Fixing Cities

I had lunch with my friend Dan Proft while in Florida. If you don’t listen to Dan’s show, you should. Dan dug up a couple of my posts from years ago. I am going to repost them here and see if everyone still thinks they are relevant. The dates on these posts are from November 2018.

Amazon chose Washington DC and NYC. Does it make sense?

It all depends on the goals of Amazon. Clearly, they weren’t looking at business decisions like logistics or to make sure their cost of doing business was low. DC and NYC have very high costs of living and very high taxes.

One thing that it’s important to recognize is that they chose DC. I think the reasons behind that are not only because it’s close to government operations where Amazon might be able to make a lot of B2B inroads. I think it’s also a recognition of the power of a central government. That’s too bad.

People really need to get to know Professor George Stigler and his theory of regulation. To generalize. Democrats put their trust in centralized government and hate corporations. Establishment Republicans are similar but really like crony capitalism. Other Republicans dislike big government and big corporates. They favor small and medium size businesses. Stigler shined a light on the role of government in our capitalist society. Econlib says,

He argued that economists should study the effects of regulation and not just assume them. He twitted the great economists of the past who had given lengthy cases for and critiques of government regulation without ever trying to study its effects. In Stigler’s view things were not much better in the twentieth century. “The economic role of the state,” he said, “has managed to hold the attention of scholars for over two centuries without arousing their curiosity.” Stigler added, “Economists have refused either to leave the problem alone or to work on it.”

Many economists got the point. Since the mid-1960s, economists have used their sometimes awesome empirical tools to study the effects of regulation. Whole journals have been devoted to the topic. One is the Journal of Law and Economics, started at the University of Chicago in 1958. Another, the Bell Journal of Economics and Management Science, later the RAND Journal, started in 1970. As a general rule economists have found that government regulation of industries harms consumers and often gives monopoly power to producers. Some of these findings were behind economists’ widespread support for the deregulation of transportation, natural gas, and banking, which gained momentum in the Carter administration and continued until halfway through the Reagan administration. Stigler was the single most important academic contributor to this movement.

Stigler was not content to examine the effects of regulation. He wanted to understand its causes. Did governments regulate industries, as many had believed, to reduce the harmful effects of monopoly? Stigler did not think so. In a seminal 1971 article, “The Theory of Economic Regulation,” he presented and gave evidence for his “capture theory.” Stigler argued that governments do not end up creating monopoly in industries by accident. Rather, he wrote, they regulate at the behest of producers who “capture” the regulatory agency and use regulation to prevent competition. Probably more important than the evidence itself was the fact that Stigler made this viewpoint respectable in the economics profession.

NYC on the other hand was a different story. It’s got all the retail capital markets. It’s also a city that is huge, and unlike any other American city. NYC isn’t a closed network. It’s constantly flowing and changing and the question there isn’t “Where are you from?” The question is “Can you do it?” People come from everywhere. There is just a huge number of people there in a concentrated area compared to anywhere else in the US. Networks like that don’t get smaller, they get bigger. NYC is in America, but it doesn’t necessarily feel like an American city.

Amazon opened itself up to randomness by selecting NYC.

So, why not Chicago? It’s a big city. It’s logistically perfect. Talent wise, it is super easy to recruit to Chicago. There is not only tech talent, but marketing and logistical talent. That seems to be the stuff Amazon needed.

Others have postulated reasons for not Chicago. Sam Zell cited the political situation. John Pletz at Crain’s cited other issues. The Chicago Tribune cited still more issues.

I am going to take a different cut at it.

Chicago is a great city. It’s beautiful. The quality of life is wonderful. It has great restaurants. It has really great people with Midwestern values that are loyal. But, it’s not NYC. It’s also not like San Francisco.

Chicago is a closed network. Look at the 600 member committee that was tasked with bringing Amazon here. See anyone that isn’t connected to anyone? See any looseness around it? It’s the same names in Chicago over and over again. The same people and they all get connected back to the Democratic political machine which is suffocating growth in Illinois and the city of Chicago.

There is a “Project 33” going on now. See anyone new? Anyone that is out of the mainstream or not connected?

Great gains are not planned or linear. They jump all graphical lines. They often are accidents. That doesn’t happen in tightly controlled networks. Closed networks like predictability, not randomness.

Chicago has always been a closed network since its inception back in 1830. It hasn’t changed. Read the book City of the Century if you want to understand it. The only places that were “open” were the trading floors. That brought new blood to the city. The floors were merit based and it was about “can you do this-can you survive?”. If you knew the Speaker or Mayor you might have gotten a wink once in a while but you had to perform. Chicago isn’t going to change because it’s too fearful for the power drivers in the network to have a lot of new people that will make outcomes more random.

Once, a politico invited me to a meeting to inject some randomness. I was an outlier. We were talking about tax increment financing districts and what to do about them. I didn’t know a lot about them so I listened and asked a lot of questions. At the end of the meeting, they asked me what I thought. I said, it seems that these TIFs give a lot of power to one person, the alderman. Why not just take all that power away, all that application process and paperwork away, and simply lower the taxes across the entire district for businesses that decide to locate and employ people there?

I wasn’t invited back because an idea like that is too scary to people in a closed network that want to control things. They don’t want nobody nobody sent.

I think Amazon saw that on their visits here. If you spend enough time here, you get a sense of that.

Our tech scene is infinitely better today than it was in 2007. When we started HPA, we were seen as interlopers. Outsiders. No one knew us. We were the nobodies nobody sent.

However, our tech scene can be awfully closed minded and tough to navigate from the outside. It’s a closed network. When politicians are giving away awards at awards ceremonies, you have a problem.

We lose entrepreneurs to the coasts because of this attitude. Outlier ideas are very unsettling. But those are the ones that can become blow out ideas. Uber should have started in Chicago. But, I bet if the Uber guy tried to raise a seed round here people would have looked at him like he had four eyes. Black car service on your phone? Random? Come on.

The other reason we lose entrepreneurs is lack of capital-and one of the reasons there is a lack of capital is because of the closed network. It’s tough to raise capital if you are the nobody that nobody sent.

Addendum:

I wanted to add something to this post to put a finer point on it. I was watching a television program on WTTW about New York City. In 1950, David Ogilvie arrived in NYC from London. Instead of wearing gray flannel or dark suits, he wore tweed. Sometimes he wore a kilt. Often, he’d wear a black cape over his suit instead of a coat.

He created a blowout ad agency and changed advertising forever.

In NYC he was accepted and became part of the network. If he would have tried to do this in Chicago there is no doubt in my mind he would have been excluded and run out of the network. I think a lot of times that holds true today.

When Amazon chose NYC and DC I posted why I thought they did. I think that people might read into that post that I am bearish on the Chicago tech ecosystem. That’s not true. I am pretty bullish Chicago. I am certainly bearish the fiscal condition and the politics. The city, state and county are headed in the absolute wrong direction. Read Wirepoints to learn more about that. Right now I am bearish on the Bulls and bullish on the Bears.

There is a big difference between a large public company behemoth choosing Chicago and a startup. Chicago’s major networks are closed networks-and the startup network can feel very closed and small to an outsider.

There are many reasons for a startup to choose Chicago.

I agree with Howard Tullman that Amazon’s choice doesn’t affect the startup community. If Amazon would have come here in the short term it would have strained recruiting. In the long run it would have been a benefit because as Amazon recruited new people, they would have spun out and either joined or started companies. We are seeing that happen with people in the high frequency trading community already.

One of the things I have always stressed is not to compare yourself against another ecosystem. Silicon Valley is always going to be bigger than any other ecosystem. I think taking the virtues of that ecosystem and implementing them in your own is a good idea. An open network one integral part of the Valley that absolutely needs to be implemented in Chicago. Because of our history as a city, it will be hard to do and people in the network need to be vigilant.

In places like NYC, the culture of the town is already open.

If you don’t know a lot about networks, I can point you to a couple of academic sources that you should get familiar with. The first is research done by Professor Ron Burt. He identified what closed and open networks look like. There are structural holes between networks and you can arbitrage information between them. The second is by Professor Mike Gibbs. He looked at how companies structure themselves for strategic advantage. Some structure themselves in a hierarchy and some are flatter. There is no right or wrong structure. Companies structure for strategic advantage.

Combining the concepts of both professors will really open your eyes to the world you confront every single day. You will see things a lot differently than other people.