Everybody's in a Bubble, and That's a Problem

In politics as well as business, people are shaped by who they see—and who they don't.

One of the most useless political observations since the election is that liberal elites live in bubbles. It is useless, not because it’s wrong—they often do—but rather because it’s like saying "liberal elites live in the biosphere.”

Living in bubbles is the natural state of affairs for human beings. People seek out similarities in their marriages, workplaces, neighborhoods, and peer groups. The preferred sociological term is “homophily”—similarity breeds affection—and the implications are not all positive. White Americans have 90 times more white friends than they have black, Asian, or Hispanic friends, according to one analysis from the Public Religion Research Institute. That’s not a description of a few liberal elite cliques. It’s a statistic describing the social networks of 200 million people. America is bubbles, all the way down.

The implications of Americans' social and geographical sorting are complex. In politics, it creates circumstances where more than half of Donald Trump and Hillary Clinton supporters don’t know anybody voting for the other candidate.

But American homophily is not purely driven by our individual choices. Bubbles are often a result of public policy. For decades, U.S. housing policy has subsidized large suburban homes, but restricted housing construction in rich neighborhoods and deprived minorities of mortgage support. So, poverty concentrates in one area, and the rich cluster in another.

Even before Americans can do “the big sort”—moving near like-minded neighbors—they’re victims of a “little sort.” Children are sorted by their parents’ income, since public schools draw funding from  local tax bases which tend not to be economically diverse. These neighborhood effects among young friends can have major implications for their careers and ambitions as adults. It’s not just that young people who grow up in low-income areas are more likely to adopt certain diets, smoking habits, and drug use. It’s also the case that parents, schools, and law enforcement in different neighborhoods treat similar behaviors differently. Young rebellious minorities? Arrest them. Young rebellious white men? Channel their creativity into start-ups.

The latter fact sprang to mind while I was reading about the extraordinary whiteness and maleness of America’s entrepreneurial universe. A recent study of U.S. venture capitalists and founders uncovered some astonishing numbers: 90 percent of founders in companies with venture capital (VC) funding are men, and 80 percent of VC firms have never hired a female investor. While the share of women working in formerly male-dominated industries like medicine and law has grown significantly in the last 20 years, it's barely changed in the founder and VC space.

Why is a community theoretically predisposed to disruption so demographically static? The study’s authors, Paul A. Gompers, a professor of business administration at the Harvard Business School, and Sophie Q. Wang, a Ph.D. student in Harvard's economics program, test several explanations. Perhaps women avoid technology and engineering programs and MBAs, they posit. Nope, that’s not it. Women earn almost 50 percent of the master’s degrees in science and engineering and a similar share of MBA degrees; they account for just one-in-10 founders and venture capitalists.

But they give a lot of weight to bubbles. The venture capital world is a little clique—or, at least, a handful of interlocking cliques. The Bay Area accounts for about 40 percent of all venture investments in the United States. When you add New York, Boston, and Los Angeles, those four regions account for two-thirds of all VC funding. These cliques can have rigid patterns of thinking, ones that often incorporate troubling assumptions about gender and race. One study by Gompers and Wang showed that something interesting happens when male venture capital partners have daughters. Suddenly, they hire more women. In other words, there is something lacking in the pre-daughter default of many VCs.

Venture capital firms themselves tend to be small and uniform. Behemoths like Sequoia and Andreessen-Horowitz notwithstanding, the median number of partners in a VC firm is just three. Small clubs tend to be even more homogenous than larger groups. Let’s say you're a white male employer with a preference for people like you. If you had 100 positions to fill, you’d make dozens of hires who weren’t white men. But if you're only hiring one person, you default to hiring the white guy who seems like he just “gets you.” It’s just one job in a nation with 170 million workers, you tell yourself. But the sum of all these singleton hires adds up to an astonishingly white and male industry.

The white and male venture capital community bestows its money on white male founders. Little surprise then that this world is yet another bubble. Like whooping cough and smoking habits, entrepreneurship is contagious. Knowing a founder makes somebody more likely to start a company, according to the Kauffman Foundation, a nonprofit that studies entrepreneurship. There is another way to think of this: Capital flows through homophilic networks, from white men to white men, sending a social and financial signal that encourages others to join the in-group. But ultimately, Gompers and Wang acknowledge that the start-up world’s stark homogeneity resists easy explanation.

In both politics and cities, there are enormous downsides to a bubbly start-up industry. Implicitly discriminating against half the population is a terrible way to solicit the country’s best ideas. What’s more, research has shown that similar founders—e.g., two white men with from the same elite school—are better at attracting investment, but worse at actually running companies (to be fair, the exceptions to this rule are pretty famous). That might be because every founder comes into a new industry knowing a minuscule fraction of what he or she will eventually learn. A partner from a slightly different background might catch the blind spots.

In fact, “blind spots” isn’t a bad way to describe the cost of all bubbles, from founders clubs to hunting clubs. Rich Americans in expensive coastal metros don’t see all the lower-income people their housing policies discourage from moving to the area. Whiter rural towns don’t see many non-white immigrants, except maybe in the news. Conservatives don’t see the same news as liberals in their Facebook News Feeds and vice versa. The United States is a melting pot, in theory. But in practice, it is a cafeteria plate with its carefully inserted divisions keeping the constituent ingredients from cross-contaminating.