One of the themes of this blog is what is required to achieve economic growth and prosperity. So far, I have written posts about the role of many plausible factors including geography, specialisation, capital accumulation, innovation, institutions, and ideas. It is in cities that these factors combine to power economic prosperity.
The correlation between urbanisation and prosperity is very clear. As a countries become richer, they tend to be more urbanised. This could just be a coincidence. As countries industrialise and economic output shifts away from agriculture to factories, it makes sense that more people would move to cities.
However, there are theories and evidence that cities drive growth rather than simply being correlated with prosperity.
Agglomeration Economies — Bigger is better.
Adam Smith wrote about cities and economic growth. His view was that growth was driven by the division of labour, resulting in specialisation which increases productivity. The degree of the division of labour was driven by the size of the market. Hence large cities — with its larger markets — would have a greater degree of specialisation, productivity and economic output. Cities can also act as coordinators, with larger markets better able to match workers with employers.
“Cities may facilitate the division of labor which enables individuals to specialize in a particular range of skills and therefore become more productive more quickly” (Learning in Cities p.2)
Cities may also have better access to transportation networks. Initially this was being close to the coast or navigable rivers. However recently this has shifted to railways lines and airports. Large markets combined with access to transportation networks reduce the transport costs for goods and services. During the industrial revolution, the most rapidly growing cities were close to supplies of energy such as coal.
Scale economies also plays a role. For many things such as certain factories, universities, ports — bigger is simply better. Big cities must also deal with the negative costs of scale — such as contagious disease, crime and traffic congestion. Housing also tends to be more expensive in large cities.
Institutions and infrastructure
There are ways to overcome the negative costs of large cities. Capital investment in public infrastructure can reduce the negative costs of large cities. This includes subways and roads to reduce traffic. Clean water for drinking and sanitation also requires vast amounts of public infrastructure. A lack of housing can be overcome by building up; crime can be reduced with effective policing.
“Even the densest agglomerations can provide a virtually unlimited supply of safe clean water by desalination and spending enough on wastewater treatment, like Singapore.” (A World of Cities p.20)
Institutions and governance are vital for large cities to prosper. This includes policies to reduce corruption so that infrastructure investment and policing are effective. Adam Smith wrote about the role of governance in a thriving city -- he noticed that cities run by merchants seem to be more prosperous. Policies can also be used to incentivise behaviour — such as fines for littering or congestion charges to reduce traffic.
“Historically, these downsides of density have been fought with infrastructure investment or behavioural modification or both, and almost all of these problems can be solved by competent governments with enough money.” (A World of Cities p.20)
Ideas in Cities
Paul Romer emphasised the role of knowledge and ideas for economic prosperity. His thinking was that ideas have almost infinite potential for growth due to their non-rivalry and economies of scale. Cities are good at promoting new ideas and are centres of innovation — think of artists in Van Gogh’s Paris or tech entrepreneurs in Silicon Valley. The reason for this is that the density of cities facilitates smart people to connect, talk to each other and share ideas. Owners of patents are more likely to cite other owners that are geographically close.
“Cities exhibit ‘superlinear’ scaling, which makes them super creative. Double the size of a city and you more than double the overall wealth, income, number of patents, number of universities or creative people” (Human Frontiers by Michael Bhaskar p.271)
“Human capital spillovers found in cities are intrinsic to the creation of new ideas which underpin economic growth” (Learning in Cities p.2)
Cities are not only good for the smartest people to share ideas and for people to get jobs. Human beings are social animals, we collaborate and talk with each other, and most importantly we learn from each other. It is our ability to talk to one another that makes dense cities so powerful. Small talk can be a way of sharing ideas that have the potential to increase productivity. It is also a way to connect with others and build a network. We also learn from others, spreading ideas and other successes and failures — increasing our human capital. Knowledge is contagious, it spreads from one person to the other.
Human Capital
The density of cities allows people to collaborate and learn from each other, however this only works if there are smart people to learn from. The idea is that individuals become more productive when surrounded by other skilled people. Think of a successful older engineer mentoring younger engineers. Having some level of human capital — the accumulated knowledge and experience of individuals — is vital for ideas to work in cities. There is evidence that the link between city size and worker productivity is only true for cities with enough smart people:
“There is a strong connection between per worker productivity and metropolitan area population, which is commonly interpreted as evidence for the existence of agglomeration economies. This correlation is particularly strong in cities with higher levels of skill and virtually non-existent in less skilled metropolitan areas.” (The Complementarity between Cities and Skills p.2)
Human capital is vital not only for ideas to spread, but also for cities to be well governed. In a counter argument to Acemoglu’s famous paper about the importance of institutions, Glaeser instead argued that it was human capital that was required for institutions to prosper:
“Lipset (1960) believed that educated people are more likely to resolve their differences through negotiation and voting than through violent disputes. Education is needed for courts to operate and to empower citizens to engage with government institutions. Literacy encourages the spread of knowledge about the government’s malfeasance.” (Do Institutions Cause Growth p.3)
Human capital and social capital — the social network of individuals — also tend to be correlated. Large cities create more opportunities to meet new people, resulting in larger social networks for everyone. Those with a high amount of human capital also tend to invest more in social capital. It is this interconnected web of networks with skilled individuals which improve institutions and provide opportunities to exchange ideas.
City Design
A city’s urban design plays a role in how individuals interact and spread ideas. Often for industries, the most interesting and innovative ideas come from outside the core industry. This the view of the Urbanist Jane Jacobs. This means that a diversity of industries and income levels within a geographic area is important for the spread of innovative ideas.
“Jacobs' idea is that the crucial externality in cities is cross-fertilization of ideas across different lines of work. Because cities bring together people from different walks of life, they foster transmission of ideas.” (Growth in Cities p.8)
Streets are also safer when there are more people using and looking at streets, what Jacobs’ calls “eyes on the street”. A diversity of industries increases the likelihood that a street would have more “eyes” at more hours — think of the periodic busyness of a school. Instead, a more diverse area with a school, an office and a restaurant would have eyes at more hours — making streets safer.
A city designed for density also plays a role — higher density reduces the physical distance between people. The best urban design is to have shops, restaurants, and light industry at the ground floor with residential housing of around 5 to 6 stories above it. Combine this with plenty of pedestrian and cycling space and public transport such as subways, trams, and busses — while having limited space for cars in the urban core. This is the general design of Paris, Barcelona, and Tokyo. This increased density and reduced transport costs increases the amount of foot traffic, eyes on the street and the number of individual interactions. It also likely increases the size of individuals’ network, the number of connections and the spread of ideas.
Given the importance of human capital to a city, cities should do more to attract highly skilled individuals. This is possible by making cities fun and interesting places to live. Consumer amenities are an important part of this. This includes a diverse set of stores, theatres, restaurants, art galleries, parks, and other entertainment options. Good architecture and nice weather can also play a role. Good schools, universities and decent governance are also important.
Cities in the Developing World
Probably the main argument against cities is the failure of many cities in the developing world to drive prosperity. Developing countries are rapidly urbanising, but lack the infrastructure, human capital, and quality of governance to make them work — resulting in growing slums. Glaeser argues that cities in some parts of the developing world are urbanising prematurely. Historically, countries needed increases in agricultural productivity and economic growth to feed cities. The factors that cause increases in agricultural productivity — such as investments in infrastructure and improved governance — also lead to better run cities. However, an increasingly globalised world has ended this connection, allowing cities in poorly run countries to grow — by importing food — without good governance and investment.
“I also find a sharp decline in the connection between local agricultural productivity and urbanization between 1961 and 2010, which is compatible with the hypothesis that global food supply has reduced the need to develop a domestic agricultural surplus before building cities”. (A World of Cities p.3)
Although poverty persists in poor cities, the advantages I’ve mentioned, such as enhanced idea exchange, economies of scale, geography and improvements in human capital, are still present and taking place. There is some hope for the urban poor. The urban poor are better connected, have more opportunities and are more visible than those in rural poverty. They are also better able to organise and connect, forming political groups to drive better governance. There is some evidence that increased urbanisation in poor countries would lead to democracy and better governance:
“...urbanization may increase the demand for democracy and enable uprisings and revolution by facilitating coordination and enhancing the power of organized action.” (Transforming Cities p.3)
“Just as importantly, history seems to suggest that urbanization is one tool for institutional development. The connections and social movements that form readily in the dense confines of urban areas can ultimately be strong enough to change and discipline government. The rural past in the poorer world has shown little evidence of supporting institutional development. The cities of the developed world have been wellsprings for the growth of politically-minded groups. Indeed, it is possible that an urban contribution to the growth of institutional quality may be the most important urban benefit” (A World of Cities p.41)
Triumph of the city
Very large cities with good infrastructure, good governance, lots of skilled people and an urban design that encourages people to interact and collaborate is possibly the most powerful tool to foster human prosperity. It promotes a Smithian ‘division of labour” allowing people to specialise; it facilitates face-to-face interactions which help to spread ideas and increase innovation. Cities in the developing world also benefit, even though they struggle with costs of density — disease, crime, and traffic. These challenges can be overcome with the right investments and policies. The correlation between urbanisation and prosperity is not a coincidence, cities play a vital role in the prosperity of nations.