Tuesday, November 23, 2010

Vegas Part 3 - Network effects of entertainment

Vegas also illustrates wonderfully how little of economic growth is driven by actual resources any more, and instead comes from the network effects of people interacting with each other  - either as producers of ideas and services, or just network effects from recreation (as in Vegas). People want to be near other people, and it's largely arbitrary as to where exactly that will be.

If you looked at a cross section across Nevada near Vegas, you get a picture roughly like the following:

In terms of the inherent resources present or the natural picturesqueness of the surrounding mountains, views and landscapes, Vegas looks exactly like all the nearby parts. Except that everywhere else nearby is worthless uninhabited desert, whereas the Vegas strip is priced closer to Manhattan. But Manhattan has a much more gradual decline in land prices as you move away from the centre - you wouldn't be sad to live in Brooklyn, for instance.  In Vegas, it's precipitous. 5 minute drive away from Las Vegas Blvd? You may as well be in Bakersfield.

The principle at work is no different from other places - why exactly is Manhattan much cooler than Long Island, other than the buildings and people already there? It's just that in Vegas it's the most pronounced, because you have an incredible metropolis situated right next to desert parts that could be scenes from Mad Max. It's also a city that sprang up without even any of the initial seeding geographical advantages of places like New York and Chicago (shipping, primarily). There is literally nothing to distinguish Vegas from anywhere nearby.

When network effects dominate, the location of cities is largely arbitrary. 

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