The Borsalino Test #4: The Urban Dilemma

Friends,
In the past couple of weeks I have been planning to write a series of takes on how the distribution of people in offices, homes and cities will be governed by the rules of the online world. Somehow the various takes ended up connecting in this essay.

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Why ‘The Borsalino’s Hat Test’? Everyone who's read Shantaram, my favorite novel, would find this redundant. The Borsalino is this wide-brimmed hat made from very particular furs. This piece of art apparently digs quite the hole in your pocket, and there's bound to be fakes. In comes the Borsalino hat test. You roll the hat up into tube thingy and make it pass through a wedding ring. After emerging from the other side, if there are no creases, you've got yourself a deal. Most will argue Borsalino tests are part of life.

You can read all my essays here. Let’s go :)


The Urban Dilemma

Closer together

In ‘The Triumph of the City’, Ed Glaeser states that "human collaboration is the central truth behind civilization's success and the primary reason why cities exist". Physical proximity nourishes collaboration, a core theme in the industrial world. Blue collars would get cramped in vast factory floors, shuffling widgets along assembly lines. That type of work is no longer done in cities. It first relocated to the suburbs, then to China and ultimately will fall (almost) entirely on intelligent machines’ plates.

Machines are great at manufacturing things. Humans are far superior at producing knowledge. That means originating new products, designing them, drawing narratives around them, lending an ear to customers’ headaches and building bridges with other humans throughout this whole cycle. Knowledge work is way less framed and more erratic in nature. Yet, we believe that it is better done in cities. Why?

According to Glaeser, “the core idea at the center of information-based agglomeration economies is that all of our knowledge builds on things that we learn from people around us”. Living in close proximity to other knowledge workers facilitates learning and idea generation. Urban density boosts productivity, guarantees access to goods and services, reduces travel distances and encourages sharing scarce amenities. Cities are good for business, good for creativity, and good for the environment. Cities are also fun!

This fun-factor might be more important than all others. Back to Glaeser: ‘Holding income, education, marital status, and age constant, over a twelve-month period, city residents are 19% more likely to go to a rock or pop concert, 44% more likely to visit a museum, 98% more likely to go to a movie theater, and 26 percent more likely to have a drink at a bar than their country cousins’. In the Internet-distributed information era, urbanites are having a blast.

I do not aspire to conjecture against any of these arguments. But I would surface one caveat: all we have is data from the past. The Internet has been around for a handful of decades and its full effects aren’t as cut-and-dried as many speculate. Numerous simple inventions blossomed at the eleventh hour.

Zero-sum urbanism

Cities are effectively self-stirring cauldrons brewing positive feedback loops between physical and social. There is a correlation between increased social interaction, socioeconomic activity, and greater economies of scale. On the one hand, economic activity shows a bias for spatial agglomeration. But on the other hand, cities also generated repulsive forces. They become expensive, and crowded.

We haven’t yet cracked the one-hundred-million-person city. The forces of repulsion — environmental footprint, transport, pollution, entrenched interests — have proven greater than the forces of attraction. I haven’t yet crystallized my thoughts on whether this hurdle is inherently unsurmounted rather than insurmountable. Still, the non-scalability of current major cities poses a challenge to economic growth. It is a burden that falls disproportionately on those least able to bear it. Manhattan doesn't scale well. Pre-Covid San Francisco averaged a one-bedroom at $3,500. More than 1.3M people live in dormitory towns ringfencing London commuting daily. On the present system, each added individual comes with some tiny added degree of inconvenience for every other urban resident, most notably in the form of traffic jams and housing prices.

And yet cities remain remarkably sticky. To give you an idea of how immobile people are in the US, in 1948 only 7% of people used to move from one city to another every year - in the 2000s that number dropped to 4%. That’s because great cities attract ambitious people. In a hundred subtle ways, a city sends you a message: ‘you could do more and you should try harder’. In the fifteenth century every great Italian painter was hustling in Florence. That’s why great inventor and polymath Leonardo thought it was the perfect spot for him to be, much like today’s San Francisco for tech, Milan for fashion or London for financial services.

The social constructs of urban centers and large collections of people have long been used interchangeably. I suspect the Internet will change things further. Maybe one day the most important community you belong to will be a virtual one, and it won't matter where you live physically.

A tail of two cities

The distribution of people and economic activity is constrained by geography. Until recently, the consensus was that even people who work ‘on the Internet’ have to be located in close proximity in order to produce their best work. Even the tech employees in San Francisco need access to hospitals, and schools, and other services. That’s why we cram them into shoe boxes stacked on top of each other within a 49 mile radius. Such services require a critical mass of customers in a given location in order to remain viable.

Let's just assume that the consensus is no longer valid for a minute. Let's assume that over the next decade and beyond, the distribution of people and economic activity will be increasingly governed by the economics of abundance instead of the economics of scarcity. What will happen then?

People's choice of location will likely become as specialized as their choice of other abundant goods such as Spotify tracks or YouTube videos. In other words, population and economic activity will spread across a long tail of different locations. This will not happen only between cities, but also within cities. Between cities, it will mean that a variety of small towns and villages will get a little busier, and that whole new towns and villages will be established. Within cities, it will mean that a variety of employment areas will pop up and save everyone the trouble of commuting to a central business or entertainment district or of competing to live next to a handful of good schools.

The end result will probably be a hybrid model: the office will become less of a work-hub and more of a watercooler, while much of the labour will be distributed across the satellite offices of people’s homes. The second and third-order consequences will be profound – not least for white-collar employees, for whom the talent pool is eventually going to be globalised and offshored the way it was after the 1980s for blue-collar workers. This new hybrid model could catalyse the creation of new management cultures, forms of organisational design, and a reinvention of the very fabric of our towns and cities.

Better off without the office

There are at least a couple of immediate reasons why some companies are already going remote-first. The first one is simple – it lets them hire more talented people. Rather than hiring the best person in a 30-mile radius of the office, they can hire the best person in the world for every role. The second one is because it lets them be far more cost-efficient. Rather than spending $20,000 / worker / year on office space they can provide the best remote setup on the planet for $2,000 / worker / year.

There are second and third-order consequences to that. Many companies care massively about the environmental impact that eradicating the office – and the commute – will have. Even more importantly, organizations are realizing they don't need to expect workers to waste 2 hours a day commuting to sit in an office chair for 8 hour. In the office, the measure of performance is how much time you spend sitting in your seat. The measure of performance while working remotely has to become output.

Finally, a few companies have decided to be more remote than they initially intended because their competitors already did it. There is an intrinsic fear that if they don't go remote they will lose their best employees to their competitors. Most companies aren't scared about the quality of work that will be produced. They are scared about intangible things they can't measure, such as 'quality of communication' 'collaboration in person', 'water cooler chat'. But many have already realized these were excuses. Offices are instantaneous gratification distraction factories where synchronous work makes it impossible to get stuff done. Time will be replaced as the main KPI for judging performance by productivity and output. Great workers will be the ones who deliver what they promise consistently. Advancement decisions will be decided by capability rather than who you drink beer with after work.

Sure, certain demographics and generations will reject the transition. Their benefit – that everyone in the office is like them and it's easier for them to progress – will be their reason. But for many, the rise of remote will lead to people re-prioritizing what is important to them. Not organizing your work around your life will be the first noticeable switch. A number of people's main social contact comes at work, with people decided by their bosses hiring policy - remote work will subvert this paradigm and hopefully lead to deeper, more meaningful relationships.

Positional scarcity, business travel and higher education

So let’s say everything is going to be different for an extra year. Then at some point we revert back to where we were. No Covid anymore. Then what? Many aspects of our everyday life will revert back to normal, with a couple of tweaks maybe (masks? More touch-free interaction?). I suspect at that point two industries in particular would look radically different then. I am looking at business travel and higher education.

Business travel and college campuses have both been frozen, resumed and then frozen again for some time. Now we essentially have no choice but online video for both of them. The longer the crisis, the better video solutions will get. Hopefully. So once all of this is done, will we go back? We used to pay a huge premium for business travel versus a phone call, or for university tuition versus learning online.If we’re forced for an entire year to forego the in-person benefits of these practices, what happens when life returns to normal?

Our year of remote-only will dispel the familiar rituals and expose our expensive addictions to these things. And after this is over, we’ll have a harder time with casually approving $4000 of flights, hotels, and lost productivity for an in-person meeting that a zoom call could do. Or $100,000 for school tuition.

The counterfactual to that is that this year of disruption may very well reinforce, not disrupt, the core reasons for why we do these things. In environments of abundance, relative position emerges as a new kind of scarcity that’s expensive and valuable. That’s positional scarcity. It’s a zero-sum game, and something we can purchase with our money and effort. The more costly it was to get yourself there, arguably the better.

Let’s take business travel. Getting on the plane means you’re serious about something. Everybody’s busy; the fact that I’m choosing your one hour in person rather than an entire day of otherwise productive work is a signal: “I’m taking this seriously.” It establishes a concept of “place in line”, with this meeting being at the top.

Higher education works in a similar way, although at higher stakes and over a longer time scale. Everyone understands that the university system today works as a credentialing service, where universities must run faster and faster against one another in a Red Queen’s Race in order to preserve the relative rank and elite signalling that they confer on their graduates. A university degree confers a certain place in line for your career, and universities care a lot about making that place as competitive as possible. Paying up to attend a brand name school may seem expensive, but that’s the price for securing your place in line.

So now we have this weird experiment for a year where everything has to happen virtually. The pandemic has imposed this new temporary condition where we are no longer able to pay for positional scarcity and access in the same way, because we’re all stuck at home in Zoom meetings. There are two theories on the future from here.

Theory one. All of that spending on positional scarcity; all the time and cost and energy we’re exerting while running the Red Queen’s Race just to keep up and maintain our place in line; all of that is ultimately zero-sum and pointless. The virus is giving us a one year suspension of the race. During that year, we’ll adapt, and ultimately we’ll forget what we were missing. Everyone will stop paying this stupid tax, and we’ll all be better off.

Theory two. If you think that when all of this is done we’re not jumping right back into the race, I have a bridge to sell you. The one-year viral reprieve is going to make it especially clear what we were paying for all that time. Also, it doesn’t matter if you disagree with this; as long as at least some of your competitors feel otherwise, you’ll be forced to go along anyway.

So, rest assured: just because coronavirus is putting a temporary pause on some of these positional scarcity mechanisms doesn’t mean we’ll all collectively cast off that weight forever. Unless! We come up with new positional scarcity gates and barriers during this next year that are just as effective.


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