The Beauty Contest: Or, How John Maynard Keynes Explains Seattle’s Gentrification

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Earlier this month, Washington, D.C.-based economist Ben Klemens and I wrote a two-part series about how the human desire to emulate other people can help explain (and help cities address) gentrification for the website Strong Towns. The two-part series can be found here (Part 1) and here (Part 2). Here’s a bit of the beginning of Part 1, which explores a game-theory concept known as the Beauty Contest (which, as the non-economist author, I’ll describe as the process by which people sometimes make decisions based not on their own preferences or prejudices, but on the perceived preferences and prejudices of other people). The series focuses on the corner of 23rd and Union in Seattle, and the neon-clad monument to cannabis consumerism that is Uncle Ike’s.

It’s a little more academic than the usual fare here at The C is for Crank, but I encourage you to read it if you’re interested in alternative ways of looking at gentrification.

 

This story takes place in Seattle, but it could be set in any large or midsize city where gentrification is changing the political, cultural, and physical landscape. For the purposes of this story, we’ll define gentrification as the process by which the residents of historically working-class, minority neighborhoods are displaced, often rapidly, by people with lighter skins and higher incomes. [Editor’s note: Read our own previous discussion of the different understandings of “gentrification” here.] How you choose to explain gentrification says a lot about your political worldview. Do gentrifiers act out of self-interest? Racism? A little of both? Or something else entirely?

In Part 1 of this two-part series, we use the example of one Seattle neighborhood to argue that it’s entirely possible to explain gentrification with something we can easily observe—signals, which communicate to prospective homebuyers what other people like them believe about whether it’s a good idea to invest in a certain neighborhood. Then, in Part 2, we use accessible theoretical modeling to demonstrate two ways in which, even in the absence of conscious beliefs (such as racism, classism, or the belief that land values will rise over time) or preferences (a desire to live next to popular amenities), signals can still lead to gentrification.

But before we get to Seattle, we have to go back to 20th-century economist John Maynard Keynes, and an economic concept called the beauty contest. In 1936—a time when newspaper sweepstakes were popular—Keynes came up with the following thought experiment: What if newspaper readers were asked to choose the most beautiful woman from a roster of photos, and the sweepstakes winner was drawn from a list of everyone who chose the most popular woman? The trick to winning that kind of “beauty contest” isn’t to pick the woman you personally find most beautiful, but to guess which woman other players think is the most beautiful, knowing that they’re doing the same thing.

The crux of the beauty contest is that we don’t form our opinions about beauty, the value of a dollar, or a house, in a vacuum—we come up with those beliefs based on a long chain of assumptions about what we think other people think. Why do I think a piece of paper printed by the Treasury that says “$1” in the corner is worth a dollar? Because I think I can give it to somebody, Steve, because Steve values it. Why does Steve value it? Because he thinks Maria thinks it is worth something. And I believe Steve thinks Maria values it because she knows Paula will accept it. And so on.

If the piece of paper said something else (maybe the ID for a bitcoin wallet), the same process might not happen. Given multiple options, it isn’t always obvious who’s going to win the beauty contest, or which centrally located neighborhood is going to suddenly shoot up in value. What is certain is that as long as human beings make predictions about value based on these signals, they will result in predictable behavioral patterns—you may not know where gentrification is going to happen next, but there will be some sequence of signals that will precede it.

So let’s make this less abstract.

Consider buying a new condo, with an asking price of $500,000. Whether it is a good deal today at $500,000 is partly a question of whether it will one day sell for more or less than $500,000. Your purchase is a wager, based on the information available to you, that the value of your condo and similar properties in the area will continue to appreciate.

Your decision to buy also depends on what amenities are nearby now. Will your friends want to move in nearby? Will restaurants and a grocery store start filling up empty storefronts nearby, and will they be able to stay in business? Will you have access to reliable transit lines when you move in? In a decade? All these questions also factor into whether you choose to buy here or across town.

There is no way to poll all the people somehow involved in such questions, so we have to play a beauty contest game, guessing what our friends, local restaurateurs, and transit planning agencies are thinking, and what they will be thinking in a decade. Meanwhile, they’re all doing the same thing: just as I don’t want to move to a neighborhood with no restaurants, no restaurant wants to open in a neighborhood where they aren’t likely to have customers.

In the 1950s, determining a neighborhood’s status was easy: check the map. As part of an arrangement by the National Association of Realtors and the U.S. federal government to limit the ability of African American homebuyers to buy houses in “white” neighborhoods, maps were developed with clear red lines around black neighborhoods and explicit racial covenants or bank practices enforced the racial divides on those maps. Today, these formal covenants have been replaced in most US cities by zoning, which walls off certain areas—often those originally segregated by redlines—as designated single-family-only neighborhoods, which tend, by historical precedent and by design, to be mostly white.

Seattle’s Central District in 1968. (Source: Seattle Municipal Archives)

Recent years have seen the demographics in the Central District nearly flip. In the 1970s, the neighborhood was more than 70 percent black; by 2016, that number was 20 percent. Whites now make up about 60 percent of the area’s population, and the trend is on track to continue.

Few neighborhood businesses more perfectly exemplify this demographic shift—or serve as more of a lightning rod for protests and accusations of racial insensitivity and white colonization—than a flashy recreational pot shop called Uncle Ike’s. (Washington state voters legalized recreational pot in 2012.) Lit by cheeky neon signs—on the next block: “Hey, stoner, around the corner”—it sells recreational pot like fancy coffee: expensive and unabashedly bourgeois. A ten-pack of Magic Kitchen peanut butter brownie bites will set you back $28, and a bottle of Moss Cow Mule cannabis ginger ale goes for $20.

Situated between an old car wash (recently purchased by Uncle Ike himself, Ian Einsenberg, and rebranded as Uncle Ike’s Car Wash) and an African- American church, Uncle Ike’s is a sign of the apocalypse for anti-gentrification activists, at the literal crossroads of old and new. Across one street: A doomed strip mall anchored by a liquor store, a barber shop called Earl’s Cuts and Styles, and Africatown, a local nonprofit working to build affordable housing and preserve the history of the neighborhood. Across the other: A sleek modern apartment box called The Central, where open-plan one-bedrooms go for $2,060 a month.

Uncle Ike’s wasn’t the first new business in the neighborhood to cater to a largely white crowd—a quaint, quirky bar next door called “The Neighbor Lady”, which a local news report said would “breathe new activity” into “the troubled corner,” preceded the pot shop by two years. But Ike’s opening in 2014 was quickly followed by an influx of new businesses catering to a similar crowd, which converged on the intersection as if summoned by a pot-leaf-shaped bat signal. Today, a strip that once housed a 25-year-old soul food restaurant called Thompson’s Point of View and was notorious for gang-related violence is home to an airy, loft-style coffee shop, a salon/cafe owned by two women who have said they were priced out of a nearby neighborhood known in past decades as a haven for artists and hipsters, a bike shop that sells $3,000 electric bikes, and a doughnut shop specializing in gluten-free mochi doughnuts.

Read the rest of this piece, and Part 2, at Strongtowns.org.