Where You Live Matters More Than You Think
Enrico Moretti. The New Geography of Jobs. Houghton Mifflin Harcourt, 2012, pp. 294, $28.00 If you worked in a bookstore, but had dreams of possibly going to law school and eventually buying a home close to the city where you resided, where would you rather live: Nashville, Tennessee, or the Boston suburbs? Each individual, based [...]
Enrico Moretti. The New Geography of Jobs. Houghton Mifflin Harcourt, 2012, pp. 294, $28.00
If you worked in a bookstore, but had dreams of possibly going to law school and eventually buying a home close to the city where you resided, where would you rather live: Nashville, Tennessee, or the Boston suburbs? Each individual, based on his own personal preferences, would have to weigh the choices carefully. If one absolutely could not live without access to country music, Nashville would be the logical choice. Similarly, a Boston Bruins fan might prefer to live in southern New Hampshire than in a small town in Tennessee. But if one were more concerned solely with one’s long-term economic prospects, what city would be a better choice? Indeed, is there a clearly better choice? And what data would one employ to make that decision?
In The New Geography of Jobs, Enrico Moretti (University of California, Berkeley) contends that, when it comes to prosperity, where you live matters more than you might think. “America’s new economic map,” writes Moretti, “shows growing differences, not just between people but between communities.” He calls this divide the Great Divergence, and argues that it has its roots in the 1980s when the character of different American cities began to be defined by the educational levels of their residents. Indeed, he posits that, at the same time that American communities are desegregating along racial lines, they are becoming more segregated in terms of education and income. Moretti’s argument is that, “the growing economic divide between American communities is not an accident but the inevitable result of deep-seated economic forces.” Think of the differences between Boston and Silicon Valley, on the one hand, and Detroit and Bakersfield, California, on the other.
If one has been paying even scant attention to American demographic trends, one would certainly realize that, over the past ten to fifteen years, cities like San Jose, Seattle, and Austin have become attractive destinations for graduate-educated professionals. Oklahoma City, Cleveland, and Flint, Michigan, are not typical destinations for the same demographic. What explains the difference? In a word: innovation. According to the author, cities that have become centers of innovation, broadly construed, have become magnets for educated professionals whose presence in a city has a positive multiplier effect on those in the service industries around them. Indeed, Moretti posits that, “the best way for a city or state to generate jobs for less skilled workers is to attract high-tech companies that hire highly skilled ones.” In other words, innovators are the new engines of economic growth. Human capital is what matters.
In the book’s fourth chapter, Moretti first notes that there is no obvious explanation in terms of natural advantages to explain why innovative companies are located in particular locations. “As it turns out, in the world of innovation, productivity and creativity can outweigh labor and real estate costs.” Three forces, collectively known as the forces of agglomeration, are responsible for the aforementioned Great Divergence, the process that is separating American communities from each other in terms of education and income.
These three forces are: thick labor markets, specialized service providers, and, in the author’s opinion, most important, knowledge spillovers. Put simply, innovation hubs such as the Bay Area remain so because those with special skills move and remain there, because of the close proximity to venture capitalists, and because skilled innovators in a city enhance innovation and prosperity. Innovation, it turns out, is actually a fairly local phenomenon. “In the end, geographical proximity to venture capitalists still matters. Skype and cell phones have not changed this simple fact. This is one of the reasons that the world of high tech is and will remain geographically concentrated.” Where you live and work and, more importantly, whom you interact with, matters deeply for both a city’s and an individual worker’s economic prospects.
Earlier in the book, Moretti directly challenges Friedman’s world-is-flat theory, by noting that the opposite of a flattening world is occurring. “In innovation, a company’s success depends on more than just the quality of its workers—it also depends on the entire ecosystem that surrounds it. This is important, because it makes it harder to delocalize innovation than traditional manufacturing.” Indeed, one of the highlights of Moretti’s work is his willingness to challenge shibboleths on both the left and the right. While he calls for more government financial support for scientific academic research, and private R&D through tax credits, he also rightly calls out those who falsely claim that greedy bankers killed blue-collar jobs by pointing to the real, structural culprits responsible: globalization and technological progress.
If Moretti’s thesis about the divergence of American communities is valid, then what can, or should, be done to remedy the situation? Specifically, he notes two different policy approaches that will help the United States continue to lead in innovation and economic prosperity: drastically reform the immigration system to allow for more college- and graduate-educated workers to come to the United States and, alternatively, increasing human capital at home through spending programs that would revamp secondary education and greatly increase higher education.
Overall, The New Geography of Jobs is a well-written and engaging work of scholarship. Moretti does an excellent job at making complex economic concepts accessible. The work does, however, contain a strong bias toward Silicon Valley and northern California. Perhaps this is due to, at least in part, the author’s position in the Economics Department at Berkeley. As the debacle surrounding the Facebook IPO demonstrates, innovation hubs are not without potential pitfalls. I do not mean to suggest that Silicon Valley will be displaced anytime soon. Rather, it suggests that one should always be skeptical of any overarching thesis regarding American economic trends. Moretti is correct in pointing out that long-term economic trends matter more than the short-term policy thinking that dominate contemporary policy discussions would have us believe. “Our ethos of immediate reward and our almost structural inability to take responsibility for long-term problems is leading us to underinvest in our future.” Sobering thoughts indeed.
In conclusion, The New Geography of Jobs is filled with interesting data and is well worth consideration. Intuitively, one feels as if Moretti is largely correct in his assessment about the diverging fortunes of American cities. A larger question, and one beyond the scope of his work, is whether the people in those cities with large salaries are truly happy and doing work that they love, or whether they are there because of nearly insurmountable student debt. Whatever the case may be, it is very likely the case that Boston, New York, and Seattle won’t be displaced anytime soon.
Jonathan Eric Lewis (c) 2012
Finance as a Positive Force
Robert J. Schiller. Finance and the Good Society. Princeton University Press, 2012, pp. 288, $24.95 The financial sector has gotten a bad rap of late. Indeed, as referenced in this recent work, the emergence of both the Tea Party, which argued against the massive taxpayer bailouts of large financial institutions, and the Occupy Wall Street [...]
Robert J. Schiller. Finance and the Good Society. Princeton University Press, 2012, pp. 288, $24.95
The financial sector has gotten a bad rap of late. Indeed, as referenced in this recent work, the emergence of both the Tea Party, which argued against the massive taxpayer bailouts of large financial institutions, and the Occupy Wall Street movement, which condemned the capitalist system, signified that large segments of the American populace are not happy with Wall Street and investment professionals. As the economy has shown signs of improvement, the public anger has seemed to lessen. That said, it is still too soon to tell whether the news about J.P. Morgan’s losses will have the effect of rejuvenating the public’s distrust of Wall Street and of finance, in general.
In Finance and the Good Society, Robert J. Schiller (Yale University) argues that the world of finance, in its best incarnation, has the potential to improve peoples’ lives. “What I want most for my students . . . to know is that finance truly has the potential to offer hope for a more fair and just world, and that their energy and intelligence are needed to help serve this goal.” Schiller is cognizant of the problems in our current financial system. The solution to these problems, however, is not to castigate financial capitalism as a system for producing wealth, or to denigrate the profession of finance in which many Americans make their living.
The financial crisis, contends the author, cannot easily be blamed “on a sudden outbreak of malevolence” on the part of those employed in the financial sector. The causes of the crisis can be traced to “fundamental structural shortcomings in our financial institutions,” rather than to greed or dishonesty. Schiller further posits that the post-crisis legislation and regulations have not solved our financial system’s real problems. That said, he does not think the answer to our current woes is to restrain finance.
In fact, he believes the opposite to be true. “It seems a paradox that the very financial system that is the facilitator of some of our greatest achievements can also implode and create such a disaster. Yet the best way for society to proceed is not to restrain financial innovation but instead to release it.” In order to reduce the likelihood of future financial crises, contends Schiller, we need “better financial instruments, not less activity in finance.” Indeed, as he rightly acknowledges, there does not appear to be a realistic alternative to financial capitalism.
An expanded and further democratized financial system will allow more people to benefit from finance’s ability to improve people’s lives. Indeed, Schiller, as the title of the book suggests, believes that finance can help build a good society. Finance, he argues, is “the science of goal architecture—of the structuring of the economic arrangements necessary to achieve a set of goals and of the stewardship of the assets needed for that achievement.”
Finance, which is not a goal in itself, can help allow for the creation of the good society, a philosophical notion regarding an aspiration goal for an egalitarian society in which all people are valued. The implication is that finance should not be synonymous with greed. Rather, it is a mechanism which, when working correctly, allows for prosperity. As examples, Schiller cites the funding of a new medical research project and the construction of a new subway system as two goals that finance can help achieve.
Finance and the Good Society is divided into two distinct parts. The first, “Roles and Responsibilities,” details the various careers in finance. He devotes chapters to, among other careers, chief executive officers, lawyers and financial advisers, and regulators. The book’s second section, “Finance and Its Discontents,” borrows its title from Sigmund Freud’s 1930 work, Civilization and its Discontents, in which the famed Austrian-Jewish psychologist noted that many seemed to be discontented with civilization as it existed, but that ultimately it was not so easily improved. Schiller contends that we cannot go back to a simpler time; we can only move forward.
While there is a plethora of interesting material in Finance and the Good Society, there remains something uneven about the work as a whole. Perhaps this is due to the fact that the book is divided into thirty distinct chapters, some of which are only several pages long. It could also be due to the (overly?) ambitious nature of the book, in which Schiller interweaves finance with history and philosophy. For instance, in his discussion of speculative bubbles, he posits China’s Great Leap Forward to have been an “investment bubble that took place in the absence of financial markets” and that “World War I was in a sense a bubble.” These arguments, while thought provoking, are ultimately unconvincing.
In conclusion, Finance and the Good Society is a further edition to the vastly growing corpus of scholarly literature on the financial crisis and the role of finance in society. In many ways, this could prove to be an excellent introduction to the subject of finance for liberal arts-oriented undergraduates. This is particularly true given the fact that many current undergraduates may be skeptical of pursuing careers in finance.
Jon Lewis (c) 2012
Economic and Political Institutions Explain Prosperity
Daron Acemoglu and James A. Robinson. Why Nations Fail. Crown Publishers, 2012, pp. 529, $30.00 Why are some nations prosperous, while others remain mired in poverty? Is it culture, geography, or leaders and advisers who are ignorant of good economic policy that best explain why some nations succeed economically, while others fail miserably? In Why [...]
Daron Acemoglu and James A. Robinson. Why Nations Fail. Crown Publishers, 2012, pp. 529, $30.00
Why are some nations prosperous, while others remain mired in poverty? Is it culture, geography, or leaders and advisers who are ignorant of good economic policy that best explain why some nations succeed economically, while others fail miserably? In Why Nations Fail, Daron Acemoglu (Killiam Professor of Economics at the Massachusetts Institute of Technology) and James A. Robinson (David Florence Professor of Government at Harvard University) contend that none of the aforementioned factors adequately explains economic disparities between nations. The focus, they contend, should be on various nations’ economic and political institutions, specifically those that give people proper incentives, allow people to choose their careers freely, and engage in the democratic process.
Early in this engaging recent work, the authors take the case of the city of Nogales, divided by the U.S.-Mexico border, with a Nogales, Arizona and a Nogales, Sonora. Nogales is a metaphor for the authors’ thesis. Both cities have the same geography. Culturally, they aren’t all that different. What, then, explains the difference? Different economic and political institutions that provide individuals with different incentives do.
Similarly, the stark differences in the standards of living between the two Koreas, the totalitarian North Korea and the democratic, capitalist South Korea, can be explained by different economic and political institutions. “The economic disaster of North Korea, which led to the starvation of millions, when places against the South Korean economic success, is striking: neither culture nor geography nor ignorance can explain the divergent paths of North and South Korea. We have to look at institutions for an answer.” After all, the institutions of communist North Korea are about as far as one can imagine from what one would expect to provide incentives for individuals to work, to invest productively, and to motivate people to prepare for the future.
The authors distinguish between inclusive, and extractive, economic and political institutions. Inclusive institutions allow for broad economic opportunities, promote secure property rights, and create inclusive markets, wherein people have economic opportunities to choose their own paths in life. They allow for mass participation in electoral democracy, allowing voters to replace their leaders. They also allow for technology and education. By contrast, extractive institutions do not allow for freedom. Rather, “such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset.” Politics matters.
Inclusive institutions, along with some centralized form of state power and public services, will provide for greater prosperity than deeply fragmented polities in which leaders extract wealth from the population and deny them economic opportunities. Thus, political leaders of a nation may actually prefer extractive institutions because this would allow them, or their clan, to retain political power. This can be seen in nations in which a small elite uses highly non-democratic political institutions to control a country’s wealth.
“The central thesis of this book,” write the authors in Chapter 3, “is that economic growth and prosperity are associated with economic and political institutions, while extractive institutions typically lead to stagnation and poverty.” They qualify their thesis and note that this does not “imply that neither extractive institutions can never generate growth nor that all extractive institutions are created equal.” The Soviet Union, for instance, is an example of a nation that did grow under extractive institutions. Those who say that government can never foster rapid economic growth, even for decades, have a prime counterexample in the U.S.S.R. between the first Five-Year Plan in 1928 and the 1970s. This was done, of course, at a great cost to human life.
The authors wrote How Nations Fail for a general audience and contend that their work has real-world implications. After all, if geography is the determinant factor in shaping a nation’s prosperity, then why bother doing anything to change the status quo? If institutions matter as much as the authors believe, then one can’t change a poor country’s economic trajectory without first changing the country’s economic and political institutions.
Overall, the authors make a very convincing case for their thesis that institutions, rather than geography, culture, or ignorance of the best policies best explain why some nations fail, while others succeed. For those have been academically trained either as historians or as lawyers, much of the material will not be particularly groundbreaking. Those who devoted their careers to studying the Soviet Union, for instance, are well aware that economic and political institutions matter for understanding the country’s rapid economic ascent and industrialization, as well as its decline and ultimate collapse under its own weight. Furthermore, lawyers understand that property rights, as well as an impartial system to adjudicate property disputes, matter greatly in allowing for economic growth.
In conclusion, Why Nations Fail is a solid work of scholarship. It is particularly well written. The authors do an excellent job of demonstrating how political institutions can determine a country’s economic success or failure. Still, one is left wondering whether the world is simply too complex and history too fluid for any overarching thesis, or grand narrative, that attempts to explain why some nations fail. Maybe, in some cases, geography actually is the determinant factor. And maybe culture and religion aren’t as unimportant as the authors think. That said, the authors should be commended for writing a work that surely is to provoke considerable debate in the days and months ahead.
Jon Lewis (c) 2012
Jobs in an Uncertain World
Little Bets: How Breakthrough Ideas Emerge from Small Discoveries. Peter Sims. Free Press, 2011, pp. 213, $25.00 With the dismal news about zero job growth in August 2011 and significant evidence that the United States might be entering another recession, it behooves policymakers to think critically about ways in which we might get the economy [...]
Little Bets: How Breakthrough Ideas Emerge from Small Discoveries. Peter Sims. Free Press, 2011, pp. 213, $25.00
With the dismal news about zero job growth in August 2011 and significant evidence that the United States might be entering another recession, it behooves policymakers to think critically about ways in which we might get the economy rolling again. While President Obama has called for payroll tax cuts and increased spending, the Federal Reserve has not yet signaled whether it will utilize any measures to stimulate the economy. The only certainty about the American economy, it would seem, would be that the future is increasingly uncertain for both businesses and households alike.
The immediate political concern in Washington is how to create jobs and get Americans working again. Often forgotten in the national discussion, however, is the fact that what the United States may really need is a new generation of risk-taking entrepreneurs who will be able to both create jobs and provide new goods and services that will enhance consumer welfare.
Although Peter Sims’s Little Bets is neither a political tome nor an work of political economy, it does provide a unique and welcome perspective on entrepreneurship that merits serious attention by both policymakers and those concerned about lagging job growth and America’s declining global competitiveness. Sims, a writer with an MBA from Stanford University and a career background in venture capital, challenges the reader’s assumptions about what successful entrepreneurship requires.
Sims, who acknowledges the inspiration and collaboration of George Kembel from Stanford’s d.school, draws upon contemporary academic scholarship and utilizes case studies. These include both the thinking and work of architect Frank Gehry, Amazon’s Jeff Bezos, and U.S. General McMaster, who developed the ‘clear and hold’ counterinsurgency strategy in Iraq, to make the case for experimental innovation. The author draws upon the concept of “little bets,” a phrase coined by former Hewlett-Packard Executive Vice President Ned Barnholt, to describe a way of thinking that embraces unpredictability, creativity, and nonlinear thinking in which entrepreneurs do not begin with a brilliant idea, but rather discover them through experimentation and an acceptance of failure.
The author describes Little Bets as being “based on the proposition that we can use a lot of little bets and certain creative methods to identify possibilities and build up to great outcomes. At the core of this experimental approach, little bets are concrete actions taken to discover, test, and develop ideas that are achievable and affordable.” He identifies the following as fundamental to the little bets approach to thinking: experimentation, playfulness, immersion in the world, defining specific problems and needs before solving them, reorientation and flexibility, and iteration. The methodology utilized by the comedian Chris Rock is of particular interest to Sims. To hone his craft, Rock regularly appears at a small comedy club in New Brunswick, New Jersey where he repeatedly tries out new jokes, many of which fail to resonate with the audience. It is through this repetitive process of experimentation, contends Sims, which makes Rock such a successful comedian.
One of the more important insights in Sims’s work is that rigid, linear thinking may no longer serve us well going forward in an uncertain, largely unpredictable era. Adaptability, rather than ideology or a reliance on the past to predict the future, may be the most useful skill. Although Sims is not a political writer, he does briefly reference how former Federal Chairman Greenspan had to rethink his ideological assumption in the wake of the financial crisis. “Just as former Chairman of the Federal Reserve Board Alan Greenspan acknowledged a ‘flaw’ in his understanding of markets during the 2008 economic crisis, we cannot rely on past assumptions to predict the future. In this era, being able to create, navigate amid uncertainty, and adapt increasingly be vital advantages.” If Sims is correct in his assessment, and there is no good reason to believe that he is not, the implication for formulating appropriate regulatory and tax policies is stark. It would seemingly imply that well-worn shibboleths about unfettered and deregulated free markets, spending, and taxation that harken back to the political debates of the 1980s are no longer workable in today’s complex, globalized world. Although he could have amplified upon this point further, Sims, referring to work of educational historians, rightly observes that the American system in its current form was designed for the industrial era and not for the knowledge economy.
In conclusion, creative types, entrepreneurs, and free thinkers who feel constrained by the rigidity that dominates much of the corporate world and federal bureaucracy today would likely agree wholeheartedly with Sims’s assessment that we are taught to be linear thinkers in a nonlinear world. Although he acknowledges that, “experimental innovation should not entirely replace linear thinking in our regular work processes,” Sims nevertheless does put forth a cogent argument as to why those individuals who are willing to think differently and persevere through likely failure have a distinct advantage in an ever-increasingly uncertain global economy. The future may no longer be so bright that we all have to wear shades; it may, however, be so uncertain and unknowable that we must learn to appreciate the merits of nonlinear thinking.
Jon Lewis (c) 2011