Non-linear Ethnic Niches

The emerging Western caste system

Written by Arctotherium.

If you want to join Britain’s thriving cocaine smuggling industry, you have to be Albanian.¹

One of the few parts of the British economy that has done well since 2008. Source.

There’s no a priori reason why this should be the case. Albanians do not have a racial, cultural, geographic or political affinity for Colombian narcotics. A reasonable and informed observer in 2000 would not have predicted that they would come to dominate the industry. Yet such an obsever would have predicted that some ethnic minority would because organized crime is almost always organized along ethnic lines. This is true even when the ethnic minority is less criminal on average than society at large, as with the Jewish mafia in early 20th century America.

This phenomenon isn’t unique to criminal enterprises. Chaldeans control 90% of the grocery stores in Detroit. 40% of the truck drivers in California are Sikh, and about a third of US Sikhs are truck drivers. About 95% of the Dunkin’ Donuts stores in Chicago and the Midwest are owned by Indians, mostly Gujarati Patels. In New England and New York, 60% of Dunkin’ Donuts stores are operated by Portuguese immigrants. 90% of the liquor stores in Baltimore are owned by Koreans. I am not the first, the tenth, or even the hundredth person to notice this. From a 1999 New York Times article titled ‘A Patel Motel Cartel?’

America's motels constitute what could be called a nonlinear ethnic niche: a certain ethnic group becomes entrenched in a clearly identifiable economic sector, working at jobs for which it has no evident cultural, geographical or even racial affinity.

I don't mean Italians owning pizzerias, or Japanese people running judo schools. I mean, to use an obvious example, the Korean dominance of the deli-and-grocery sector in New York -- a city where the Chinese run most laundries and Sri Lankans, in case you didn't know this, run most porn-video stores. Or the Arabs in greater Detroit, who have a stranglehold on gas stations, or the Vietnamese who monopolize nail salons in Los Angeles. Farther afield, I could mention London's taxi drivers, sharp-tongued in their big black cars, many of whom are Jews from the city's East End; or the security guards outside New Delhi's more affluent residences, virtually all of whom are Nepalese; or the prostitutes in the United Arab Emirates, who are so often women from Russia.

I don’t believe previous writers have really considered the broader implications. The general economic case² for immigration is that immigration means larger markets and hence more competition, more opportunities for specialization, more economies of scale, and so on. I’ve covered in the past how substantial international trade³ means this doesn’t apply today (small nations benefit from the competition, specialization and scale of the world at large).

The existence of non-linear ethnic niches weakens the economic case for immigration even further. The key point is that immigration fractures national markets. Once a niche is taken over, outsiders can no longer compete in that niche.

There is still competition within ethnic groups inside the niches, but these groups are tiny fractions of the population and often have informal institutions and kinship structures that allow them to act as cartels. In the words of Vishal Shah, a Dunkin’ Donuts store owner in Chicago:

“In Indian culture, if it’s a friend of your father you still call him uncle,” Shah said. “You are family through respect because your parents are friends; everybody’s family.

That makes a big difference on a daily basis in business. “We all help each other,” said Shah, whose family has six stores. “Whenever someone needs something no one ever said I don’t have the time. If your mixer goes down, it’s a matter of a couple of phone calls and you know you’re taken care of.” Likewise, he said, if half his crew gets sick, those same few calls will get him back in business.

What this means is that in vocations taken over by non-linear ethnic niches, modern-day multi-ethnic Chicago has a smaller talent pool to draw from than the smaller but more homogenous⁴ Chicago of generations past, and the same goes for many American cities.

We can roughly quantify the importance of non-linear ethnic niches by examining levels of co-ethnic hiring in new firms.

By comparison, German immigrants are at 1.8%, British and Canadians at 2.3%, and Italians at 5.2%. Source.

But the chart above significantly understates co-ethnic hiring in cases where the sending countries are themselves multi-ethnic. The correct unit of analysis for the motel industry, for example, is not “Indians” but Gujaratis. For Detroit groceries, it’s the minuscule Chaldean minority, not “Iraqis”. And while the chart tells you how dependent a given country’s immigrants are on these niches, it does not tell you how dominant they are inside them, which is the more important number.⁵

It’s worth looking at some of the more famous non-linear ethnic niches in the US to get an idea of how they operate.

Cambodian donut shops

Cambodians run about 80% of the donut shops in Southern California (despite being only 0.17% of the state’s population). The Cambodian donut empire got its start with refugee Ted Ngoy, who first learned the trade thanks to an affirmative action program to increase minority hiring at Winchell’s Donuts. The Cambodians were able to completely dominate this traditional American culinary sector through a mix of extended family credit and the use of tong tines, an informal lending club. From a 2016 article by Erin Curtis (p. 113):

The Cambodian variation of the arrangement allowed refugees to swiftly receive and pay back money. The loans were tax-free and interest-free, supporting Kolker's assertion that informal lending clubs exist “to save money, not to make it.” Perhaps most importantly, they made cash “quickly available to those who couldn't otherwise get credit.” As Sokhom notes, tong tines were common for “Cambodians who cannot get a bank loan or did not know how.” Being able to, in Lonh’s words, “kind of avoid the bank” through personal savings, the help of friends and family, or the support of a tong tine allowed Cambodians swifter access to independent business ownership with lower initial expenditures, fewer long-term costs, and less engagement with U.S. financial institutions.

This ability to borrow money cheaply made financing much easier for them than for their American competitors. Once the business was purchased, Cambodians could also keep operating costs down through informal employment of family labor, allowing them to get around expensive income taxes, not to mention labor laws and regulations—including ones around child labor (p. 115).

Notably, Cambodian donut shop owners are notoriously conservative and invest and innovate very little (p. 117). With access to cheaper labor and financing than their American competitors, they have little incentive to boost productivity. And the Cambodian community of Southern California is too small (65,000 people) and lacks the “culture of improvement” required to generate innovations internally.⁶ From a consumer perspective, this is fine in the short run (efficiency improvements from cheaper labor and financing get passed on as lower prices), but bad in the long run (there’s a hard limit on how much donut shops can improve without innovation). This is analogous to Britain’s infamous 21st century de-automation of car washes in favor of immigrant labor.

Patel motels

Gujaratis, mostly with the surname Patel, run an estimated 42% of the hotels and motels in the United States—despite being only 0.3% of the US population (and an even lower percentage back in 1999 when this was first noticed). Their dominance rises to 80–90% of motels in small town America. The Patel motel cartel got its start with an illegal immigrant, Kanjibhai Desai, in the 1940s. The initial attraction for Patels was that motel ownership did not require English proficiency, and as with the Cambodians, Patel motel owners were able to use informal ethnic loan networks and immigrant family labor brought in via family reunification to undercut their American competitors. Patels now totally dominate the hospitality industry in the US outside of the big chains.

Vietnamese nail salons

Over half the nail salons in the US are run by Vietnamese, which rises to more than 80% in California (they are only 0.7% of the US population). Just like the Patels and the Cambodians, Vietnamese immigrants were able to finance nail salons more easily than American competitors because they had access to below-market credit from family and friends.

Pro-immigration conservatives often celebrate the “entrepreneurship” of non-linear ethnic niches as a route to assimilation, but that’s getting it backwards. As with the Patels, Vietnamese refugees were attracted to nail salons because they didn’t require English proficiency and in fact enabled ethnic separation from core America.⁷

Vietnamese refugee women are likely to become manicurists because the salon business provides a high degree of autonomy and insulation from an alien—American—culture, language and people.

After the ethnic network was established, Vietnamese owners gained another advantage over non-Vietnamese competitors: better access to workers and training. The language barrier is part of this; once most salon owners spoke primarily Vietnamese, prospective workers had to as well, and cosmetology schools began teaching courses in Vietnamese rather than English. Vietnamese owners and workers could also draw on their ethnic and kinship networks to find each other, avoiding the often cumbersome market hiring process. This plainly goes against the spirit of Civil Rights law in the US, but it’s essentially impossible to apply the laws to informal networks, nor has anyone really tried.

Mechanics

As Thomas Sowell would say: prejudice is free but discrimination has costs. In a market economy, refusing to hire from certain groups means leaving money on the table and being outcompeted by entrepreneurs who will hire from those groups.⁸ Extra-market forces, such as monopoly or fear of the EEOC driving private diversity efforts, can change this—but that’s not what’s going on here. There is no society-wide push to fill the motel sector with Patels or ensure every nail salon is Vietnamese, and the small businesses they dominate are not monopolies. So how do non-linear ethnic niches work? The common features in all of them are as follows.

They are founded and sustained by first-generation immigrants. This allows niche owners to exploit labor arbitrage through their ethnic and kinship networks in their home countries, and also creates a language barrier that makes it harder to find workers outside the ethnic group and harder for co-ethnics to find work outside the niche. Running a low-prestige small business on tight margins isn’t easy, so second- and third-generation co-ethnics often leave.

They are in low-prestige, low-margin sectors that used to be major avenues of upwards mobility for Americans and in which there is no inherent reason⁹ for one ethnic group to dominate. Note that this is distinct from an ethnic group becoming prominent in an industry because its traits make them well-suited to the industry (e.g., black dominance of the NBA, Chinese dominance of Chinese restaurants).

The fact that these sectors are small and don’t have much prestige is what allows them to be dominated. The main reason people run motels, small grocery stores, gas stations, nail salons, and donut shops is money—not prestige, status or any other intangible. (This comes across very strongly in the history of the Cambodian donut niche I’ve been relying on: several owners express contempt for the industry but say it’s good money.) And this means that once undercut, non co-ethnics stop trying to enter. Initial advantages can quickly snowball into complete dominance, at which point maintaining the niche is much easier than establishing it in the first place.

They establish dominance through a combination of below-market-rate extended family loans, exploiting labor arbitrage between the US and countries of origin, labor networking within the group, and racial privileges.

The single most important reason non-linear ethnic niches can dominate some sectors of the economy is below-market-rate loans. Small businesses tend to have tiny profit margins, so getting better terms on financing is a huge advantage. Every single article on a non-linear ethnic niche mentions how important credit from extended families and informal ethnic networks is. Americans do not typically have such credit at our disposal: we don’t have ethnic networks and our families are tiny relative to most of the world. Formal sources of credit, like banks or the Small Business Administration, are prohibited from favoring specific ethnic groups—except where they have mandates to favor non-whites in general. We are dependent on society treating us fairly as individuals.

A second advantage these niches have is wage arbitrage between the US and their countries of origin (Vietnam, India, Cambodia, Iraq and so on). American immigration law favoring family reunification and hence chain migration enables this by allowing individual employers to engage in arbitrage outside the requirements of labor visas like the H1-B (it is socially difficult for family members or co-ethnics to change jobs, especially since they often can’t speak English). In the words of Padma Rangaswamy:

The dominance of South Asians in the Dunkin’ Donuts franchise industry in the American Midwest can be explained with reference to many of the classic theories of niche formation—the desire of immigrants for self-employment, contribution of family members, access to cheap labour and informal funding, and group solidarity. But its unique trajectory of rapid growth and success owes as much to the selective nature of U.S. immigration policy. Its origins lie in the post-1965 immigration of skilled professionals who first bought into the business. It grew as a result of the legitimate use of the family reunification law which permitted the early immigrants to sponsor less-educated relatives and employ them in the business. However, the labour of unauthorized immigrants and continued chain migration of family members have contributed most significantly to the profitability of the businesses, and enabled South Asians to continue to dominate the field.

The same individuals are vastly more productive in the US than in their home countries.¹⁰ This means that part of the difference in wages between what they would have earned at home and what they earn in the US can be pocketed by the employer. In any case, their total compensation includes getting to live in a First World country (with free public education) and having a path to citizenship, which is effectively a subsidy from American tax-payers to the employer, who doesn’t have to pay these costs.¹¹ American small business owners are left at a disadvantage, since they do not typically have family in enormously poorer countries.

The third advantage non-linear ethnic niches have is the various racial privileges that non-whites enjoy in the US.¹² The Cambodian donut shop empire began with affirmative action. And in addition to below-market credit from the ethnic network, non-whites are entitled to below-market loans from government programs designed to promote non-white business ownership and benefit from government contracts set aside solely for non-whites.

In fact, getting access to these racial privileges is what motivated the creation of the Asian-American US census category in 1980. Indian small businessmen lobbied the census bureau to group them with East Asians (who were at the time classified as Orientals) rather than whites to benefit from these programs. While racial privileges don’t explain the formation of niches (why concentrate in motels when these privileges¹³ apply so broadly?), they do help ethnic networks muscle out white competitors to begin with.

Once ethnic dominance is established, it is easy to sustain because co-ethnics have the enormous incumbent advantage of labor networking within the group. Employers finding workers and workers finding employers is challenging, and being able to focus the search on co-ethnics massively facilitates the process. And because there’s usually a language barrier between first-generation immigrants and Americans, it’s harder for non co-ethnics to work inside the niche and there’s less incentive for co-ethnics to defect from the cartel. This is psychologically self-reinforcing: the more dominant a group is within its niche, the less likely outsiders are to imagine themselves entering it and the more likely insiders are to imagine themselves staying put.

Winners and losers

The big winners of non-linear ethnic niches are the business owners themselves, who are broadly protected from competition outside of their small group, and secondarily other members of these groups, who have protected employers to fall back on if needed (as well as a protected source of visas into the US). In the short run, consumers benefit, because the lower costs from cheaper financing and labor get passed on. But in the long run, they are harmed because the lack of competition reduces innovation—businessmen protected within their ethnic niche can rest on their laurels.

The big losers are Americans at large. Not only do ethnic niches facilitate mass immigration, with all the problems that causes, but small business ownership (especially franchises) was one of the classic paths of upwards mobility for Americans. As ethnic networks take over more and more sectors, this gets closed off, leaving only¹⁴ the incredibly overcrowded path of college and a professional career. The historic American love of economic independence through ownership is dying.¹⁵

Turning back the clock

So nonlinear ethnic niches exist and are able to sustain themselves in the face of market competition. This might hurt some Americans, but so do a million other problems. Does it really matter?

Yes. Western civilization has been different for so long (more than 700 years) that we’ve forgotten what it looks like, but non-linear ethnic niches are a throwback to premodern forms of social organization—with all that that implies.

The collective brain

In The WEIRDest People in the World, Joseph Henrich argues that the “special sauce” of Western exceptionalism is free association and individualism. The most common form of human social organization throughout history has been kin-based. These social structures almost invariably extend beyond immediate relatives through fictive kinship, but nevertheless have upper limits on size. And they balkanize society into much smaller competing groups.

By breaking up kin-based structures into nuclear families, the Western European Marriage Pattern facilitated impersonal cooperation, which both enabled cooperation at much larger scales and greatly improved the efficiency of learning:

Nevertheless, while large kin-groups beat nuclear families in size and interconnectedness by tying more people together, nuclear families have the potential to be part of even larger collective brains if they can build broad ranging relationships or join voluntary groups that connect them with a sprawling network of experts. Moreover, unconstrained by the bonds of kinship, learners can potentially select particularly knowledgeable or skilled teachers from this broader network. To see why this is important, consider the difference between learning a crop rotation strategy from the best person in your extended family (a paternal uncle, say) or the best person in your town (the rich farmer with the big house). Your uncle probably had access to the same agricultural know-how as your father, though perhaps he was more attentive than your father or incorporated a few insights of his own. By contrast, the most successful farmer in the community may very well have cultural know-how that your father’s family never acquired, and you may be able to combine insights from him with those from your own family to produce an even better set of routines or practices.

Once an ethnic group takes over an economic niche, these benefits are lost. Rather than learning from the best in any group, prospective entrants can only learn from the best in their specific group. And the mechanisms by which niches form and propagate further encourage kinship networks within these groups. From page 134 of Blue Dreams: Korean Americans and the Los Angeles Riots:

The vast majority of Korean immigrants invest what money they have for their own businesses, above all, and for close kin and possibly friends. In this regard, the nature of chain migration and the significance of kinship are crucial for many immigrant entrepreneurs.

Large-scale cooperation and a bigger collective brain, rather than individual exceptionalism¹⁶, is what allowed Western civilization to break out of the Malthusian trap and make real material, scientific, philosophical, cultural, political, and moral progress—thereby utterly dominating the world for centuries. Non-linear ethnic niches are slowly dragging Western society back into the default world of tribes, clans, extended families, and middleman minorities that we escaped 700 years ago.

Internal markets

In most agrarian societies, commerce, tax farming, moneylending, and many skilled trades were the province of particular ethnic minorities—whether that be Greeks and Armenians in the Ottoman Empire, Jews and Germans in Eastern Europe, Fujianese in Southeast Asia or any number of castes in different parts of India (see Chapter 1 of Yuri Slezkine’s The Jewish Century for more examples).

By contrast, northwestern Europe was comparatively ethnically homogeneous, with middleman majorities. Homogeneity enabled Clarkian selection, that is, the diffusion of productive traits through the higher fertility of the rich in a market economy. Such traits do not generally diffuse from endogamous ethnic groups into the broader population. Market-dominant and middleman minorities are thus not conducive to national development.¹⁷ I believe lacking them was one of the biggest advantages of northwestern Europe in general and England in particular over Eastern Europe.

18th and 19th century nation-builders (from Bismarck to Alexander Hamilton to Pyotr Stolypin to Meiji Japan to Napoleon) were obsessed with creating national markets, the bigger and more homogenous the better. Breaking down internal barriers to trade allows for more competition and greater economies of scale, thereby boosting national prosperity and national power.

It also breaks down internal divisions within the nation, allowing it to be more united in the face of outside threats. Most relevant discussion concerns political barriers, such as internal tariffs (which can be removed through legislation), or physical barriers, such as mountains (which can be removed through infrastructure). Yet cultural barriers (especially language) have the very same effects. A common slogan in the online right is “a nation, not an economic zone,” but the reality is that the two go hand-in-hand. The more internally homogenous the nation, the larger the effective market size, the more prosperous the people and the more powerful the state.¹⁸ This is well-known in development economics. From Yavuz and Bahadir (2021):

Next, we find that ethnic diversity is negatively associated with new business creation in developing countries. This provides support for our argument that lack of homogeneity in ethnically diverse societies results in the difficulties in forming social networks across different ethnic groups to access resources, and markets, and achieving greater outreach. While ethnic groups facilitate the diffusion of credit and ideas within their boundaries to fill the voids in formal institutions, and minimizes transaction costs (Ouchi, 1980), out-group members are discriminated against in the allocation of resources, which results in less entrepreneurial activity in more ethnically diverse societies.

The lesson that diversity fractures national markets has yet to sink in. In the United States, such fracturing manifests in more diverse areas founding 26-28% fewer large firms, but 6-8% more small firms. These small firms are more amenable to non-linear ethnic niches: a tong tine or SBA loan can fund a donut shop purchase, but not an auto factory, and preferentially hiring family members and co-ethnics gives more of an edge in establishments with five workers than five thousand. Given the lack of competition within ethnic niches, we might expect small firms in more ethnically fractured areas to be less productive and they are.

Source, based on this study.

Non-linear ethnic niches are what fracturing internal markets along cultural lines look like in the real world—the undoing of centuries of progress purchased in blood by visionary statesmen.

Informality

One of the most notable things about non-linear ethnic niches is the lack of formal organizations. There are a handful of such institutions, such as VietAid for the Vietnamese nail salon owners and the Asian-American Hotel Owners Association¹⁹ for the motel Patels, but these are much less important than informal kinship and ethnic ties. In particular, ethnic money pooling schemes replace formal banks as a source of finance and family members replace formal employees as a source of labor.

Informal networks do have some advantages over formal institutions, like lower transaction costs within the network and lower exit costs once they’ve served their purpose. But the benefits of formal institutions are legion. Formal institutions are more fair, scale better, can maintain their purpose for longer, and better align individuals towards a common purpose. At a societal level, legal succession works better than civil war, banks work better than tong tines, supermarkets work better than street vendors, and police forces work better than clan justice. From the state’s perspective, formal institutions are legible and can be taxed and regulated.

Formal institutions are also critical for specialization. Imagine trying to rely on your kinship network (and maybe some friends) to build a power plant, operate a grocery store or maintain public order. It’s not possible for one group to do all of those things well, but freely-associating individuals can create different companies for the power plant and store, as well as a police force to maintain public order.

There is an incredibly strong relationship between non-self employment (a rough measure of the dominance of formal institutions within the economy) and living standards. The default human mode of entrepreneurship, a self-employed street vendor or subsistence farmer, is extremely unproductive—but it’s difficult to go beyond that in a kinship-based society. Source.

It’s therefore not surprising that one of the markers of Western, and particularly English, ascent before the Industrial Revolution was the explosion in formal clubs.

Source: The WEIRDest People in the World.

Formal institutions of freely-associating individuals replacing informal kinship networks is perhaps the core social trend of modernity.

Universities and guilds are two important examples of formal institutions replacing informal networks in early modern Europe. Source: The WEIRDest People in the World.

Americans were historically exceptional at building formal institutions, with more corporations than the rest of the world combined in 1812, and freedom of association is so important to Americans it’s protected in the First Amendment (since abrogated by the Civil Rights Act of 1964). Formal institutions are sometimes set against individual agency (consider the pain of interacting with the DMV), but it very much depends on the context. If Americans in the 19th century needed a bridge, they created a temporary corporation to build it, and this bridge-building corporation was a specialized tool that did not rule the rest of social or economic life like a kin-based organization would. For all of their problems, formal institutions are by far the best way to combine collective action with individual agency.

The rise of formal knowledge societies in Europe. Source: The WEIRDest People in the World.

As with shrinking the collective brain and fracturing national markets, replacing formal institutions with informal kinship networks should be seen as a regression towards the human mean—turning back the clock on 700 years of Western progress.

India: the country of the future?

The extreme example of non-linear ethnic niches²⁰ is India, where practically every economic niche is locked down by an endogamous caste, a system that is thousands of years old.

This has a number of deleterious effects, aside from the long-term problems of stifling Clarkian selection (because selection for success does not diffuse outside of successful castes) and entrenching kin-based structures over impersonal ones. For example, caste discrimination in employment, even in large international firms where the caste system should be less relevant, is rampant.

Many complaint about discrimination are really complaints about differing group abilities—but that’s not the case here. Lower caste applicants do just as well in the early stages of the process, including the aptitude test, where their caste is not apparent, but are massively penalized in the face-to-face interview. See this write-up from Cremieux. Source.

Caste discrimination causes the same problems as affirmative action (which is also extremely widespread in the Indian government). Companies hire worse workers and are less productive; consumers get worse and more expensive products; and of course individuals are not judged on their merits. We can ask Thomas Sowell’s question again: how does this sustain itself in the face of market competition without some sort of legal mandate?

The answer is that this behavior is economically rational even in the absence of prejudice. In a highly balkanized society like India, if you allow your niche to be taken over by a different ethnic group, you will then be discriminated against in turn—and unlike America, there’s no wider economy to fall back on. Hence individuals within companies have very strong incentives to discriminate, and even if we abstract away individual incentives (which we shouldn’t), companies benefit from discriminating against all but the most capable group for their particular niche, since that niche will inevitably be dominated by the group in question.

Indian companies constantly complain of labor shortages [1][2][3][4][5][6], which is odd in a country of 1.5 billion people with almost 650 million small farmers and graduate unemployment approaching 30%.²¹ But it makes sense when you consider that the correct labor market is not “Indians,” or even “people within commuting distance,” but rather “people of the right jati,” a much smaller group. Note that this group is even less likely than numbers and IQ would suggest to contain relevant skills if they’re not part of that caste’s traditional skillset.²² About 40% of Indians are willing to forgo money equivalent to 10 days wages just to avoid doing non-caste-appropriate tasks for 10 minutes.

Something similar occurs in capital markets, with caste members refusing to lend to non-caste members, leading to cases where entrepreneurs of the locally-dominant caste in a certain niche are far less capital efficient than their out-caste competitors but never get outcompeted—causing persistent capital misallocation. See Munshi (2017) for an example of this in the Tirupur knitted garments industry.

An individual can only know and meaningfully interact with so many people. Dunbar’s number (150) is dubious, but the true number is probably less than a thousand for all but the most socially-adept individuals. The number of people a person will be forced to interact (in classrooms, in the workplace) is nearly fixed, and doesn’t increase when the total population increases. If some people within this social circle are effectively off-limits as workers, employers, contractors and so forth because they’re not of the correct ethnicity, this reduces the effective market size for any given worker or employer even further.²³

What this means is that a small but comparatively homogeneous area²⁴, such as Reykjavik, can have de facto larger labor markets than a highly diverse place dominated by ethnic niches, such as New Delhi. And this can be true even if individual castes within New Delhi are larger than the entire population of Iceland, because large chunks of the social circles of individual Delhiites will be composed of outgroup members off-limits for various activities.²⁵

Indian villages are so ethnically fractured that each caste makes up on average only 6% of the village’s population, and even with residential segregation this only rises to 14% of the ward. In a way, India’s unique social structure ensures it remains a preindustrial economy even with modern technology—where cottage industries dominate factories.

Source: Chapter 2 of Reforms and Economic Transformation in India by Jagdish Bhagwati and Arvind Panagariya.

Indian firms are notoriously bad at scaling, which is particularly true in manufacturing—a sector that greatly benefits from learning curves and other economies of scale. Unlike American firms, which grow and expand if they succeed, or even Mexican firms, surviving Indian firms do not expand at all on average, leading to a proliferation of tiny, low-productivity firms.

Source (the axes have been re-labeled by Jonatan Pallesen for ease of understanding).

India shows that there is no upper limit to the prevalence of non-linear ethnic niches. If there are enough separate ethnicities with the correct social structures to support them, they can take over the entire economy, spreading their pathologies to sectors far more important than Dunkin’ Donuts.

Conclusions

Immigration is the most reactionary force in Western societies today. Anti-woke liberals idealize the 1990s; intellectually honest social conservatives prefer the 1950s; Mencius Moldbug wants to return to 1750. But immigration supporters are turning back the clock 700 years. Non-linear ethnic niches portend the reversal of centuries of social progress towards impersonal cooperation and economic progress toward larger, better integrated markets. Economists who support immigration on the grounds that it increases market size are simply wrong. Residing in countries that have been at the cutting edge of modernity for centuries, they’ve forgotten that the default human society is based on kin, and are playing handmaiden for the return of kind of society to the West.

The good news is that non-linear ethnic niches are almost all confined to recent immigrant ethnic networks. Ethnic networks in politics can last in perpetuity, but in business they tend to break down in a couple of generations. Owning a small business is tough, and later generations who are more assimilated into US culture often prefer education and the professions instead. Low fertility means it only takes a few defections for the ethnic network to unravel.

The bad news is that this breakdown only happens if immigration is stopped. As long as migration from the old country continues, ethnic networks maintain their sense of apartness from broader American society and can continue to dominate their niches and take over ones. There is no upper limit to this process. Until that changes, India awaits.

Arctotherium is an anonymous writer interested in demographics and the future of civilization. You can find more of his writings at his blog Not With A Bang or at his Twitter.

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1. Albanian nationals in Britain have an arrest rate of 209.8/1000, 17.5 times the rate for British nationals.

2. There’s also the innovation case, but this only applies to a small fraction of immigrants (say, those above 110 IQ) and ideas can cross borders even more easily than goods—Iceland is not generally less technologically advanced than the United States.

3. This is one of the reasons I find the anti-immigration right’s opposition to free trade counterproductive. There are many arguments against complete free trade (reindustrialization, maintaining process knowledge and industrial synergies, geopolitics, national defense, and favors for key constituencies). But making internal market size irrelevant is an enormous boon to the cause of immigration restriction. The other big reason is that getting trade restrictions wrong causes enormous damage for no gain, which is both inherently bad and destroys the right’s broader credibility.

4. Before someone yells at me that Chicago was never homogenous, homogeneity is a gradient not a binary. In 1960, with the various white ethnic groups of the Ellis Island era in the process of fully assimilating after being cut off from their home countries and the only significant nonwhite group being American blacks, Chicago was much more homogenous than today.

5. It’s also misleading to compare Mexicans to other immigrant groups, given how long they have dominated. More than half of all immigration to the US between 1986 and 2008 was Mexican, and Mexican fertility was much higher than other major groups’ too, allowing the formation of ethnic enclaves. This is distinct from non-linear ethnic niche formation, which serves a multi-ethnic clientele but looks the same in terms of co-ethnic hiring.

6. According to Vaclav Smil, this intensive-over-extensive or thrift-over-innovation model is typically Asian. It is very good for excelling within a system, but very bad for creating better systems, which is the only route to long-term progress.

7. This is a perfect example of “citizens, not Americans” or “administratively American”.

8. As the common rejoinder in discussions of the gender wage gap goes: if women really are paid 25% less for precisely the same work, you could start a business that hires only women and become a millionaire, but no one does this. The same applies to most claims about racial wage gaps. The most well-known exception here proves the rule. In professional baseball, there was a period of decades in which some teams excluded blacks and others didn’t, and those that hired blacks first did much better, which is to be expected from the discrimination hypothesis.

9. I avoid mentioning Indians in the tech industry for this reason; although there are many, many anecdotes and allegations of Indians using these tactics in individual companies or departments (including celebratory accounts from Indians themselves explaining how they “conquered” Silicon Valley), the industry as a whole is too big, too prestigious, and too competitive for this sort of ethnic capture. Indian prominence here has more to do with the fact that a very large fraction of Indian immigrants are recruited from the top couple percent of a country of 1.4 billion on skilled-labor visas specifically to work in tech. Ethnic networks for hiring and mentoring and VC capital do matter (and the latter in particular is why I’m suspicious of metrics like “numbers of unicorns founded”) but are not nearly enough to monopolize the whole sector the way Patels have for motels.

10. The First World productivity advantage derives from a mix of historical, cultural and biological advantages. These are a collective property of the nation, not a rent and not derived from “magic dirt”, and are generally degraded by immigration—which is why this should not be used as an argument in favor of open borders. The accumulated capital of the past is spread more thinly across more people, and given the reality of deep roots (immigrants making the societies they move to more like the ones they came from), immigrants reduce American cultural advantages in the long run. In the case of non-linear ethnic niches, the incredibly important WEIRD norm of impersonal cooperation is eliminated in captured sectors of the economy.

11. Parenthetically, businesses and other institutions should not be allowed to sponsor visas. This is totally incompatible with republican or democratic government because it outsources the composition of the future demos to a smattering of special interests and privileges institutions with foreign ties over those without (which is ruinous to national cohesion). This practice was sensibly banned in 1885 under the Foran Act (a.k.a. The Alien Contract Labor Law), but has since resurrected itself. If Western countries had an apartheid-style system that totally excluded immigrants and their descendants from positions of power, it might make more sense, though I would still oppose it for the same reason free-soilers opposed slavery: it’s bad for the moral character of owners to rely on a disenfranchised caste of foreigners with fewer legal rights. If we must have labor visas, they should not be tied to a specific employer and workers on them should have full rights regarding switching jobs (and have to pay payroll tax, which nonresident aliens on the OPT visa presently do not).

12. I don’t want to overstate this. Such privileges are accessible to every group in the US except for white men, but there are no comparable black networks (except for those in municipal governments, but that’s a different story) and very few Latin American non-linear ethnic niches outside of organized crime. I think the fact that Spanish is so common is part of this. Because there are so many Spanish speakers from many different ethnic groups in the US, you don’t have the language barrier providing a mechanism for informal ethnic separation from outsiders.

13. See this 1995 article about a Gujarati businessman using Florida’s minority entrepreneurship incentives to become a landlord risk-free. Gujaratis do not dominate real estate, but they have the same political advantages as they do elsewhere, and use them.

14. The zero-marginal-cost, winner-take-all nature of tech means startups cannot possibly replace small businesses as a route to the middle-class for large numbers of people across the country.

15. Compare with immigration choking off another traditional American route of self-improvement, internal mobility towards booming economic centers.

16. Henrich would deny that Westerners are individually exceptional at all. He’s wrong on the world scale, but it is true that other groups (Eastern Europeans, Ashkenazi Jews, East Asians, some Indian jatis) are just as capable as individuals, but never managed anything remotely similar to Western takeoff. Western civilization is far more collectively exceptional than Westerners are individually exceptional.

17. The lack of minority tax farmers (who could be relied on to efficiently extract from the peasantry and then thrown to the wolves during inevitable backlashes) also forced the development of sophisticated tax collection systems, which in turn both promoted limited and representative government, and hence higher total revenues, and hence state capacity.

18. Free trade between states does this too, but there’s a catch. While the gains from larger markets are positive-sum, they do not accrue evenly to all participants. From the perspective of the state, it’s fine if one part of the nation gains more than others do, since all contribute to national power. But a rival state gaining relatively more is dangerous (as in the rivalry between the US and China). Geopolitics, unlike prosperity, is zero-sum.

19. Parenthetically, the ability to formally organize on behalf of ethnic interests is the most important privilege non-whites have in the United States. Affirmative action in college admissions gets the most attention, though its counterpart in government and corporate hiring, promotion, and contracting probably affects people more in the pocket book. The ability to freely associate and hence coordinate matters much more for affecting the parameters of the system itself—whether by lobbying, bloc-voting, boycotting or other methods of exerting power. Try to imagine a “White American Hotel Owners Association.”

20. India takes Peter Thiel’s maxim that competition is for suckers and implements it at the biological level.

21. In the US, businesses push the labor shortage narrative to encourage looser immigration laws, but this isn’t really a factor in India outside of maybe Indian Bengal.

22. Note, however, that this is a long-run problem. In the short run, castes can leverage their networks to deliver goods and services more cheaply than out-caste entrepreneurs. But by strangling competition, long-run improvement is curtailed.

23. A similar phenomenon occurs with marriage. Most people have a real, though not absolute, same-race preference, so marriage rates drop in more diverse areas because a larger fraction of the fixed-size social circle comes from other races.

24. Which is the correct unit of analysis most of the time (hence my focus on two local nonlinear ethnic niches). Patels don’t have to dominate Dunkin’ Donuts across the whole US to qualify; regional dominance is enough.

25. It’s worth noting that even Indians descended from unskilled laborers from what is now the poorest part of India are several times more productive in societies without the caste system, such as Guyana, Trinidad & Tobago and Mauritius.