizes well-known historical episodes (who allied to go to war, to build empires, large companies, etc.) by noting the networks and networking that were involved.

We all know that networks and networking are important.  We also know that all of us are keen to find sources of useful information (Mokyr). This is why I prefer to note supply chains for ideas to networking. Ferguson cites the spread of ideologies.  Ideas can be thought of as “in the air” and as they rain down on us. But purposeful action in seeking ideas is more interesting and more descriptive. Supply chains are everywhere. In fact supply chains for ideas accompany many supply chains for things. They can be intertwined. We often learn when we transact. 

In recent work, John Cho and I have looked at pairwise co-locations of industries in the greater Los Angeles area. Using census block groups we estimated 2,991 co-location coefficients.  For all of the industry pairs we also know sales and purchase coefficients from input-output tables.  Using the latter as explanatory variables in a regression, we see that they explain just 3% of observed co-location.  What explains the rest?  There is surely noise in the data but we surmise that much of the rest must be due to the draw of information exchange.

The textbooks teach that information is a “public” good and unlikely to be traded. But only some of this is true.  Because we are keen to find useful information and because so much useful information is tacit, requiring interacting, we choose locations that help us with access specific information. The strong and the weak links are in play.

We network for many reasons to secure goods and to secure ideas. We do all this over many media, electronic as well as face-to-face. Choosing the best location for us to get all of this done becomes important and tricky. It also suggests that “agglomeration” can be many things, near as well as far. Fitting our data to Ripley-k functions shows that non-chance odds of encountering a same-industry firm, increase beyond 5km (the side of a large but square downtown). Near and far.

We agglomerate not just in tight clusters but over many geographic ranges.  New York is a financial hub but one that extends beyond Wall Street. L.A. is an entertainment hub but one that extends well beyond Hollywood (and even the San Fernando Valley). San Francisco is a tech hub that extends far beyond Silicon Valley.  High rents in all of these places suggest supply and demand forces.  Restrictions on supply have been widely noted. Strong demand is what our story is about.

All of  this illustrates once again that spatial arrangements and networks (including the paths we wear over lawns that were never laid out for us) emerge.  Jane Jacobs famously noted all this many years ago. “Their intricate order – a manifestation of the freedom of countless numbers of people to make and carry out countless plans – is in many ways a wonder” (Jacobs, 1961)

Sunday, January 14, 2018

Good news, not bad

Over at Marginal Revolution, Alex Tabarrok notes that today's NY Times just misses the opportunity for another "teaching moment".  He refers us to their "Fine Lines ... Inside one of America's last pencil factories."  I am referring to Leonard Reed's I, Pencil, an essential teaching tool re specialization and exchange. No one person can easily make a pencil. But something as mundane as a pencil reaches us at very low cost because large numbers of strangers have come together as specialists, producing pencils for us at low cost.  It's a wonderful lesson in how market signals perform remarkable coordination at great benefit to us all. It thereby explains our material well being.

The same issue of the NY Times includes "Your child's preschool teachers may be the most important educators she'll ever have ... So why do they get paid so little.?" It's another supply and demand opportunity squandered. The essential "The Economic Way of Thinking" by Paul Heyne, Peter Boettke and David Prytchitko includes another simple and incisively useful example. I am looking at their question #9 at the end of Chapter 11 (11th edition).  Why do hairdressers earn more than day-care workers? Does our "society" care more about vanity than children? Pretty awful? Bad news? No. Demand and supply indicate that there are many people who enjoy working with young children. Apparently many more than want to muck around in other people's hair. Good news.

Here are just two simple but profound lessons from very basic economics. It's not about "fake" news. It's about good news, much better than what the "wets" (thank you, Margaret Thatcher) dwell on.

Monday, January 01, 2018

Urban structure, not urban size

Tyler Cowen asks "Why don't cities grow without limit." He comments on (and links to) a Paul Krugman discussion of the same topic.

"City size" as the focus has problems.  What is the boundary of "the city"? And cities are about spatial arrangements. Spatial arrangements involve many trade-offs and are necessarily emergent. Emergent arrangements would bend and displace the (imaginary) marginal benefit and marginal cost functions. This goes on as the "cities" keep spreading out.

But emergent spatial arrangements are up against the durability of physical forms as well as the durability of politicized land use regulations.

All of this sounds like Jane Jacobs v Robert Moses all over again.  But times have changed insofar as people now link up in many ways. People in cities want space as well as access. That alone suggests a trade off. But they want access to many things. They also choose the mode of access to all these things (electronic v. traditional).  "Geography matters more than ever despite the digital revolution ..." And more potential trade-offs than ever.

Sunday, December 24, 2017

Every time

Today's NY Times includes "The Megacity, Untethered ... Urban giants are going global, but losing their connections with smaller neighbors."

What do we know?  (1) This is the age of AI, expanding platforms, and disruptions. New applications of blockchain technology will boost all of this. (2) Humans are alpha-everythings because they (we) communicate/cooperate better than any competitor. We easily dominate rivals who are much stronger and much faster. (3) Our wealth comes from our productivity.  Our productivity comes from new ideas. Our new ideas are new combinations of old ideas. The clearer the networks in our brains, the better we are at coming up with new combinations. (4) Being good communicators, we can do even better. Our brains are actually networked networks. What we do in cities is to cultivate and form networks. We network in many ways, in person as well as electronically. We are prompted to seek the best blend of networking options.  The blend is peculiar to each individual's mission and includes choice of location and travel. (5) This is how the physical forms in which we operate (including cities) evolve. But they are also a constraint. They are durable and they adapt slowly. The crony capitalism that gives us the rules and regulations of land use assure that the adaptations will be slow and costly.

But tech will beat regulators every time.  Regulators will slow tech every time.


Evidence that the world is getting better (H/T Cafe Hayek) does not get nearly the attention it deserves. My blog post simply highlights how our cities are part of the story.

Wednesday, November 29, 2017

Inequality and cities

The trend to bigger government and bigger politics is clear. With that we get ever more discussions of inequality. Current tax reform discussions gravitate to who will get (or lose) what. Growth (a bigger pie instead of allocating pie slices) gets second place.

In a world of Death of Distance or The World is Flat, cities would have a minor part in the increasing inequality discussion. But neither of these have come to pass. The highly skilled are paying big bucks to be near similar people.  They surely engage in electronic interaction but feel strongly about complementing these with the possibility of personal interactions. Hence the value of proximity (even if not cheek-by-jowl) -- and very high rents in San Francisco (and environs), Los Angeles, New York, etc.

That's the demand side.  The supply size and the role of regulation have been commented on in various places. For one-stop shopping (reading) has assembled much of the relevant research. See also Enrico Morretti's The New Geography of Jobs.

Many people now have the wherewithal to bid high for selected locations and, in the process, greatly enrich property owners in these places. We get housing wealth inequality compounding the inequality trend.

What can be done? Make it less difficult to build and develop. A minor irony involves the fact that those who fret most about housing "affordability" problems like the tough regulations the most. Their answer is more "affordable" housing provided via various programs. But programs make it worse -- and will never match what market forces could accomplish -- if allowed to.

Sunday, November 12, 2017

Driverless future: not everyone aboard

Randal O'Toole writes "It's the Last Stop on the Light-Rail Gravy Train ... Mayors want new lines that won't be ready for a decade. Commuters will be in driverless cars by then." Sounds ironic but only if one ignores Bootleggers and Baptists cronyism.

Jim Moore and Tom Rubin write about LA's MTA. Fewer riders but evermore spent on expensive fixes rail. This is the MTA's long-running and continuing story. In their alternate universe, red ink is not a sign of flagging demand but an indicator of "underfunding".

The mega-dollar waste is plain enough. But in an age of dazzling entrpreneurial breakthroughs, think of the opportunity cost. Dollars diverted from genius work hurts more than ever.

Today's New York Times Magazine has a special issue devoted to driverless cars. Just as Henry Ford's inventions changed the world, so will driverless cars. Futurism is hard but several writers take their shots. The imaginative Molly Young writes about "The Future of Sex in Cars."


Wendell Cox adds information on the expanding alternate universe.

Friday, November 10, 2017

Not about profit-loss

Don Boudreaux has been (almost daily) punching away at protection and the crony capitalism involved.  Here is a sample.

Almost daily we hear that Wharton grad Trump sees the balance of trade (and the "trade deficit") as the economy's (the country's?) profit-loss statement.  This mistake pops up in almost all of his remarks on trade, including who is"winning" and who is "losing."  But this silliness is picked up by many others. Whether it is Fox News or the PBS News Hour, the talk is the same. What will we do about that perennial trade deficit?

Smart people should know better. The U.S. dollars that foreigners accumulate eventually come back. Either via trade or via investment. Capital "imbalances" and trade "imbalances" cancel each other almost every day because exchange rates are always adjusting. There is no reason for panic or anything like it. Instead, celebrate that there are the adjustments and responses throughout.  Each of us benefits via the links to the world's sellers and the world's investors.

The economic ignorance goes way beyond Trump and his followers.  That's the problem.

Tuesday, October 31, 2017


What is charisma?  You know it when you see it.  Reports cited in the WSJ go a bit further. Various studies are cited.  Here are the results of one:
“What we found is charisma is composed of two elements,” says the paper’s lead author, Konstantin Tskhay, who now works as a consultant at Deloitte. “One relates to influence, or the ability to guide others, and the other to affability, or making other people feel comfortable and at ease.” ...
Political success is measured by an ability to build and sustain coalitions.  This usually means issuing more than one message on any issue to more than one potential constituency -- and worrying less about inconsistencies. It means getting away with it: doing so without being thought of as duplicitous. It means sticking to the bland and crowd-tested cliches -- and getting away with it.  FDR and LBJ managed to build and sustained coalitions. All political actors carefully hone their approach and their rhetoric.  But are they a turn-off or a turn-on?  Ask Hillary Clinton.

Many people (here and abroad) were dazzled by (fell in love with) the charismatic Barack Obama. Many still like Bill Clinton. Infatuations are funny. Our natural BS detectors go limp for a while.

Celebrities (usually from entertainment these days, from the military in the past) presumably have charisma. Recently, Maureen Down speculated whether or not Mark Cuban would run for the presidency. It is not simple. Ronald Reagan made the entertainment-politics transition. Arnold Schwarzenegger and Jesse Ventura were less successful. Who knows about Al Franken?

My guess is that the jury is no longer out on Donald Trump; his approval ratings appear to be stuck below 40%. Not a sign of successful coalition building -- or of charisma as the cited authors define it. His efforts, just feeding red meat to the true believers, are not adequate.

Friday, October 13, 2017

Networked networks

Tyler Cowen noted that Cities and Suburbs Are Becoming Pretty Similar.  Of course.  A city-suburb dichotomy is much too simple. Nevertheless because Census and others report many data series this way, we keep using the two categories.

The idea of (suburban) "sprawl" is useless and specious. Qian An, Jim Moore and I showed some time ago that, using conventional travel time data, means as well as variances for work as well as shopping trips varied little no matter whether the traveler was "urban" or "suburban". In other words, most people and businesses have an interest arranging themselves spatially so as not to have to put up with irksome distances.

People and businesses in cities want two things: space and accessibility. We now say they want to network profitably. "Space" can proxy for a preferred amenities package. How can they get both? When large numbers of people and businesses consider the possibilities and the trade-offs available to them they make workable choices. The outcome is the cities we have.

There is enough movement of people and capital among cities that they must see themselves as competing. Uncompetitive packages of location and travel costs cannot survive for very long.

Robin Dunbar thought that a village of 150-250 would be as large a community that our brains could cope with -- in the interests of group survival.  Our "villages" are now much bigger.  The networks in our brains are networked with the networks in the brains of very many fellow citizens -- the ones with whom we interact physically and/or electronically.  That's modern accessibility; we can seemingly manage the blend of networks we want whether in the "city" or the "suburbs."

Friday, September 29, 2017

Not "in the air"

Russ Roberts interviewed Philip Auerswald on populism. Rapid change divides the population; some thrive while others are left behind and become resentful. The two discuss rural-urban divisions but focus on the big cities (they mean metropolitan areas) vs the rest. The success of these places as breeding grounds for new ideas (end enhanced productivity) is an old idea. We talk about "engines of growth."

Roberts and his guest evoke "density" as a proxy to explain how it is that new interactions and new ideas are spawned. They discuss "water cooler effects", coffee houses and places to meet for breakfast gatherings. Ray Oldenburg calls them "The Great Good Place". From Vienna's coffee houses to Starbucks -- and many more. The discussants also mention that big cities are places where good ideas are "in the air."

I prefer to talk about supply chains. The fundamental lesson of economics is that these are formed by profit seekers responding to market signals. There are supply chains for things and supply chains for ideas. All of us participate in many of these -- as buyers and/or as sellers. We choose locations as we trade off all of these roles.

The Coasian what-to-make-vs-what-to-buy choice (in light of transactions and monitoring costs) involves what to buy where.  Overcoming distance involves a key transaction cost. All supply chains have a spatial realization.  This is how we get the spatial patterns that characterize the cities we know.  Location choices in light of supply chain participation(s) over many interaction modes (including electronic) are constrained by many things, including land use controls and historical facts on the ground. The former involve policy choices.

Supply chains for things are based on technological requirements ("recipes") while supply chains for  ideas make sense in light of Joel Mokyr's idea that we are all keen to find useful knowledge.

Ideas, trust and social capital are made in cities. But not from or in "the air." They are formed (emerge) via the deliberations, choices, and actions, of motivated individuals.

I prefer this story to the much invoked idea of "agglomeration."  Agglomeration and "clusters" (also vague) occur via many densities and many spatial arrangements. The point is to understand how and why specific arrangements emerge.

Monday, September 11, 2017

Love and markets

Just a few days ago I posted this:
When natural disasters occur, supply and demand is a lifesaver. It is the way to reallocate resources to stricken areas (people). Price signals do their work when they are allowed to reflect new realities: when they ration on the demand side and elicit on the supply side.  But banning price hikes (anti-gouging laws) stymies both adjustments, making bad situations worse.
The standard debates that always follow pose the usual questions.  (1) Is altruism not enough?  (2) Why not enough altruism? (3) Do market responses crowd out altruism? (4) Would not altruism be better?

The inevitable politics of pander follow with price controls that offer fake answers to serious questions.

We hear much the same when it comes to markets for human organs.

One would think that Adam Smith settled this some years ago. "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." He apparently had not. The same dance seemingly follows every calamity.

Non-zero-sumness is a wonderful thing. We find it in markets and we find it in altruism (love).  They are both good news. The bad news is that many people see the two phenomena as absolute substitutes; e.g. you cannot have one without the other.
Read more at:

Saturday, September 09, 2017

Amazon's RFP

Amazon wants a second headquarters. But where? Near or far? Reasons for nearby expansion involve scale economies but (as always) there can also be scale diseconomies -- including the group-think that can set in.

Amazon has invited cities to bid for the plum. Here is the RFP. Not that they have asked me but I would suggest a place with light-touch and flexible land use regulations.  The fact that tough regulations show up as slow construction and housing affordability problems is well known. Wendell Cox (and many others) have documented the link many times.

But there is more. Amazon understands supply chains. Whenever I cite value chains, I add that there are chains for things and chains for ideas. We are all involved in many of these and choose locations in light of many participations (as buyers as well as sellers).

Cities are the spatial realizations these choices: the spatial realizations of large numbers of supply chains.

For Amazon (any company) and the host city to do well, it must be a place where supply chains can be formed -- and re-formed as necessary.

An improved Amazon RFP might include a way to tell local officials that ham-fisted land use regulations are not beneficial or promising.

Time to reiterate that this is not a matter of being "pro-business" which is often synonym for an open door to crony capitalism.  Rather it is clearly pro-market.  Start calling the latter pro-people in this age of tweets and shortened attention spans.



Wednesday, August 30, 2017

Teaching Econ 101

In Adam Smith's day, it was moral philosophy.  But for many years, that has been replaced with what Deirdre McClosky calls Max U (or Samuelsonian or standard textbook) economics.  It has not been a good trade.

When natural disasters occur, supply and demand is a lifesaver. It is the way to reallocate resources to stricken areas (people). Price signals do their work when they are allowed to reflect new realities: when they ration on the demand side and elicit on the supply side.  But banning price hikes (anti-gouging laws) stymies both adjustments, making bad situations worse.

This is simple and clear.  But we teachers of Econ 101 have seemingly not done the job of imparting simple ideas like this. Look at the protectionist utterances of Wharton grad Donald Trump -- and many, many others. (I notice that ABC_TV news loves to report on products that are Made in America.)

In light of the Houston floods, the usual suspects are arguing for price controls ("anti-gouging laws) and thereby claiming the moral high ground.

Teachers of Max U note the fine points of efficiency when they should first deal with Question #1: in which settings are people most likely to have better lives?  The most noted thought experiment of our time may be John Rawls' "veil of ignorance": when considering political choices, do not think of where in the wealth distribution you are but where fate might deposit you.

Do you want to be inside or outside an exchange economy? If it's a hard choice, look at the real world and place yourself behind a veil of ignorance.

Perhaps if we taught this first and Max U second, there would be fewer grating rants about the immorality of markets.


And while we're at it. Here is how young people view socialism vs capitalism.

Sunday, August 20, 2017

Statists rule

The Economist includes a nice summary of Pigouvian taxes (or subsidies) as a straightforward remedy to the problem of uncompensated externalities. When market coordination is missing for any  reason, here is the (seemingly) simple policy fix.

But missing from the discussion (almost all such discussions) is the politics. Who administers the tax? How do they choose who and how much to tax, when and where.

Public choice economics points to a non-trivial answer:  crony capitalism and the threat of regulatory capture are always in play.

Today's NY Times Book Review includes a review of Nancy MacLean's Democracy in Chains: The Deep History of the Radical Right's Stealth Plan for America.  The print edition uses the lede, "Minority Rule: How the economist James McGill Buchanan laid out the game plan for the radical rights." This is turn-off laced with smear job. The electronic version switches to "How the Radical Right Played the Long Game and Won."

This is all bizarre and I have no plans to read the book. Don Boudreaux has been tirelessly exposing MacLean's errors and misconceptions at Cafe Hayek.

Are the problems of democracies and majorities really new and arcane for anyone?  We learn about the Bill of Rights at a very early age.  Limiting majoritarianism addresses a very old and well known problem and is not a part of some vast right wing conspiracy.

The Economist and a string of others are strangely resistant to public choice analysis, as the many discussions of the elixir of Pigouvian taxes indicates.

I do not get it. Are we to maintain a blind faith in the ability of elected officials to somehow divine the "public will"? And do so while maintaining a near-virginal innocence? And these are the people we see in the news all day?

How obsessed and blinkered a statist does one have to be to go on living and believing that way?