Category Archives: Economics

Cities and the Efficiencies of Urbanity

The indomitable Paul Krugman has been discussing cities and geography lately in his NYT blog (a fitting subject for an economist who was awarded the Nobel for his work in economic geography, particularly what we call “New Trade Theory”; wiki here, Alex Tabarrok here). Some particularly interesting lines from different posts. First, the aesthetics of urban development in Hong Kong:

Hong Kong, with its incredible cluster of tall buildings stacked up the slope of a mountain, is the way the future was supposed to look. The future — the way I learned it from science-fiction movies — was supposed to be Manhattan squared: vertical, modernistic, art decoish.

What the future mainly ended up looking like instead was Atlanta — sprawl, sprawl, and even more sprawl, a landscape of boxy malls and McMansions. Bo-ring.

And some commentary on conservative attitudes about evironmentalism:

As I noted a while back, a lot of anti-environmentalism in America these days is about symbolism. And I think the same thing is true about pro-sprawl commentary. Consider the case of Portland, Oregon. Conservatives really, really hate on Portland; examples here and here. Aside from the tendency to engage in factual errors, the hate seems disproportionate to the cause. But it’s an aesthetic thing: conservatives seem deeply offended by anything that challenges the image of Americans as big men driving big cars.

My basic commentary is that I really really like cities. I like the idea of being able to walk most of the places I really need to go, I like the freedom from the responsibilities of suburbia and its trappings, I like the intellectual and cultural diversity that comes with putting lots of people close together. And from a sustainability standpoint, the basic premise of a city is that humans can gain much from exploiting the efficiencies of scale and synergies that close spatial organization allows. Specifically, I’d point you to this op-ed by mathematician Stephen Strogatz in the NYT; Strogatz is a very important mathematician for those following the fields of dynamical systems and non-linear analysis, among others. He wrote my introductory textbook on the subject, which is easily accessible for anyone with a working knowledge of differential theory. Some particularly good insights:

For instance, if one city is 10 times as populous as another one, does it need 10 times as many gas stations? No. Bigger cities have more gas stations than smaller ones (of course), but not nearly in direct proportion to their size. The number of gas stations grows only in proportion to the 0.77 power of population. The crucial thing is that 0.77 is less than 1. This implies that the bigger a city is, the fewer gas stations it has per person. Put simply, bigger cities enjoy economies of scale. In this sense, bigger is greener.

The same pattern holds for other measures of infrastructure. Whether you measure miles of roadway or length of electrical cables, you find that all of these also decrease, per person, as city size increases. And all show an exponent between 0.7 and 0.9.

Now comes the spooky part. The same law is true for living things. That is, if you mentally replace cities by organisms and city size by body weight, the mathematical pattern remains the same.

For example, suppose you measure how many calories a mouse burns per day, compared to an elephant. Both are mammals, so at the cellular level you might expect they shouldn’t be too different. And indeed, when the cells of 10 different mammalian species were grown outside their host organisms, in a laboratory tissue culture, they all displayed the same metabolic rate. It was as if they didn’t know where they’d come from; they had no genetic memory of how big their donor was.

Freaky cool, innit? More later.

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Regulatory Arbitrage and Mom and Dad

As I was just walking to the library I had the quick thought that I could analogize part of what happened in this financial crisis through the dynamics of a typical family. Bear with me here (and also note that since my family is something I am particularly familiar with I will use my family as the example, which is sure to be funny). Of course the story is a stylized one and bears only a loose relationship to reality.

So I’m the oldest of 7, which means that my family is fairly large. So let’s adopt this conceptual schema: Imagine us children as citizens/market participants and our parents as government. During the early years, government passes prohibition on candies and other sweet things to protect the public health and maintain an orderly populace. But as in any market, prohibition of a substance like candy isn’t always effective: in this case, the market for candy becomes a black market, with candy being obtained from illicit sources (Sunday School, neighborhood friends, etc). Government sees the candy ban hasn’t resulted in the desired outcome and implements further regulation, specifically regulations detailing how external interactions may happen so as to preserve the benefit of external contacts without allowing the trade in black market candy.

Of course, this isn’t effective because kids are sneaky and good at getting what they want. Government eventually adopts a rather nasty and prickly web of regulations that ends up being functionally unenforceable because of their size and complexity while the market develops cavities. Also, since everyone’s strung out on sugar all the time, public order suffers. Private cartels (shifting alliances of siblings) emerge to internally regulate the access and trade in illicit candy, creating a situation where fights break out over the control and allocations of a scarce resource. Eventually, government had no alternative to imposing martial law and borrowing against the future because a dental bailout of the market was urgently necessary.

What are the lessons to be learned here? Well, first, it’s that markets innovate and arbitrage around undesired regulations. If you have difficulty understanding what I mean by that, it may help to think about regulations as goods in a market: people desire good regulations and flock to the best suppliers. Second, it’s that government is bad about thinking in incentive-compatible terms. Solutions like bans rarely work and end up being prohibitively costly to enforce. Other solutions that might be more incentive compatible are ignored because of the incentive structures government faces, that is to say, government likes to maintain the illusion that it is really in control and refuses to lose face through the perception that laxer regulatory structures imply a loss of control and legitimacy. Of course, governments that look past that illusion are usually the ones that do the best.

Instead of banning candy, government could have tied comsumption to the performance of some other activity, like doing homework or chores (of course, this doesn’t work in markets where participants think they can arbitrage around doing homework or chores). But an outcome where government can monitor consumption is preferable to a situation where it can’t since crises are more predictable instead of less and also because you leverage some control over the incentive structures that market participants face, so markets don’t reach dangerous and unsustainable levels.

Think about the war on drugs or the financial meltdown in this way. It’s clear to me that the politicized debates over regulations typically miss the point: the debate is not over more vs. less regulation but about what is good regulation.

Any thoughts?

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A Few Quick Thoughts

1. The United States as a countercyclical asset by the irreplaceable Tyler Cowen. One of the best essays on US power I’ve read in a while.

2. Pop culture meme: From The Lonely Island featuring the stoically impressive T-Pain, I’m on a Boat.

3. Cautiously optimistic: Good news from Wells-Fargo and some positive economic indicators. Are credit markets thawing a little bit?

4. Gaffe prone Joe Biden gets rebuked by Karl Rove. Even if Biden is something of a blowhard, I have trouble believing anything Rove says. Ever.

5. Great lines from Thomas Pynchon’s novels here. Still plowing resolutely and happily through ‘Gravity’s Rainbow’.