Return on Brain Damage

This morning I was part of a really interesting group discussion over email, which I thought the Strong Towns audience might enjoy hearing a bit of. Without copying the entire email chain, here's what regular Strong Towns contributor Ian Rasmussen and I had to say.

We've seen a number of studies that indicate the traditional development pattern generates more wealth than conventional, auto-exclusive development over the long-term. If this is so, why hasn't traditional, walkable development already come to dominate the development market?

Ian observed the following:

Its my belief that self interest lies at the core of capitalism, innovation and our entire economy.

The question should be... why is the [individual] developer's most profitable option to do the strip mall? -- right now it is. I think we'd all agree that if developers were allowed to truly do whatever they want, the forces of profit and innovation would drive them to urbanism. But, as we are all so painfully aware, real urbanism is not allowed under zoning, with streets too narrow for DOT or FD standards, with banks unwilling to lend for it, and people protesting at every public meeting that you're "urbanizing" their town.

The question is raised - if the traditional pattern creates more wealth over time, how can it not be better for the developer?

Here's my take:

What most developers face is this conundrum: in the time it takes me to get 1 traditional development built I could have done X conventional developments. X is going to be higher or lower based on the regulatory environment for a given market. When that number, X, is 3 or more, then traditional development has a really hard time competing.

From the perspective of the developer, even if you make a lower return on each of the three projects, you're distributing your risk over three projects instead of only one, and also you can reinvest the returns from the first project in the second and so on, meaning you have the chance to start "playing with house money" (at least to a certain extent) rather than your original capital investment.

If you dig into Complexity Theory you'll see that cities behave like Complex Adaptive Systems. In this case, one of the more interesting principles of Complex Adaptive Systems comes into play: the principle of sub-optimization.

This is easy to see applied to a small-scale CAS, like an ant-hill. What the principle means is that when the ants have made their nest and their foraging pattern "good enough" to succeed in their environment, they should not spend any more energy improving the nest or foraging pattern, but should instead concentrate all their energy on making more ants.

This is why I believe that Tactical Urbanism, proceeding towards a philosophy of "good enough urbanism" is so important. If we can determine a specific quality level for the built-environment that is "good enough" then we should focus our energy on creating as much of it as possible, instead of trying to further perfect the model.

This is similar in application to the law of diminishing returns, it's all about the tipping point between evolution and reproduction -- or innovation vs. market share. Or, as our friend Will Dowdy so nicely described it, Return on Brain Damage.

When we go back now and look at developers participation in the Complex Adaptive System of the city, we can see that they are following their instinctive best-interest, which is to come up with a product that is "good enough" to be reasonably profitable, and then focus on making as much of it as they can. The problem we have is that our regulatory environment has established a "good enough" form which is not directly habitable by human beings, nor financially productive to society as a whole.

Now, in the discussion this morning, some objected to this observation, stating that people can act irrationally and "against their own best interest" all the time. People vote, invest, and spend their money in all kinds of irational ways, so why would the larger human ecosystem be rational?

Ian replied:

I would agree if we were looking at an individual, or few, actors. That is where the straight-up rational actor theory breaks down. But, when you look at 1,000's of developers across the country, almost all of them pursuing the CSD model, I believe that is evidence that it is -- at least for now, and incorporating all the costs -- the most profitable option for them. That is not to say that urbanism wouldn't be the most profitable option in the absence of "the system." But the system (laws, finance, etc) is real.

And, if CSD is not currently the most profitable model, than how else to explain its dominance?

The obvious excuse is that developers just don't know about urbanism. But I don't think that evidence supports that. People in RE development know all about new urbanism by now. And, if that were true -- urbanism were truly more profitable at this moment, all things considered --  then the developers pursuing urbanism would be putting the CSD developers out of business. But that, for the most part, does not appear to be happening yet.

I do believe the results reflects the truth of the matter here. That's the brilliance of the market.

So, to sum up, from the perspective of the individual developer, the long-term wealth creation of the traditional pattern is not enough motivation to cause them to walk away from the conventional development model as long as the traditional pattern is still encumbered by significant regulatory barriers. The challenge for Strong Towns is to look closely at the way they control what can and cannot be built, and to ask the question carefully: are we getting what we really want, what is in our own long-term best interest? If not, then we've got to change these rules.