(Dec. 23, 2002)
In the 1980's and 1990's, New York was rapidly becoming a stock
monoculture. All kinds of other industries were driven out as the stock
market embarked on a path of apparent growth which turned out to be a
Furthermore, the gross statistics tend to understate the extent of the
destruction of other industries. The firms which remained were the more
established ones, those most easily able to meet the higher rents, but
also with the least incentive to change. Large numbers of computer
for example, are now being published in places like Indianapolis.
the firms which remained in New York tended to be those most connected
with the financial industry, eg. the Wall Street press. Even the
redevelopment of Manhattan worked out in practice to stockbrokers
closer to their work. New York bet its future on the stock market, so
is surely valid to examine whether the stock market has a future.
However, the stock market carries the albatross of the dot-com crash. Social Security is not going to be privatized because too many people have already lost their shirts on the market. The dot-com bubble happened because Wall Street failed to apprehend the nature of the internet. The internet proved to be a gift economy, as Eric Raymond had noted in the particular case of open-source software. That was more generally true. At every level, the internet was driven by people who gave away information, and even their time in giving advice, and were content merely to minimize their out-of-pocket expenses. However the financiers of Wall Street continued endlessly searching for the capitalist market they "knew" had to be there. The result was that Wall Street blundered into the arms of outright confidence swindlers. Millions of people correctly apprehended the nature of the internet, and by extension, the information economy, as it pertained to their daily business. The internet could only expand so rapidly because millions of people had found uses for it. Investment was not their daily business, and they did not spend very much time thinking about investment, so it is hardly remarkable that these millions of people did not penetrate the investment aspects of the internet. However, Wall Street financiers were in the business of thinking seriously about investment. In short, the characteristic Wall Street exhibited was conspicuous stupidity relative to the general population.
The question to be asked is this: what was it about New York which rendered stockbrokers abnormally stupid. I think part of the answer is that as New York overspecialized, it became increasingly difficult for stockbrokers to talk to anyone who was not either a stockbroker or someone trying to raise money from stockbrokers. Wall Street was effectively stripped of its information antennae. It is technically possible for a Boston banker in Boston to lunch in a MIT student hangout, and if he works at it hard enough, and doesn't come on too strongly, he might get the students to tell him about what they are doing. Mind you, very few bankers have the mental qualities to do this with success. But still, it is possible. This kind of thing might easily have bought the banker an extra five years to digest the implications of the internet. Certain kinds of important ideas are so unthinkable, that they take a long time to mentally absorb. However, a wall streeter would have serious logistic difficulties in getting out of the financial district during his lunch hour. Given the kinds of conceptual deficits which resulted from only talking to other stockbrokers, Wall Street was not even able to interpret the information at its disposal.
Another point is simply that New York is a very expensive place to live and work. The economic distinctions are much starker than they are elsewhere. The people most likely to participate in the internet were also those least disposed to live in some place like New York. They felt, rightly or wrongly, that the internet would give them most of the advantages of living in a big city, and that the lower living expenses of a smaller place would give them greater economic freedom. The internet was part of a whole complex of reinforcing tendencies. At the same time, Wall Streeters, locked into their cycle of high salaries and high living expenses, had difficulty in understanding the psychology of someone who would simply give something away. The lived in a world in which there were only two kinds of people-- uber-capitalists and welfare recipients. The stockbrokers often chose to invest in a classic dot-com scam, because the entrepreneur displayed what they considered a healthy greed.
A probable reform of the financial markets, which seems to be in progress, is to recognize that large companies now have real time information systems. So do the brokerages and the exchanges. The disconnect is in the corporate reporting system. There are large numbers of corporate officers walking around with unpleasant facts in their heads which they will have to disclose on quarter day, or go to jail. This situation lends itself to discreet leakage, which can shade off into insider trading.
However, due to the advances in corporations' internal reporting systems, corporations can be made to report much more information, much more frequently, and with much greater automaticity (financial reporting markup languages, etc.). The effect will be to shift the practice of finance from intuitive "flying blind" to computerized auditing. Daily reporting is likely to radically reduce the scope for insider trading and arbitrage. Things will not be allowed to build up for weeks before they have to be reported, so there will be fewer surprises. The effect is that there will be fewer traders playing hunches on Wall Street, and more programmers writing reporting programs in places like Akron, and submitting them to additional SEC inspectors in a regional office in Cleveland. Brokerages will of course create their own programs to interpret the reported data, but much of this programming is likely to be done over the internet. Similarly, there are large numbers of day traders on the internet, who are in effect recreational gamblers. Since they have jobs elsewhere in the country, and don't have to make their livings from the stock market, they can consistently undersell professional Wall Street arbitragers. Day traders also tend to have better information about economic fundamentals, since they can choose to trade in securities related to their employment. The economist George Goodman ("Adam Smith") once pointed out that people who either make or use something are likely to have a much better idea of its value than mere stockbrokers. Thus, a nurse, for example, is likely to have sounder ideas about pharmaceuticals than a MBA. The traditional weakness of a day trader was that he did not have access to "street tips," meaning low-level leakage from people with a legal duty of confidentiality. Such tips did not lend themselves to being sent by e-mail, because that would have tended to create a paper trail for what was, after all, a somewhat questionable proceeding. An audible remark in a restaurant, on the other hand, had the advantage of being practically untraceable. Daily reporting will tend to eliminate this inside advantage.
At the same time, the requirements for floating a public company will increase. Start-up businesses will be forced to shift to private forms of financing, eg. limited partnerships, formal cooperatives, franchises, etc. Employees' compensation packages will tend to consist not of stock options, but rather of royalties on definite products, perhaps along the lines of movie actors' "residuals." In practice, employees exercising stock options have commonly been obliged to resell some of their stock to pay taxes, or to take out loans on the stock if they did not have sufficient capital to exercise the options. Thus, stock options have implicitly involved selling shares to the general public. Royalty compensation schemes, on the other hand, tend to insulate corporate incentive payments from the stock market.
Additionally, the economy is becoming much more software-oriented, and much less hardware-oriented. An economic characteristic of software is that it has much smaller time lags, and consequently, much lower capital requirements, than hardware. The style of software is to write a thousand-line program which works after a fashion; put it into use in a favored niche where the need is so desperate that its imperfections will be tolerated; and then set about improving the program by small increments to address wider markets. This is totally distinct from the massive up-front investment characteristic of hardware. The implication is that a software businessman who needs to sell equity to finance development is usually in the process of setting himself up for a failure. He has not been able to discover a niche where he can grow the program incrementally, and that usually means that there is no market at all. Alternatively, the businessman may want to "cash out," which is another way of saying that he thinks he has already extracted most of the "juice" from the business. Indeed, one striking characteristic of software is the extent to which it is actually developed by the end user organization. By the time the software is offered for sale, it is likely to be a mature product with well-defined capabilities and markets. A start-up firm or product may very well be sold to a big company without ever having been publicly traded.
Finally, technology is becoming much more scalable. For example, a householder who installs solar cells on his rooftop obviously has that much less money to invest on the stock market. Since he both owns and uses the solar cells, he does not have to pay the administrative overhead inherent in long-distance investment. As a result, this kind of "self-investment" can often price stocks and bonds out of the market.
All of this has been masked by a bull market which made everyone look good. In a prolonged bear market, with great pressure to reduce costs and ongoing downsizing, great sections on the financial industry are likely to depart New York for points south and west. And New York is dependent on the financial industry.
New York is going to experience the same kind of economic medicine that Detroit went through in the 1970's. New York is about the only sizable northeastern city which has not gone through a population crash in the last fifty years. Now it is New York's turn. This time it will happen faster. There are more computers around, and computers speed up all kinds of business, including that of outmigration. New York's population will drop down to whatever the United Nations and Columbia University can sustain, probably about two or three millions. Except for ground rents, skyscrapers are much more expensive to build and operate than low-rise buildings. This will become still more the case as realistic safety requirements are enforced. Ground rents will become irrelevant as New York downsizes. The counsel of economic prudence for a firm remaining in New York will generally be to find a brownstone to move into. New York will find itself stuck with an "office-space-brownfield." Former industrial cities such as Philadelphia find repeatedly that the last owner of an abandoned factory is insolvent, and that there is no alternative but to seize the building for unpaid taxes and demolish it at city expense. Failure to do so results in the building becoming a dangerous nuisance. New York will experience the same problems in a more acute form, since skyscrapers overhang public thoroughfares. An object detaching itself from the fortieth floor of an abandoned skyscraper would strike the sidewalk with exceedingly deadly force, or it might punch through the roof of an automobile.
A realistic plan for the redevelopment of lower Manhattan would be to create a sizable park, of say, 100-200 acres, in what is now the financial district. The World Trade Center site would be the center and nucleus of this park. Eventually, this park might be extended northward to link up with Central Park. Federal money would be involved, of course, and in the short run, such an "unbuilding" project would tend to economically stabilize New York.
Andrew D. Todd
1249 Pineview Dr., Apt 4
Morgantown, WV 26505
Spencer Reiss, The Transparent Corporation, Wired Magazine, Nov 2002