Come One, Come All

If the world is so flat, then why are people willing to pay so much to be in New York? Since we can telecommute from the Ozarks to Azerbaijan, shouldn't one spot on earth be as good as another? Yet as the world has become more accessible, people increasingly have been attracted to a few privileged spots, like Manhattan.

Globalization reflects a dramatic decline in transport costs that has hurt goods-making cities like Detroit and helped idea-producing cities like New York. America's industrial centers have suffered because globalization has brought fierce competition to the manufacturers of cars and clothing and anything else that is easily shipped across the Pacific.

In addition, globalization has brought vast profits for the idea-producing entrepreneurs who can now search for profit opportunities throughout the planet. Honda may have brought heartache to Detroit's Big Three but the Yen carry trade has earned vast sums for New York's hedge funds.

Throughout most of history, people and firms crowded into cities in order to reduce the costs of moving simple products, like food and clothing. New York's major 19th-century industries, sugar refining and garment production, were in the city because of New York's harbor and its cargo holds crammed with raw sugar and cotton.

Detroit's Great Lakes location made it a great place to import iron and wood and then to export cars. Over time, the decline of distance as a trade factor has indeed destroyed the transport costs advantages that made American cities manufacturing mammoths. Why sew skirts in New York City when labor is so much cheaper in China?

While there isn't much sewing left in New York, there are still plenty of Calvin Kleins and Donna Karans, producing ideas for designs that often will be made on the other side of the planet. New York, like all of today's most successful cities, thrives by making ideas, not goods. The city's extreme population density enables smart people to learn from each other, which speeds the flow of innovation in fashion and insight in finance.

Urban density has spread ideas ever since Socrates harassed his students on the street corners of Athens. We are a social species that learns by watching and listening to the people around us. Big cities contain a concentration of talented people and diverse experiences that turns those cities into forges of human capital that has become ever more valuable in our connected world. No business school or e-learning program can duplicate the skills produced by working at Goldman Sachs or Google.

While the death of distance did indeed destroy the advantages that American cities once had in making goods, distance's demise has only increased the economic returns to being smart — you become smart by hanging around other smart people. Improvements in information technology make it easier to learn anywhere, but the smartest people will always have both electronic knowledge and a soupcon bit of extra wisdom learned face-to-face.

The biggest money comes from being the smartest person on the planet, and as long as the person who has learned from smart, urban neighbors keeps even a slight edge, that edge will make that person rich. The promise of those riches attracts smart people to New York and the cycle begins.

New York's transformation from producing goods to producing ideas occurred in the seemingly bleak years of the 1970s, when a cluster of financial idea producers learned from each other and produced a chain of interconnected innovations.

Academic ideas about trading off risk and return made it easier to sell riskier assets, like Michael Milken's high yield bonds, which made it possible for Henry Kravis to use those bonds to increase the value of underperforming companies through leveraged buyouts. Many of the biggest innovators had no formal training, but acquired their knowledge through proximity to other financiers, like Mortgage-Backed Security magnate of "Liar's Poker" fame, Lewis Ranieri, who started in the Salomon Brothers mailroom.

New York has benefited from globalization ever since the city was founded as an outpost of the very globalized Dutch West India Company. Manhattan has nothing to fear from the death of distance as long as the global market for talent remains free enough so that great minds can come to New York.

Mayor Bloomberg's flirtation with presidential politics has given him a national stage. I hope he uses it to fight to make America more open to skilled, and unskilled, immigrants. New York must attract a disproportionate share of the world's talent if it is going to continue producing the world's best ideas.