The false promise of cyberspace

Aaron Renn makes an interesting argument in City Journal:

Many of Chicago’s woes derive from the way it has thrown itself into being a “global city” and the uncomfortable fact that its enthusiasm may be delusional. Most true global cities are a dominant location of a major industry: finance in New York, entertainment in Los Angeles, government in Washington, and so on. That position lets them harvest outsize tax revenues that can be fed back into sustaining the region. Thus New York uses Wall Street money, perhaps to too great an extent, to pay its bills.

Chicago, however, isn’t the epicenter of any important macro-industry, so it lacks this wealth-generation engine. It has some specialties, such as financial derivatives and the design of supertall skyscrapers, but they’re too small to drive the city. The lack of a calling-card industry that can generate huge returns is perhaps one reason Chicago’s per-capita GDP is so low. It also means that there aren’t many people who have to be in Chicago to do business. Plenty of financiers have to settle in New York, lots of software engineers must move to Silicon Valley, but few people will pay any price or bear any burden for the privilege of doing business in Chicago.

In my day, Chicago was the probably the best place to be if you were in the consumer packaged goods marketing services business. But, you didn't have to be there. You could be anywhere there was a big airport with lots of direct flights to other cities.

I wonder whether wealth is becoming ever more squeezed into single industry-dominant cities? Despite the rise of cyberspace, industries seem to be flocking at least as much as ever to a single city. For example, the term "Silicon Valley" was coined around 1971 and within a few years, important people around the world were saying to each other: We should be the New Silicon Valley. Vast efforts went into these projects, and, yet, the main outcome has not been two, three many Silicon Valleys, but that Silicon Valley's one traditional competitor for tech startups, suburban Boston's Route 128 has fizzled out. In the 1970s to 1990s, people normally grouped Route 128 with Silicon Valley, but now almost nobody does anymore.

Lots of theories have been put forward for why Route 128 was crushed by Silicon Valley, such as the more staid culture of Boston or Massachusetts' stronger enforcement of non-compete provisions in  employment contracts. Perhaps, though, the essential reason was that the way things work these days is that it's best to have just one hub for an industry, and Silicon Valley had better weather than Route 128.

But, also consider magazines. Most journalism comes out of New York and Washington D.C., but for a century and a half, the Atlantic Monthly was based in Boston. And why not? There are a lot of highly literate people in Boston. And this had the beneficial side effect that the kinds of topics that the Atlantic worried about ("genteel foreboding" was its calling card), were not always the same things as what the rest of the gang in NY and DC were currently worried about. Then, about a decade ago, the magazine was moved to D.C. 

This isn't a solely modern phenomenon. The headquarters of American automobile manufacturers were widely spread out a century ago, but then consolidated in Detroit by about a half century ago as Studebaker of South Bend, IN died out.

To get to the top, you have to be, physically, where the top people are. 

I think this is tied into the much discussed growth of inequality. Notice two contradictory trends in modern life: the growth of economic brusqueness, with MBAs feeling ever less regret about pulling the trigger on big layoffs, outsourcing, and insourcing versus the growth of Sensitivity and Niceness in daily life.

How do people reconcile these two trends? Well, I don't think they do. Instead, they tend to be more brusque toward the people they only deal with as numbers on a spreadsheet, and more sensitive and nice toward people whose names they can associate with a face. 

The career advice implications are unsurprising: now, more than ever, you want to get a job where you go out to lunch with the powerful people.

Update: Commenter Bostonian cites a study confirming this intuition:

This article from the Review of Financial Studies is consistent with what Steve writes. 

Trade-offs in Staying Close: Corporate Decision Making and Geographic DispersionAugustin Landier
Stern School of Business, New York University
Vinay B. Nair
Wharton School, University of Pennsylvania
Julie Wulf 

Abstract 

We investigate whether the geographic dispersion of a firm affects corporate decision making. Our findings suggest that social factors work alongside informational considerations to make geography important to corporate decisions. We show that (i) geographically dispersed firms are less employee friendly; (ii) dismissals of divisional employees are less common in divisions located closer to corporate headquarters; and (iii) firms appear to adopt a “pecking order” and divest out-of-state entities before those in-state. To explain these findings, we consider both information and social factors. We find that firms are more likely to protect proximate employees in soft information industries (i.e., when information is difficult to transfer over long distances). However, employee protection holds only when the headquarters is located in a less populated county, suggesting a role for social factors. Additionally, stock markets respond favorably to divestitures of in-state divisions.

My old articles are archived at iSteve.com -- Steve Sailer