The externality lens

Will Wilkinson has written a provocative paper that tries to explain a remarkable regularity in American politics. Wilkinson writes:

[T]here is now no such thing as a Republican city. “As you go from the center of cities out through the suburbs and into rural areas, you traverse in a linear fashion from Democratic to Republican places,” Stanford political scientist Jonathan Rodden has observed. The electorate is typically equal parts Democrat and Republican at about 900 people per square mile, according to Mark Muro of Brookings. The exact number varies a bit from place to place; higher in more Republican and lower in more Democratic states. Overall, majorities tend to flip from blue to red roughly where commuter suburbs give way to “exurban” sprawl. That’s where the political boundary of the density divide is drawn.

Higher population density predicts higher Democratic vote share even in small cities in deep red counties in deep red states.

Wilkinson explains this “density divide” by suggesting the process of urbanization sorts people with relatively fixed prior characteristics (ethnicity, ethnocentrism, personality type, educational attainment) into different geographies, and then ghettoization within now more homogeneous places further entrenches those differences. Wilkinson’s perspective is worthy of careful consideration. I’m not writing to dispute or endorse his view, but to offer an alternative explanation that might or might not complement it. (Our tendency to like debates hot—and to attach our egos to this view or that—often leaves us arguing hypotheses as though they are mutually exclusive when, in social affairs, they usually are not.)

A very simple explanation for Wilkinson’s density divide might have to do with people’s intuitions about the pervasiveness of externalities. People who live in dense places correctly perceive that the things their neighbors do blow back upon them. If a neighbor wants to tear-down her single family home and replace it with a midrise apartment building, the typical urbanite doesn’t think “it’s her property, she can do what she wants”. She goes straight to the planning commission to complain about parking and shadows. If someone wants to open up a strip joint, a gun range, even a posh bar in a dense city, urbanites instinctively understand that those choices will have consequences for people other than the entrepreneur and her clients, and demand a regulatory process to balance the external costs (and benefits, at least in theory) against the benefits that business stakeholders would enjoy. This view, that most potential actions have significant repercussions for people who do not voluntarily choose to participate in them, we’ll call externality pessimism.

In more rural areas, libertarian intuitions seem more sensible. For many actions, external costs decline pretty directly with distance. In places sufficiently sprawled that parking is rarely an issue but nearly all interaction is mediated by an automobile journey, a kind of hermetically sealed, climate-controlled pod-world serves as both an insulator and diffuser. The external cost to you if some kind of eyesore becomes your “neighbor” is much less if your neighbor is well down the road and you just have to drive past it than if it is literally adjacent to your home. The dangers you (or at least wussy urbanites like me) might fear from rough clientele at a gun range are attenuated if the clientele doesn’t actually congregate anywhere in particular, because once they step from the parking lot into their vehicles they are everywhere and nowhere at once. Gun ownership itself looks very different from the perspective of someone living in the countryside, for whom policing and eyes-on-the-street mutual supervision cannot be relied upon and an unintended stray bullet is unlikely to hit anything more vulnerable than a tree, than within a city. In an urban context, the external costs of pervasive gun ownership are large. Weapons might fall into the hands of lunatics and criminals, and there are always lunatics and criminals nearby. Incautious shots intended recreationally could harm or kill someone. The petty conflicts that are ubiquitous in urban life, that in the ordinary course of things flare hot and then are quickly forgotten, might needlessly escalate to tragedy, when the satisfying punctuation of a trigger is near at hand. People who live in sprawl or genuinely rural places just don’t bump into one another as much. Their homes are their castles. Driveways and garages, cul-de-sacs and long ribbons of asphalt, serve as moats. A real sphere of privacy exists, where in general the effects, good and bad, of people’s actions are mostly restricted to those within the household. If we accept that, except in extreme circumstances, households are best placed to see to their own interests, then there is not much call or place for external regulation. What people do with and on their own property is, to a good approximation, their own affair, and meddling by outsiders, whether well-intended or corrupt, is likely to do more harm than good. This is externality optimism. If the costs and benefits of people’s choices are fully internalized, they can be left to do whatever they wish.

If we think not so much about the current, Trumpified Republican party (there will be another lens for that!), but the coalition that used to flatter itself as the Party of Reagan, Wilkinson’s density divide becomes largely explainable in terms of where people understandably sit between externality optimism and pessimism. By virtue of direct lived experience, people living at high densities perceive nearly all actions as interactions and seek (though rarely find) a competent and fair regulatory framework to mediate conflicts of interest. People living at low densities experience a world much closer to Econ 101 models: interaction is not the default, and when it is sought, markets can coordinate mutually beneficial outcomes. External regulation is counterproductive.

Many of my readers will, I think, see this as an unduly charitable read of even the pre-Trump Republican Party. Maybe. One of my aims in this exercise is to find bases for some charity between factions, without which I think we have a great deal to fear. Still, let’s go through why I also think the pre-Trump Republican Party was misguided in its externality optimism, despite (I claim) how understandable that optimism may have been from the lived experience of individuals who affiliate with that party.

Once upon a time, a person’s direct lived experience may have served as a sufficient proxy for the forces that affect people’s lives. But that time has long passed. Technology and the scale at which our economy and finance has become organized mean that we all live in a crowded city, whether we notice it or not. Urbanites, in a sense, have an unearned advantage because our direct experience forms intuitions that better match a reality that in fact we all share than those that might be formed in salubrious isolation on a Wyoming ranch. Consider this phenomenal story by Claire Kelloway (ht Matt Stoller) on the tremendous squeeze Big Ag has placed on predominantly Republican farmers.

Market concentration is what I refer to as a power externality. At every step of the way, firms like Monsanto may have gained their market strangleholds via notionally voluntary transactions, all parties to which believed in their interest. But the accumulated effect of those transactions is to increase the bargaining power of just a few firms and undermine the bargaining power of future counterparties, who may not have consented to any of the earlier transactions. For example, much of what is sought by the acquirer in a merger is a better “market position”. That benefit is internal to the transaction: Both the acquirer and the target often understand its economic value, and price negotiations determine how the benefit will be shared. But the benefit of a better market position, which translates to increased monopoly or monopsony power, is created by increases in revenue from future customers or reductions of payments to future vendors, all of whom are not parties to the merger. Antitrust regulation, in this sense, can be understood to be much the same as land use regulation in cities. It exists to balance the interests of transactors who internalize benefits against costs the transaction will impose upon third parties.

Farmers aren’t stupid. They fully understand how and by whom they are being squeezed, and their ex-urban perspective on gun rights notwithstanding, countering the power of Big Ag might be a way for Democrats to make inroads into rural America (as Kelloway argues). This kind of vulnerability helps to explain Republican operatives’ enthusiasm for emphasizing “culture”, which allows them to highlight the small, the kind of controversies rank-and-file voters might experience very locally, and call attention to the absurdity and perniciousness of meddling by governments or self-appointed do-gooders into matters where the rural peace would best be kept by leaving people alone and perhaps building good fences.

Climate change is another domain where I think the externality lens can help us understand how the parties have sorted. Droughts, violent storms, floods, and heat waves do not discriminate between rural people and city dwellers. These catastrophes are indifferent to the culture wars that flamboyantly mark our tribes. But people from lower density environments just intuitively have less reason to believe in weird, counterintuitive consequences of apparently benign actions. Urbanites are constantly arguing over prima facie good things. (Housing for the humans is good but it is bad!) They frequently make and consider counter-intuitive cases with appeals to indirect effects. That’s less common for people who live at lower densities. Republican politicians almost constantly emphasize—because their constituents are receptive to them—notions like “common sense”. A simple version of common sense often works pretty well in low density environments where the (directly perceptible) consequences of most actions are experienced by the people who voluntarily participate in them. People formed by lower densities have stronger priors to overcome before they concede the existence of invisible but urgent consequences to what seem like ordinary, and very valuable, activity. Given the stakes for America’s huge oil and gas industry, (at least) one of America’s two political parties was always liable to be climate reactionary, regardless of the evidence. Of the two parties, perhaps climate skepticism finds a more natural home among Republicans than Democrats not because rank-and-file Republicans are anti-science, but because their reasonably formed priors render the burden of evidence for “spooky action at a distance” higher than for density-addled Democrats.

It is easy for people like me (and most likely for people like you, dear reader, although I hope not all of you) to conclude that it is Republicans who are basically mistaken, afflicted with an externality optimism that may be understandable but is in fact unsupportable in the contemporary world. I think that’s true, but not quite the right lesson to draw. For while externality pessimism is more suited, descriptively, to the modern world than externality optimism, in a prescriptive sense there is perhaps no project more important than restoring or creating contexts within which externality optimism would be correct and adaptive.

Wilkinson writes, “There are no Republican cities.” An obvious retort by Republicans might be, “There are no well-governed cities.” Among larger cities, at least within the United States, I think the retort is broadly correct. You don’t have to endorse the slander against my remarkable native city by this moment’s unfortunate President to concede that the problem of effective governance remains pressing and unsolved in America, at the municipal level as much as any other. America’s most prosperous cities are far from immune. Governance is the world’s most pressing unsolved problem. We need new ideas and “petrie dishes” that enable creative experimentation and hopefully progress. We are, for now, just terrible. The scale and scope of diverse modern polities has outstripped our capacity to govern.

So, arguably one of the best approaches we have for now, is to try to reorganize our affairs so we need governance less. That’s a quite different claim than to argue for “small government” in the world as it is. As poorly governed as our cities currently are, it would be idiocy to argue for less government where in fact the reality of pervasive externalities demands extensive regulation and negotiation. But, to the limited degree that it is possible without making ethically abhorrent or materially intolerable trade-offs, encouraging ways of organizing ourselves that render externality optimism a less deluded intuition would mitigate some of the harms of our incapacity to govern.

The first-best solution, of course, would be to get better at governing, at every scale and level. If the problem of governance were solved, if we knew how to i) coordinate the provision of public goods at any scale, with ii) widespread legitimacy and minimal dispute over the distribution of benefits and obligations iii) across diverse constituencies while iv) upholding liberal values, the possibilities that would be unlocked for human flourishing are unfathomable. And though we may never fully achieve all that, governance is a practice, an institution, a social technology. It is susceptible to improvement. We can make progress.

But in the meantime, altering circumstances where we can, so we require governance less, so that the stakes of political conflict are lower, may be a helpful stopgap. That sounds like, and is, a very Republican kind of insight. But it’s also the basis for a lot of small-is-beautiful intuitions among lefties. And it’s the basis for these words, by John Maynard Keynes in 1933 (ht Tyler Cowen):

To begin with the question of peace. We are pacifist today with so much strength of conviction that, if the econornic internationalist could win this point, he would soon recapture our support. But it does not now seem obvious that a great concentration of national effort on the capture of foreign trade, that the penetration of a country’s economic structure by the resources and the influence of foreign capitalists, and that a close dependence of our own economic life on the fluctuating economic policies of foreign countries are safeguards and assurances of international peace. It is easier, in the light of experience and foresight, to argue quite the contrary. The protection of a country’s existing foreign interests, the capture of new markets, the progress of economic imperialism–these are a scarcely avoidable part of a scheme of things which aims at the maximum of international specialization and at the maximum geographical diffusion of capital wherever its seat of ownership. Advisable domestic policies might often be easier to compass, if the phenomenon known as “the flight of capital” could be ruled out. The divorce between ownership and the real responsibility of management is serious within a country, when, as a result of joint stock enterprise, ownership is broken up among innumerable individuals who buy their interest to-day and sell it to-morrow and lack altogether both knowledge and responsibility towards what they momentarily own. But when the same principle is applied internationally, it is, in times of stress, intolerable—I am irresponsible towards what I own and those who operate what I own are irresponsible towards me. There may be some financial calculation which shows it to be advantageous that my savings should be invested in whatever quarter of the habitable globe shows the greatest marginal efficiency of capital or the highest rate of interest. But experience is accumulating that remoteness between ownership and operation is an evil in the relations among men, likely or certain in the long run to set up strains and enmities which will bring to nought the financial calculation.

I sympathize, therefore, with those who would minimize, rather than with those who would maximize, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel—these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national. Yet, at the same time, those who seek to disembarrass a country of its entanglements should be very slow and wary. It should not be a matter of tearing up roots but of slowly training a plant to grow in a different direction.

Do read the whole thing. It is a remarkable essay.

We are left, I suppose, with externality pessimism of the intellect, externality optimism of the will. Until we get better at governing.

Update History:

  • 27-Apr-2019, 3:40 p.m. EEST: “Technology and the scale at which our economy and finance has become organized meansmean that we all live in a crowded city”; “…the retort is broadly truecorrect.”; “externality pessimism of the mindintellect, externality optimism of the will”; “But oneOne of my aims in this exercise…”; “TheThese catastrophes are indifferent”; “…once they step from the parking lot into their vehiclevehicles…”
 
 

13 Responses to “The externality lens”

  1. Steve Roth writes:

    Econ 101 through a Steve Randy Waldman lens, please.

  2. MORGAN WARSTLER writes:

    This is a great read. Stealing lots of it.

    BUT one big caveat: Wilkinson’s take on Urbanization = Polarization is silly and wrong.

    Polzarization in US is 100% driven by the math of centralizing decision making in DC

    I’m super disappointed more of left dont admit this – because it indicts their DC as tool for blue states to abuse Alabama prefertence.

    IF we kicked ALL EDU policy to states, no Federal pressure or prefs. People would care less about DC politics.

    Same for Healthcare. Same for Gay Marriage. Same for Abortion. And on and on.

    Back when power was left to states, we had regional Dems and GOP and horsetrading in DC was commmon, but much more importantly IMO, people moved with their feet to find a place they were happier. Moving from Downtown Columbus to the suburbs or from rural ohio to Downtown Columbs is a mere echo of what it meant to move from Ohio to Arizona in 1950.

    It’s very disappointing to me that the discomfort this obivous fact has on lefties keeps us from really solving for polarization.

    So, Will is wrong and I am right.

    And whats wose, all this handwaving about polarization is just posturing, bc the urbans don’t want to stop trying to boss Alabama around, and Will has stopped even seeing the world as it is to aid in teaching CA to be afraid of Alabama bossing CA around.

    https://medium.com/@morganwarstler/vox-com-uses-anti-federalism-to-make-americans-hate-each-other-327187201683

  3. Morgan. Doing too much at the centre for such a diverse country is a problem. But I would argue that much of the polarisation is driving by a deep alienation between the views dominant in the “cultural industries” and the wider populace. Also, how migration is allowing metropolitan elites to leave the provinces to rot (in the US, the UK and France) and so they do.

    Note, that’s not a blanket denunciation of migration, just how it is being done in those three countries.

    See my response to Wilkinson here.
    https://lorenzo-thinkingoutaloud.blogspot.com/2019/07/the-urban-rural-divide-in-us-and-other.html

  4. Nicholas Weininger writes:

    It’s telling that you start with exactly the sort of example of externality pessimism causing overregulation that is (rightly, I think) beloved of libertarianish critics of our current urban regulatory regime. Urbanites’ intuitions are no less prone to cause pathological mismatches between their intuitively-taken positions and the needs of effective governance than are ruralites’ intuitions. Our large cities would work a lot better if we told the busybody neighbors complaining about the parking problems and shadows from the new apartment building next door: suck it up and deal, they can build what they like on their property.

  5. reason writes:

    This is very perceptive.

    I will resist the temptation to ask NW to read the piece again. His response looks like he read one sentence.

    With regard to excessive centralization, I think the issue is complicated, but that are good grounds for looking at the US and the EU as opposite ends of failed federalism. The Educational example is perhaps a bad one (or a good one) because it really asks the question – how mobile are educated young people? If you look it at that way, you see why the issue is difficult and why centralization has tended to happen, perhaps beyond what might be considered ideal. Yes, to subsidiarity, but what process do you use to enforce it (note and how do you stop that enforcement itself undermining the concept).

  6. reason writes:

    There is another aspect of power externality, that I think you have neglected – it can also affect people who are in no way counterparties to any of the parties involved, and also just be the result of economic development or technological advance.

    This is because those people are dependent on being able to afford a resource whose price or availability can be affected by market actions of other actors. (Of course everybody knows this happens with wild animals – but it happens to people as well). Most people do not own a portfolio of assets that they can reorder at will. Most people are path dependent – they have roots and connections.

  7. reason writes:

    Sorry for multiple post, but they are really are disjoint points.

    Bad governance affects not just public organisations, it is rampant in private ones as well. The Peter Principle is alive and well.

  8. MORGAN WARSTLER writes:

    Lorezno I think you do a good job describing the action on the field, but I think it missues the larger reality. BTW, Drew was a good buddy of mine from way back.

    Steve as a smarter lefty gets this, but even he THOUGH STEEPED IN MY EXACT SAME POLIICAL HISTORY, resists it.

    America as sotwae is p2p. The rules written in our BIOS, grant so much anti-democratic power to the small states, that they have held power here for 230 years. NOTHING, not the new deal, not 16A, not a SCOTUS that keeps expanding 14A – nothing chnages this basic fact:

    LARGE STATES gain the greatest control and autonomy for their citizens, by keeping their power at home. The bigger that DC is – the more the small states will rape and molest the big states YOY.

    Now if you push Steve on this, and i have, he will argue that in the end, States’ Rights driven by large states becomes A RACE O THE BOTTOM as he sees it.

    Basially Texas and Florida and the states that follow in their footsteps will pull away from CA and NY – so Steve finds himself between a rock and hardplace: Centralized power creates polarization AND lets small (red) states molest his Blue Utopia.

    BUT, if his blue utopia has to compete with my red one, his blue one will fail.

    —–

    My complaint with Steve is this: He grew up seeing Dems run hard left 68 and 72, and RESIST truly runing towards center until 1992. He knows Dems need to Fear & Loathe, but he has STILL rooted for the young who dont know this, to be young and dumb.

    This is my model:

    1) the BIOS is p2p – the network weakens the big nodes the more you centralize power.

    2) The game is bi-polar – two parties will split near middle – issues don’t matter – both oarties generally aim to capture 51%.

    3) BECAUSE the Steve Team is stuck between rock and hard place, they stumble thru history between two gutter bumpers: Trump / Nixon / Teddy Jackson on one side (small states grab big DC power and without any care for ideoogy exert brutal mean-ness on the young cultural kids who DO NOT KNOW YET they must Fear & Loathe. And Blues / Dems accept they are weaker team, have a weaker hand, and begin to play wisely as such, and DC doesn’t do much to beat up on Alabama.

    For the life of me, I don’t understand why Dems who dont care at all about what life is like in MX, are so damn concerned with punishing AL. But if pushed I tell you it’s bc they know in the end TX beats CA, so they keep sending power to DC even though it dirves everyone nuts.

    Steve knows whats coming. The solution is we replace govt is software

    “i) coordinate the provision of public goods at any scale, with ii) widespread legitimacy and minimal dispute over the distribution of benefits and obligations iii) across diverse constituencies while iv) upholding liberal values, the possibilities that would be unlocked for human flourishing are unfathomable. And though we may never fully achieve all that, governance is a practice, an institution, a social technology.”

    If you imgaine the .GOV namespace as free software and free hosting that does everything software can do in private sector, BUT WITH A COMMON UX – we have an easy way to acheive digital Federalism. States compete in provisining of goods, who can make the best welfare basci per dollar??? The loser just alters a few bits in the the variables in their software and CA becomes a it more like or vice versa.

    And YES, this will lead to TX beating CA but as Steve notes, we still make progress. 20% of the time CA will add some real value, their new crazy software setting for X will prove an improvement, even though 80% of the time they fail to beat the control in the A/B test.

    Anyway, this went long, suffice to say Left doesn’t win many battles, they just slowly overtime, get the right to make some changes inthe country the control.

  9. Joe writes:

    While I find your lens interesting, I cannot help but disagree with one key assumption made on behalf of the ‘externality optimists’: Folks from less dense areas do not assume that negative externalities will never occur; They assume that if/when one does occur, that it is their own responsibility to remediate – not necessarily reverse – its impact. This sort of mindset often leads left-leaning thinkers to believe that there is a magic solution to any ailment. Striking down a Big Ag merger doesn’t replace the small farmer’s way of life, just as UBI doesn’t replace all that a job provides (money of course, but also a sense of meaning, pride, social interaction, etc.).

    And of course the point would be moot if we were collectively “better at governing”. But what incentives exist to believe that this is even possible? Skin in the game is required, of which there is little in most of today’s governing bodies. IMO, attitudes towards responsibility seems to be the more effective lens.

  10. reason writes:

    Joe,
    let me get this clear. You are saying if a farmer is negatively affected by something his neighbor does (even if that neighbor is 1000 km away) he should take his gun and personally “sort it out”? Or am I misunderstanding?

  11. Joe writes:

    reason,
    Not sure where you get the implication of using force. Personal responsibility could entail many more civilized options (using your example):

    1. Bargain with the neighbor in question
    2. Alter your own property to lessen the effects of the negative externality
    3. Move
    4. As a last resort, grin and bear it

    My hypothesis is that what differentiates low-density folks from high-density folks is not merely their *expectation* of possible negative externalities (they are not dumb/blind to potential problems). Rather, I would argue that what is different is their level of *independence* in how they choose to deal with it if/when one arises. Government, municipalities, and regulators are not the only means towards solving supposed injustices.

  12. reason writes:

    Joe,
    we’ve seen this story play out countless times in history. Voluntary regulation doesn’t work. If it is involuntary some sort of threat of violence is ultimately involved.

  13. hertavein writes:

    So bigotry and chauvinism become, through this lens, cultural mechanisms that breed “false positives” of externality optimism

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