Earn What You Spend

As I’ve mentioned before, I live in New York City.  Having grown up in small towns in the South, I never would have imagined I would enjoy living in America’s largest city as much as I do.  Now I simply can’t imagine living anywhere else - I feel everyday I head to work that I am literally  surrounded by some of the most innovative, intelligent, and inspired people in the world.  And it’s quite likely I’ll bump into more such people at every turn - by virtue of a simple numbers game, I’m bound to.

That’s why I believe Edward Glaeser’s blog post, New York, New York: American’s Resilient City, is so powerful.   While we see housing prices collapse in much of the country, New York’s drop in prices has been particularly tame.  According to the latest Case-Shiller figures, New York’s prices have only dropped 7.5% from a year ago, quite better than the 18% decrease for the 20-city index. 

Glaeser notes that despite numerous recessions, catastrophic events, wars, and financial crises of various degrees, “time and time again, smart people learning from each other in a dense city have come up with new ways to thrive.” So New York has thrived not by remaining static, nor by simple virtue of the already-large population, but rather because the city has gone through numerous transitions: “the same density that once served to get hogsheads onto clipper ships served to spread ideas.”

In one of my favorite books, The Black Swan, author Nassim Nicholas Taleb writes about the unpredictability of events and how we should prepare accordingly for them.  That is, we are often completely unprepared for the highly improbable, despite the fact that the preparation for such an event is much less costly than the potential devastation we would face in the wake of the event actually occurring.  Think of health insurance: you might very well be better off paying your doctor bills without insurance if you are healthy, but in the event you contract some life-threatening disease, your insurance policy then becomes a saviour.   The small costs (health insurance premiums) are worth it to prevent an unlikely but catastrophic event (being unable to pay medical bills from a life-threatening illness). 

What does this have to do with cities?  Think of it as a catastrophe in reverse: in the same way we should account for highly improbable events with negative consequences, so too should we plan for improbable events of positive consequences.

Taleb implores us to

Work hard, not in grunt work, but in chasing opportunities and maximizing exposure to them (emphasis mine).  This makes living in big cities invaluable because you increase the odds of serendipitous encounters - you gain exposure to the envelope of serendipity. The idea of settling in a rural area on grounds that one has good communications “in the age of the Internet” tunnels out sources of such positive uncertainty.  Diplomats understand that very well: casual chance discussions at cocktail parties usually lead to big breakthroughs.  (Pg 209)

So we started off with an observation that housing prices in New York City haven’t fallen as drastically as elsewhere.  We find that this could be explained in part by the capacity of New York to reinvent itself in times of uncertainty.  And why is the city able to do so?  Perhaps it is because living in a city such as New York increases the odds serendipitous encounters - the types of encounters that create new businesses, new economic models, new art, new forms of collaboration.   The cost of transmission of an idea in a city is low, and, perhaps more importantly, the chances of a real-world encounter that results in acting upon that idea are high.

Glaeser continues:

New York still has an amazing concentration of talent. That talent is more effective because all those smart people are connected because of the city’s extreme population density levels. Historically, human capital — the education and skills of a work force — predicts which cities are able to reinvent themselves and which ones are not. Those people who are continuing to pay high prices for Manhattan real estate are implicitly betting that New York’s human capital will continue to come up with new ways of reinventing the city.

I, for one, am also willing to make that bet: that New Yorkers will continue to reinvent themselves in the wake of this financial crisis.   When you put together so many intelligent, motivated people in the same location, progress is bound to happen.  Now if you’ll excuse me, I have to go increase my opportunities for serendipity.