Surge Pricing, Markets, and Expectation in the Taxi Industry

Recently Uber's practice of "surge pricing" during storms or other periods of increased demand. On one level, this is a fairly standard story of a more efficient market beginning to form in a highly regulated and currently distorted market.

But, I have to admit, seeing receipts like these just lead to a visceral reaction that you just can't control if you're a New Yorker. Cab rides just SHOULDN'T cost that much!

This uncovers a few more layers of what's going on. There aren't just entrenched interests that want to keep the medallion system in place, but deeply entrenched expectations among consumers.

First, consumers have an aversion to what's perceived as unfair price gauging. Gothamist asks the question in this way:

But when does surge pricing become price gouging?
Basically, there is no discernible difference.
"The best way to look at it is during Hurricane Sandy," says one financial expert. "You had these long lines because there was a limited amount of gas. But if you had surge pricing, gas could have been raised to $10 a gallon and there would have been less people on the line."

Raising gas prices during hurricane Sandy has to be the most egregious example of gauging. But, it's still true that if gas prices could have been raised to $10 a gallon there would have been no lines. Those who absolutely needed gas would have been able to get it without an issue, and those who could have done without would be able to wait for prices to come down and find other ways to get around.

This begs the question of what is a fair way to ration things during situations like this. Is it ethically more desirable to give gas only to those willing to put in the time to wait in line? 

Sandy was a disaster however, surge pricing happens more regularly. If Uber continues its growth and eventual domination of car services, it won't take long for things to find a new equilibrium.

Lets say you're a potential UberX driver, and you see how this surge pricing happens. As a driver who has control over their schedule, you begin taking note of when these surge prices occur, and will begin to act accordingly. Surge pricing will train drivers to allocate themselves when their needed, and eventually the surges will be minimal.

There are still ethical questions that need to be answered. This still won't solve the problem of ensuring universal access of cabs for example, as the introduction of metered green outer borough cabs have. Even in a perfect Uber world, cabs will still be incentivized to cluster in downtowns.

On any side of a transaction though it's always healthy to try to get rid of a sense of entitlement. Medallion owners have no legitimate reason to keep their system in place, and consumers don't have an intrinsic right to a cheap cab ride regardless of the weather. An Uber like system will allow these unsustainable expectations to come to light, and end up in an overall better system.
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Premise and The Hurdles Big Data Will Face With Economics

Premise is a fascinating new company that aims to disrupt how macroeconomic data is collected. Individual companies are using every conceivable aspect of consumer data to predict their own sales. Why can't this same insight be used to measure the economy and revolutionize economic indicators?

There is a reason Big Data started out in the collection and analysis of the data within individual companies. A huge component of the value of information is access. Within a company, this variable is taken out of the equation. All the data is proprietary to the company and everyone within the company is working towards a common goal.

The value of information about the economy depends on the information everyone else has, and this value expresses itself in a few unique ways.

The first and relatively simple way this expresses itself is the value of exclusive information. It's clear to anyone working on Wall Street how valuable having an information edge is. This drives researchers to search for more and more esoteric datasets to try to tease out a relationship no one has ever thought of. As a relationship becomes more known, its value quickly drops to zero as stock prices or any other market being watched already has this information baked into it.

There is a related converse dynamic to this value of uniqueness that comes into play once data becomes widely known. People use information to make decisions. Once information is "out there," its value increases the more people use it. This is because multiple actors are all making decisions that affect each other.

Think of a specific industry as an example. If you're an automotive company and have information that no other automotive company has access to, you can use that as an information edge. This edge pretty much disappears the minute one other company learns of it.

At this point the second dynamic takes precedence. If 10% of the industry is using a certain piece of information, there's not too much of an incentive to use that information. On the other hand, if 95% of an industry is using a certain piece of information, the 5% who aren't are at a distinct disadvantage, and if you're a new entrant or analyzing the industry from the outside, you're going to want this information too.

Economic data responds to these dynamics in some weird ways. Headline indicators are venerated as describing the pulse of the economy, and maintain their momentum through their own heavy use. GDP is a deeply flawed measure of the economy. There are some alternatives out there, and there is more and more data every day that will allow us to create better measures of the economy, but GDP is still the agreed upon standard and continues to be because of inertia.

A company like Premise can take advantage of these dynamics in two ways. The first is to simply create indicators that compete with the standard indices we now have available. If Premise creates a few "rockstar" economic indicators, it will have a stable business as long as there exists an economy to be measured.

This isn't truly unleashing the power of big data into the economy. In my opinion this would be an upsetting outcome: using all of that power to simply create a new static status quo in how we measure the economy.

I see true success coming in a second path: the creation of a platform where anyone can create their own indicators. Instead of using a headline CPI number that is created using certain statistical methods from the Bureau of Labor Statistics, these methods would be available to anyone using the platform.

With this platform in place, the dynamics that now allow certain data to become stodgy and out of touch will start leading towards innovation. All the platform will have to do is link to already existing economic data.

How will this process play out? A headline indicator like CPI has a gravitational pull that makes it a benchmark of the economy. However, if a user is able to make a few tweaks to that CPI data using its atomized components, they will gain the benefits of BOTH dynamics. Their measurement is close enough to CPI to benefit from its wide use, but different enough to create an informational edge. Instead of crystallizing into a series of discrete indicators that never change despite the changing economy, the dynamics will now be incentivizing the discovery of new and unique indicators.

Our understanding of the economy as a whole will be revolutionized, and we'll all be making smarter decisions. People will be encouraged to have a deeper understanding of the economy, instead of relying on measures of the economy that are used simply because everyone uses them.
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Apple and the End of Technological Progress

Hyperbolic title, but as I'm just starting to read Average is Over by Tyler Cowen, I couldn't help but think about what sort of limits there are to some of the technologies Cowen predicts in his new book.

All of the smart technologies we can hopefully expect depend on interconnectivity, and any sort of technology that depends on this sort of interconnectivity faces the same monopolistic temptations as any other ambitious company. Every company in a competitive market, at least on some level, has the goal of destroying its competition.

If you have a traditional monopoly, you have traditional consequences. A utility company with a natural monopoly doesn't face the same price pressures that a competitive market does, and won't innovate as fast as if it were in a competitive market. for these traditional monopolies, we also have traditional solutions: governments come in to regulate prices. In terms of innovation, I'd argue that natural monopolies are also industries in which innovation has a lower value. Think about how much improvement one can reasonably expect in a city's water infrastructure (a contrary example to his might be the fact that we don't have true high speed rail in the United States yet.)

Things are different in the tech sector. The temptation to create "walled gardens" and closed app ecosystems could be compared to the natural utility monopolies. Prices have completely different meanings in the tech sector and discussing that would probably warrant its own post, but there is a very clear link between the creation of these walled gardens and innovation.

Consider Apple. Apple makes several products that they sell directly to consumer, and maintain an ecosystem surrounding these products. They don't charge directly for the ecosystem, but the ecosystem adds value to Apple's products, and therefore Apple is incentivized to make this ecosystem as flawless as possible, in order to make their products more valuable. This is a positive externality: assuming the price of the products remain the same, consumers get the benefits of the ecosystem for free. Of course, Apple recaptures some of this value by selling its products at a premium.

Part of this value is a "stickiness." Consumers begin to depend on the ecosystem. The longer a consumer remains in the ecosystem, and the more consumers are in the ecosystem, the harder it is for that consumer to leave the ecosystem. As an ecosystem becomes more successful, the company faces fewer incentives to improve it. This is a classic negative feedback loop, and acts as a drag on innovation. The ecosystem sows the seeds of its own destruction.

Google addresses this problem as a company. It realizes it is in its own best interest to continue to innovate, and while a walled ecosystem will lead to monopoly power, it cannot afford to stultify its own evolution. This is why Android is open, why Google lets you (relatively) easily get your data out of their services. It's far from perfect, but at least it's a recognition that this is an issue, rather than the blatant ignorance of the issue by a company like Apple.

There are unfortunately more Apples out there than Googles. At this point in our economic development, the benefits that Google is foreseeing are too long term for a vast majority of companies. Even Google is only to a degree paying lip service to this concept rather than fully embracing the concept (cough Google+.) As far as I'm aware, there does not exist a way to properly align incentives within our economy to avoid this drag on innovation.
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Why You Will Never Own a Driverless Car

This Atlantic piece talks about the ramifications of a new innovation in electric cars by BMW. Rather than purely technological, BMW is simply packaging zipcar-like access to a conventional SUV for several weeks a year. It correctly gets to the heart of why people are leery of electric cars:

This consumer peccadillo has driven alternative transportation advocates bonkers for years. So, why do people buy 7-passenger SUVs with four-wheel drive in California when they usually carry a single passenger in 70 degree weather on a highway? 
People buy cars for their peak (imagined) need. If you can imagine that one day you'll drive more than a handful of people to Lake Tahoe to go skiing, then (if you can afford it) you might choose a massive sport-utility vehicle.

This concept is short changed by only being applied to electric vehicles. Every time I have a conversation about driverless cars, I'm surprised by how many people apply today's car ownership paradigm to them. Driverless cars are certainly a huge technological advancement, but the biggest shift they will cause will be in how they are packaged as a service.

You may want to own a driverless car, but what if instead you had access to a service that guides a public driverless car to where you're standing within 5 minutes? What if you could have a cheaper service that would come within 15 minutes, or had to be scheduled in advance? Or another service that would pick someone else up on the way? Or another service that will drive you to a predetermined drop off point?

It's easy to see that driverless cars allow a seamless gradient to exist between public transit and private cars. With only two options in this spectrum available today, people drive only to have access to their car when they really need it. More people's needs will be met by these hybrid options, and more people will be swayed away from the hassles and costs of car ownership.

When access instead of ownership is the focus, and more options are available to people, more people will shift to being served at least partially by pure public transit as well. If you formerly drove from a suburban location to a downtown office for example, it would be cheaper and more efficient to take a driverless car to the fixed point of a commuter rail hub rather than taking a car all the way downtown.

This program started by BMW is only the start of these custom hybrid packages, and proof that we're ready for this paradigm shift.
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Scientific Proof That Gentrification Will Hit Brownsville But Not Canarsie

Stephen Smith, writing in onion-esque form at the Observer, believes that gentrification in Brooklyn has finally reached its end game, and is calling Brownsville the last frontier (in Brooklyn at least.)

Well, if Brownsville truly is the end of the line, we should be able to compare interest in it to interest in Bushwick a few years ago. Those first steps: those pioneering hipster adventures out into wild urban frontiers, fueled by a burning question- "what's ACTUALLY out there?"- and a few PBRs, predate actual settlement. Lets check the Google trends:

This graph tells a very clear story! Bushwick has a very constant, if slightly increasing, rate of interest over the past 10 years. Which would make sense given what's happening on the ground. Until 2010 however, interest in Brownsville seems to remain flat. Isabella and Ferdinand holding court at Roberta's didn't authorize exploration until 2010, when it seems the fixie Nina, Pinta, and Santa Maria finally left for uncharted territory.

But Brownsville is over! It's obviously already been discovered. Lets compare this to the even more distant lands of East New York and Canarsie:

I'm not sure why there's such high variance screwing with the scale, but it seems like East New York and Canarsie are at least 3 years away from becoming as discovered as Brownsville is today. These are still magical lands, marked on maps as "there be dragons here."

The more interesting point in the article involves the South and East Asian immigrants filtering into these far flung neighborhood. The neighborhood I grew up in in the East Bronx, destined to forever be a boring backwater, is going through similar ethnic change. Ever since white flight in the 70s, city dynamics have been viewed as what's happening with white people vis-a-vis "undesirable" minorities. First the black people moved in and scared off the whites, and now the white people are displacing the blacks and hispanics. There are serious problems that are happening on both sides of this process, but focusing on just one process ignores everything else that's going on. Can you imagine hearing stories about what neighborhood the Asians are going to move to next? Flushing is so over, it's all about Bensonhurst now.

I think it's a good thing that we're not hearing things like this. Ethnic diversity is spreading through New York.  Recognize the negatives of gentrification and try to fight against them, but change your focus. Instead of focusing on how young white hipsters are expanding their sphere of influence in the city, focus on the more general trend that young people are more comfortable with living with people who are different than themselves, our formerly balkanized neighborhoods are starting to become less so, and this underlying trend has both positives and negative effects.
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What European Villages in China Really Mean

A friend of mine posted this photo series on his Facebook wall, and had an interesting comment on these Faux European villages that have been springing up across China:

You have to understand that there is little aesthetic education in China, especially the generation that grew up under communism that lacked charm (at least, the old type), so they have to look elsewhere to establish "charm". I wish they would just do what Asians are good at doing, minimalist, repetitive, modernist and futuristic glass and steal constructions. Maybe a bit colder, but at least a certain amount of authenticity!

Photos like these bring up interesting feelings when observed. On the one hand, they are very obviously large scale mass fabrications of successful European cities. They lack the soul and "authenticity" that the originals have, and therefore according to some pale in comparison.

On the other hand, good urbanism is good urbanism. I see amazing walkable city squares, dense city living, and cute townhouses that can serve as great templates for individuality to flourish as they age. It's aesthetically jarring to see classic European architecture look so brand new, but I also think the Chinese flora adds a unique touch to the landscapes. The Chinese brand of capitalism is one of top down organization; perhaps these kinds of pop up European villages are congruent with modern Chinese culture.

More importantly, if you believe that we should be focusing on building more densely and with more of an eye towards moving away from car-centric development, will "authentic" modern Chinese style be capable of achieving this? All modern style is influenced by car culture, and I'd argue we don't have a modern style that's truly pedestrian oriented.

This is why in American cities, urbanism is so tied to preservation. We have no modern model of what walkable space should look like, so the instinct is to preserve every single historic neighborhood because it's perceived as the best we have, even if development could increase supply, keep real estate prices under control, and divert environmentally unfriendly exurban development into cities with existing infrastructure.

An urban planner friend of mine addresses this concern at Republic of Austin when comparing development in Dallas to the lack of development in Austin:

I get it. Austin loves its neon signs, its vintage thrift shops in converted bungalows, and its trailer parks. Growth, however, is inevitable in this city and change is part of the process. Recognizing Austin’s morphology and transition from college town to major American city, Dallas may not be the poster child for what to avoid. In fact, Dallas may offer our city quite a few valuable lessons as we balance growth with quality of life. Both cities may find themselves in seas of suburban sprawl, but Dallas, quite honestly, has a head start on smart growth.

The key point here is urban growth is going to happen. If NIMBY forces win out and freeze a city in time, the end result will be a luxury city surrounded by unhealthy middle and lower class car dependent sprawl as the city develops. The question becomes how to handle this inevitable growth.

People perceive new development to be soulless, and fight hard to prevent it whenever they see it. This chases out all but the most profit driven new development, since anyone with aesthetic motives will begin siding with the preservationists. The more profit driven development is, the more soulless it will be perceived to be. A vicious cycle is born that freezes cities in place, and guarantees that any new development will look atrocious.

This is why I always try to point to examples of new developments truly enacting positive change. Via Verde in the South Bronx is perhaps the best example I can think of that shows how cities can evolve in a community driven, aesthetically pleasing way. Michael Kimmelman's review of the complex runs through all of the points. In comparison to tower in the park projects built in the past, this development had input from its future residents starting with conception, ensuring that its residents will be completely in control of their environment from the minute they move in. Kimmelman counters a common argument about how it's hard to justify paying for aesthetics in public housing by estimating it was about 5% of the total cost. If it improves outcomes for the residents, which is the point of public housing, and provides positive externalities for the neighborhood, it's worth it.

If all new development looked like this, I think we'd see a sea change in public opinion. Former NIMBYs would embrace change, and see that a city's identity is not just coded in its past, but coded in how it evolves into the future. In the meantime, at least for China, maybe it's best to recreate European villages.
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Do Old Houses Behave More Like Classic Cars?

Matthew Yglesias has used analogies similar to this in the past to describe how, theoretically, looser development restrictions should be in the benefit of existing home owners. One would think that these existing homeowners would benefit from tight regulations. In actuality, unbundling the complex good of "housing" as a physical depreciating product located on a speculative land investment, one sees why being able to do more with that land would be more advantageous to someone who owns it.

This applies to the vast majority of housing stock in the United States, but things begin to fall apart when you look at the very urban areas that are most affected by high rents caused by supply restrictions. Maybe a suburban tract home built in 1994 is a depreciating asset, but a Brooklyn brownstone is a collector's item.

Discounting the location and condition of a house, a house with historical charm and "good bones" will be worth more than a similar sized modern house. At first brush, it would seem that a historical house may behave similarly to a collectible car: depreciating at first and then appreciating as it becomes more classic and rare. But, there are a few more effects going on here.

There are two countervailing effects I can think of that effect historic houses in a neighborhood. First, lets ignore the positive externalities dense construction provide (stick with me here...) and consider only the fact that new construction is valued less than historic construction. As a neighborhood gets more and more new construction, the neighborhood as a whole begins to decline in value, which in turn causes each of the house + land bundles to decline in value as well. On the flip side of this, imagine being the one leafy side street with handsome townhomes in a neighborhood of imposing apartment buildings. Your house is now a collector's item, and even before taking into account the positive externalities of densities, your townhome would have positive price pressures because it is now a rarity.

One thing that's clear from all of this is it's slightly incorrect to put off more aesthetic concerns like this as people not thinking about money, as Matthew ends his article with. The complexities explained in his last article are not only non-economic concerns such as condo laws, but real forces that can be accounted for along with the speculative qualities of land and the depreciating nature of many houses.

I still believe these effects are smaller than the broader ones Matthew describes, but the fact is they do exist. A NIMBY's fear is that these considerations are not being taken into account at all, and more economically minded people would rather bulldoze a neighborhood into sterile oblivion in the name of progress.
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Measuring the Paradigm Shift That is the Sharing Economy

There are several issues with economic measurements that exist today. It's a known loophole, for instance, that the flurry of rebuilding activity following a natural disaster positively affects GDP numbers. The situation on the ground is obviously different than what is being expressed in the numbers.

Emily Badger writes about the implications of the new sharing economy at the Atlantic Cities. :Looking at these through the lens of economic measurement highlights emerging errors that may make measures as they exist today more and more useless. Consider her assessment of what sorts of goods lend themselves to the "shared economy of stuff":

The shared economy of stuff works best with assets that are expensive to own and infrequently used, like camera and music accessories, or high-end home tools. SnapGoods sells itself with the slogan “own less, do more,” a nod to the idea that our culture increasingly values the accumulation of experiences over assets.

Economic measurement is built around discrete transactions. GDP is a stand in for personal utility because it's assumed that if I buy something, I (or perhaps my household if analyzing from that unit) receives the value. If I buy a lawn mower, my household receives all of the benefit from that lawn mower.

The utility of having a mowed lawn is approximated by the cost of the lawn mower. In a traditional ownership economy, this makes sense. As sharing becomes a part of the mainstream economy, it will become clearer that the core concept behind the new sharing economy is in complete opposition to this assumption. A lawn mower doesn't intrinsically provide utility. If my lawn can be cut by sharing a lawn mower with neighbors, or even a service, I get the exact same amount of utility that I would have gotten if that mower were sitting in my garage. As Emily further articulates in the article:

All of these models – alongside bikesharing, coworking spaces, shared nannies – are really at the end of the day about efficiency, even if the shared economy simultaneously speaks to our more altruistic motivations to do right by each other and the environment. Ownership, by definition, implies idleness. Whatever you own that you’re not using right this second may be going to waste. Or worse, you’re wasting scarce money on it.

I'd take Emily's insight further to say that introducing formalized sharing into an economy completely decouples ownership from utility. To say that another way, assume that an economy is measured purely by the amount of lawn mowers sold. As people begin to share more, less lawn mowers will be bought. According to economic statistics, the economy is tanking, but in reality people are receiving the exact same utility as they were previously.

Discussions about the merits of economic measures have been around forever; Bhutan makes headlines when it bases its well being on Gross National Happiness instead of Gross National Product. This particular societal evolution however could lead to one of the most egregious errors in economic data ever seen, and perhaps could lead to a complete rethinking of capitalism as a whole.

To be clear, just because we're sharing doesn't mean we're becoming communist, but the transition from an economy based on ownership to one based on experience represents a paradigm shift that has no comparison. Even the Industrial Revolution, which changed our economy in countless ways, left this basic assumption unchanged.

One would probably have to go all the way back to the transition from a hunter gatherer society to an agricultural one to find a comparison. The trade off of technological advancement was a loss of the traditional ad-hoc social organization that existed in tribal societies. In order to act in the larger units of settlements, we needed formal organization, strict division of labor, and in most cases, a concept of private ownership.

With the advent of social networking, technology has finally caught up with us. We can see the beginnings of a more natural form of interaction within larger units. Within dense cities, social networking allows us to interact with each other in a "tribal" way. Humans naturally want to interact this way, and it's exciting to see technology finally approaching a point that brings us back to our roots.
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More on What is Scarce in an Abundant Society: MOOCs and the Future of Higher Education

My last post touched on the disruption of our current economy that 3D printing will cause, and how it's not entirely correct to say that we're entering a totally abundant world. The potential of MOOCs to disrupt higher education shows another side to what internet caused abundance really means.

Maria Bustillos at The Awl had a relatively damning analysis of MOOCs, comparing the positions of Aaron Bady and Clay Shirky.

She correctly identifies the tendency to simplify industries when trying to disrupt them. Making industries wildly efficient involves using hard measurements to drive production. For education, this results in high stakes testing, and evaluating teaching methods solely based off of those numbers. For non-personal industries this sort of cold approach makes sense, but it feels wrong when applied to education.

Maria correctly portrays higher education today as a bundle of services. "College" in America today includes not only a series of lectures, but the forming of a social network of like-minded intelligent people, interacting with professors during office hours, taking advantage of the academic community available to you in college, and the signaling that going to an elite institution provides. She also describes what makes higher education different from other sectors by invoking Baumol's cost disease, but misses an important connection between these two concepts. It's not accurate to simply say higher education suffers from Baumol's cost disease. Parts of the bundle of services that we currently define as higher education suffer from Baumol's cost disease.

Looked at this way, you can see why she mentioned that Shirky and Bady had more agreements than disagreements. they're talking about two different things, and both are neglecting to look at the whole picture. Lectures are very easily adapted to an abundant online format, but the community and professor interactions are not. The comment below is wiser than its snark would suggest:

Touring office hours seems like a fun idea! You have the beginnings of this with the current "celebrity professors." Some professors blog, others have podcasts (and these innovative professors seem to cluster in George Mason University's economics department.) I could imagine this sort of idea expanding in a more local way. A community college professor could become an expert in his or her field, and have periodic talks relating to lectures a group of students is going to.

This line of thinking leads to the problem of incentives and motivation. The hidden benefit of having educational services bundled is to force students to take advantage of the entire bundle. The positive aspects of community, social networks, and professor office hours are not explicitly stated as benefits of college, and cannot be commoditized in the same was as lectures can be.

Commoditizing lectures will be an amazing boon. Students who could previously not afford it will have access to college level and quality information. But, there needs to be a corresponding change in culture. Instead of automatically being placed in an educational environment, students will have to actively make the decision to seek out an educated community of like minded intelligent people.

On the professor's side, there will be less of an incentive to provide open office hours without a tenured university position. While I believe opportunities for students to form their own intellectual communities to accompany lectures will abound once this paradigm matures, professors do not have an incentive to add their expertise to these communities. With lectures largely free or minimally priced, I could see the role of government funding moving towards forming these networks of experts available for students.

Traditional college in America is a luxury. I don't believe there will be a world where everyone will be able to afford to take four productive years out of their lives to live in a dorm, meet new people, and occasionally go to lectures. With MOOCs and targeted government investment in an academic culture however, I believe everyone will be able to have a high quality university level education that we today equate to "the college experience."

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