Speculative Rushes, America, and Network Formation

Originally published on Medium on December 14, 2017

I was looking at an old, wall-mounted map of the United States yesterday and noticed how sharply the density of small towns drops off moving westward and southward from the original 13 colonies.

Looking at the map, I drew a connection with essays that I’ve been reading by economists and their wiser counterparts, philosophers, examining the causes of growth in an economy. I realized that the lack of new, unregulated territories that can be settled today in the way America was in the 18th and 19th centuries is a severe impediment to growth.

The most efficient way to grow a family’s income is usually to move to an area with higher growth rates and a booming economy. Economists lament the lack of mobility amongst struggling Americans. While that lament is often simplistic and patronizing, I want to focus specifically on network formation in this essay, and will cover the reduction of family and local relations to a flawed dollar figure in another essay.

Physical mobility is helpful for families looking to increase their wealth. Increasing urbanism from physical mobility is essential to long term growth, for two main reasons.

First, it is a far more efficient use of resources than small towns or suburbia. Wealth, often defined as the ability to consume, is maximized as physical barriers, travel, and other barriers to entry are reduced, and choice and competition are increased as a direct result. Secondly, the collision of ideas and people accelerates innovation. True innovation usually moves stepwise rather than incrementally, and is heavily dependent on moments of serendipity. If Bill Gates hadn’t met Paul Allen at the time he did, our future would be markedly different. By increasing the number of interactions that smart people have, urbanism dramatically accelerates the rate of serendipitous moments, and thus the innovation needed to sustain growth.

However, population growth in booming economic cities, with high IQ populations and consistent incremental gains in innovation, has been slowed in the 21st century by burdensome regulation, especially in the housing market. This raises the cost of moving, the cost of entrepreneurship, and is quite the drag on the national economy.

Let us now contrast 21st century America, where most important innovations happen in major population centers, and entrepreneurship dealing with complex problems is also restricted largely to major population centers, with 19th century America. This is an argument based more on anecdote than numbers, as most economics figures are skewed or made up.

My proposition is that the rapid formulation of small towns and cities in the newly settled areas of the Americas allowed for an extremely fast rate of change in innovation, and served as an accelerant to entrepreneurship by creating a competitive environment where cities were pre-modern incarnations of modern startups.

Chicago in 1840 was a small city of 4,400 people. There were dozens of towns in 1840 in Ohio, Indiana, and Illinois that were as big or bigger than Chicago. Hindsight bias makes it easy for us to believe we could have predicted Chicago’s growth and the stagnation or failure of its rivals as cities, but that would simply not be true. Popper’s takedown of historicism would apply to our picking which cities were winners in the 19th century. The factors that we think built Chicago (trade, and, most important, trade stemming from railroad routes), were dependent on thousands of other factors, which were dependent on other factors ad infinitum.

There are dozens if not hundreds of rust belt towns that once housed innovative factories and technologies. They failed, but in most cases that is not a bad thing. By competing they raised consumer surplus and provided an important bridge, as economic value has a temporal concept (i.e. would you rather have a job for yourself paying $100,000 today or $1,000,000,000,0000 in 2900).

Since we understand what factors are conducive, although not extremely predictive, for growth, we can say that these conditions are necessary but not sufficient. A competent governance, a high concentration of high g individuals, and intra-group trust are a few major components.

In the 19th century, the rate of innovation was accelerated by the ability of towns to fail, and, more important, for rivals of said towns to be created out of thin air that better met this set of necessary but not sufficient conditions.

As America was gradually settled, local laws were codified, every piece of land was divided into ownership, or oversight and sight control was granted to local or national governing officials. This control restricted competition for existing cities and made it harder for cities with a monopolistic hold to fail. Since there was no frontier, and regulations rarely are reversed, there became no way to provide a new competitor to market, and intra-group competition was reduced by the hold on legislators and regulations that the “winning” cities enjoyed.

Having intra-group competition is better than not having intra-group competition. Introducing a new rival to a group, even one who is likely to fail, will have an outsized positive effect for the clients of the competitors: Think of every person living in the United States as a potential customer of a city. Now imagine that each major city in America was surrounded by a new swathe of land that was created with little regulation except the English common law that existed in 1776, and a strong tort system for harms-you sell lead paint you get sued into oblivion, and the enforcement mechanism is strong. Outside of that, there is no zoning, parcels of land are divvied up by lottery, and local developers can establish their own fiefdoms, or their own Vegas, within the boundaries of their land.

In this scenario we would see brutal competition amongst cities and towns to de-regulate. The reduced barriers to entry and ability to accommodate rapidly changing industries would see boom towns established overnight, most of which would turn into ghost towns in a matter of decades. Cities would get larger quicker, but fail quicker. It would mimic business formation in our modern economy, but with a much larger rate of failure for businesses (or in this case, cities), as corporate cronyism would be much reduced and local subsidies would leave cities insolvent as non-subsidized industries would leave to compete elsewhere.

Creating physical frontiers would also accelerate the rapid collision of ideas that birth quantum leaps of understanding ( I apologize for stretching the metaphor too far and using the word “quantum leaps”). Look back at the Wikipedia biographies of rags to riches innovators from the 19th and 20th century, and it is amazing how many of them knew each other pre-fame. While part of this is no doubt due to the odds of a bunch of random people knowing one out of a bunch of other random people, a lot of it can also be attributed to the physical mobility of folks at the time, which led to them meeting people and spreading ideas like the internet does now.

If there was still a physical frontier available, it would accelerate physical, and consequently economic, mobility by a factor of 2x or 3x what see today. We would see rapid consolidation of cities with rapid failure, but we would also see the rapid formation of new cities. It would mimic our modern economy, where businesses fail fast, or grow by n^x. It’s winner take all, but the new games start immediately and the winner has to survive another battle to the death or they get nothing.

The map I mentioned at the beginning of this article, where small town density weakened as people moved further west, is a prime example of this theory. As regulations increased, small town formations moving westward decreased-it was harder to build new places when you had to go through the government after stealing the land from the natives, rather than just stealing the land from the natives (also a topic for another day).

It is vital to realize that at the time of the formation of most small towns, they were competitors with the mega-urban areas we see today. Chicago and Cincinnati were competitors with each other, but they were also competitors with La Salle, Illinois and Martinsville, Indiana. And people didn’t know which town (startup) would win, so they were incentivized to move around more, and local leadership of those communities was incentivized to act in a way that was conducive to growth.

Replicate the model today, and you would see a sharp increase in competition against entrenched monopolies. It would have the same effect on major metropolises that the internet had on incumbent, traditional monopolies.