Cronyism and the global city again (crosspost from crookedtimber.org)

Alex Pareene at Salon points to a bunch of evidence showing, in essence, that the rich look out for themselves and their kids, and no one else, then to a piece by Andrew Ross Sorkin defending nepotism in the US, and by extension in China. There was a time, not so long ago, when Asia’s reliance on guanxi and similar networking practices was denounced as ‘crony capitalism’, to be contrasted with the pure and hard-edged version to be found in the US. This was supposed to explain the vulnerability of Asian economies to the crisis of 1997, and the stability of the US, then well into the Great Moderation.

A few years later, in the very early days of blogging, I wrote a post pointing out that the eagerness of financial sector workers to congregate in the same physical location, even though their work was supposed to be based on objective evaluation of data transmitted by computer, was pretty good evidence that the “global city” phenomenon, much in vogue at the time, was just guanxi writ large.

I turned that into a magazine article at Next American City (now Next City, whose web site seems to have lost it). Then I wrote a longer and more academic version and submitted it a lot of journals in economic geography, urban geography and so on, none of whom were interested. I think it stands up well in retrospect (much more so than most of the ‘global city’ literature, at any rate), but of course I’m biased.

At any rate, at least now everyone, and not least a defender and beneficiary of the system like Sorkin, is comfortable with the notion that capitalism is a rigged game, in which the ability to fix the next round is part of the prize for winning this one.

Update/clarification I’ve implicitly taken the efficient markets hypothesis as a benchmark, and assumed that features of the financial sector (for example, physical colocation) that can’t be explained by EMH are likely indicators of cronyism. It’s possible to take the view that the financial sector does things that are inconsistent with EMH, but nevertheless socially beneficial. An obvious example is the kind of opaque, over-the-counter derivatives that Dodd-Frank has tried to ban, and that the finance sector is lobbying hard to protect: it seems clear that doing these kinds of deals would benefit from face-to-face contact. So, if such deals are, in aggregate, socially beneficial, my argument fails – the converse also holds.

15 thoughts on “Cronyism and the global city again (crosspost from crookedtimber.org)

  1. chinese businesses use networks because of weak contract enforcement by corrupt courts and police. imperial china had no contract law.

    david friedman wrote a nice paper on chinese law and the mechanisms that emerged to take the place of contract law and then drew analogies with contract enforcement in cyberspace http://www.daviddfriedman.com/Academic/Course_Pages/analytical_methods_08/china_to_cyberspace.htm

    both use reputational enforcement and reputational bonds to do business.

  2. I think the link between co location and chronyism is suspect. You see co location occuring in smaller cities in a broad array of inductries. Cronyism may well be going on, but that is not a causal influence. I’ve noticed this in engineering supplier businesses, but obvious others are the West End, Broadway, legal offices near court houses, Manhattans Garment and millinery districts, for instance. Reading a little on the Garment district there are a number of factors one being racial which implies a high degree of chronyism but greed is really the driver there (a more desperate group for exploitation).

    That is not to say that I disagree with the core argument that capitalism is a rigged game. I do indeed agree. What I will add is that there is a glass ceiling to wealth and opportunity. The smaller the community/market/industry, the lower that ceiling is.

    The great moderation is an interesting subject and I see that the one breakout from that moderation since its inception was the recent GFC financial market failure. The fact that this was global suggests that rather than co location chronyism being the cause it was an industry insulated from the mechanisms of the great moderation,…..and rampant cronyism within that industry. The chronyism cannot be denied as it is commonly referred to along with an unnaturally bonus driven competitive business structure. I would add in here the involvement software based of disruptive technologies compounding with other influences.

  3. What an odd thing. I had an intuition and turned up here to check that out.
    I’ve always figured Prof Quiggin is worthwhile because he has the depth of intellect, accumulated body of knowledge and work ethic I lack, to sketch, in research, figures and maths, graphs formulas and analysis, my gut hunches about things are run.
    He knows where to look and knows what to make of what he finds.
    It will be interesting to see how his hypothesis located in the update works out, but one suspects, not with an empty stomach and wallet.
    I hope Jim Rose is not suggesting that the Chinese are unique as to cronyism and parasitism.

  4. If finance was something done by heroic individuals on their laptop then location would no longer matter. However finance, like most work, is collaborative. There is sales, billing, analysts etc working together to not only invent products but more significantly to deliver them. They don’t spend large times in isolation working on tombs of knowledge but spend endless hours passing information back and forth for rapid deliberation and filtering. And a lot of information assessment is communicated in a form unsuited to electronic media. The sort of “is this important”, “is this unusual”, “is this a priority” type banter that happens rapidly in an office environment where people of different skill sets know who’s judgement to trust on various matters.

    So if I want to set up a finance firm I need a range of skilled workers to collaborate internal to the firm in a manner that does not lend itself to remote working. People with technical, legal and financial skills need to deliberate over what market opportunity is a good deal or a bad deal. Over what product should be presented to or withdrawn from market. And to supporting them I need IT and other services. So in deciding where to locate my firm I will be interested in where such workers congregate. And such workers will be interested in where such firms congregate. Hence cities.

    Of course this firm could be located anywhere if workers were loyal to a given firm and willing to move to join it, however I think all but the most naive workers like to be near a job market rather than near a specific firm.

    No doubt people who gather together sometimes do corrupt things. But that is hardly a unique explanation as to why people gather together. And plenty of people work remotely to do corrupt things.

  5. Colocation provides social advantages which make for commercial opportunities; this is perhaps a matter of historical culture, rather than a necessity in the modern era of the internet. However, it is hard to beat having a mate from across the road—at a rival/brother organisation—introducing you to a few of his work colleagues over a meal or a few beers. Contacts made in this way can lead to further business opportunities which are difficult to ferret out from outside an organisation.

    Of course there are plenty of other reasons given for colocation of like businesses, and whether those reasons are still truly valid in the age of the internet, I don’t know. Even banks are fracturing their operations to be split across geographically dispersed sites. For example, in the mid-2000’s, one major bank shifted a big chunk of its city operations across to Meadowbank (I think, or near there, anyway), which is miles away from the CBD of Sydney. That leaves the company shell, ie the company secretary and the official company offices, in the CBD. Upon thinking about what I just wrote in the previous two sentences, that actually lends support to the cronyism argument, since retaining just the official company offices (of like companies) in the one area means that the CEOs and other senior staff still enjoy the perks of rubbing shoulders with each other, while the lesser employees—who may well be quite senior too, but not board level—are disenfranchised by the tyranny of distance. Is that an intended effect, or just a collateral one? Obviously a move like this one is justifiable by cost of rent in the CBD, etc, so it is unlikely that one reason alone is why such a move occurred. Still, the consequences are interesting.

  6. @TerjeP

    You didn’t read the whole piece did you?

    Did you read the EMH and social benefit qualifications for the null hypothesis?

    Go on. Say that you did and understood it.

  7. I must admit that TerjeP is right about cronyism in financial sector. It is not cronyism but a well oiled cooperation on goals presented by their leaders. Goal is “make money”.
    Cronyism would be if coordination was done for the sole purpose of leader’s benefit and done with a zeal while breaking laws. So financial sector does not have whistleblowers, or, it does have whistleblowers but regulators/ government knows that is the system and it doesn’t use information from whistleblowers for regulating, because that is the normal course of business, not breaking the law. Remember Madoff’s whistleblower?

    Yes, that is the capitalism. A rigged system that needs regulating and taking away oversized benefits from a rigged system and spread out to all that needs it. 94% marginal tax rate will do a great job of regulating the zeal of using the rigged system and spreading the benefits more evenly.

    Why are we figuring out that fact just now? Well, whistleblowers from past centuries were persecuted as traitors and accused of “class warfare” as someone that is undermining the world peace and breaking a consensus on what society wants. Their whistleblowing was tortured and abandoned and judged by Powers That Be just as Bradley Manning and Snowden is now. All the insights were lost from whistleblowing on capitalism.

  8. @BilB

    Does the presenter really need to present text AND read it to us? Maybe he thinks 50% of us are deaf and the other 50% are blind or illiterate.

  9. Sorkin’s article lays out the problem and presents two (opposed) ideas, and then selects the wrong one.
    Sleazy, smug..

  10. Maybe I don’t get this but isn’t the EMH an equilibrium where cooperation and information exchanges reflect, in part, the agglomeration economies that occur when people are close? Don’t traders in a market create efficient markets by taking advantage of all information. I get info from you yielding a profitable opportunity and, in a zip, I take advantage of it by driving price to an equilibrium level.

    That the rich think themselves worthy of their wealth reflects the fact that they do work hard for their wealth and don’t experience the efforts of those on lower incomes. Nepotism seems inevitable – we value our children and those with whom we who have relationships of duty and obligation closer than those more distant. It seems to me that’s why we not only need a “care ethics” (that deals with those close) but also a broader ethics of altruism that forces us to think more abstractly about those in need.

  11. Of course..cultural factors.
    They live by an us v them ideology are necessarily cutthroats and use the home as an air raid shelter on the long Manichean march through life.

  12. @hc

    Semi-strong efficiency says traders take advantage of all *public* information. But you don’t need physical co-location for that.

    Taking advantage of private information is insider trading, which is problematic, to put it mildly in both ethical and efficiency terms.

    More generally, the point you make explains why financial market traders make money at all, not why they gather in the same place even with electronic trading.

  13. Andrew ross Sorkin provides a partial explanation why independent economists tend to be poor relative to accountants, lawyers, CEOs, traders in financial markets.

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