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City Density and Destiny (Posted January 18, 2006)
Mayors and Governors who want their cities to be prosperous appoint economic development officials and tell them to look for ways to create and retain jobs. Traditionally, these economic development officials make deals with companies to come to a city (or promise not to leave) in return for tax breaks.
These deals sometimes involve municipal financing of large buildings, changing zoning laws and using eminent domain to clear space for new building. The deals may be criticized at the time by independent analysis and often enough a subsequent consensus emerges that these deals were misguided, that the jobs were not created or retained as planned or that the costs were higher than expected. Some commercial bankers have decided that use of eminent domain for commercial projects is improper.[1]
This Monty Hall approach - "Let’s Make a Deal” - to luring or retaining firms provides an activity for economic development officials, may do some good and provides an ongoing illusion that the economy is being responsive to the wishes of government. But this is not the only way, and may not be the best way, for a city to pursue community prosperity. Economists looking for better understanding of what is really happening have been investigating why some cities grow, while others do not (some citations are provided in the next part of this series). They have been focusing on the importance of “agglomeration” to cities’ economies, and argue that a city gets bigger because it provides economically valuable skills. "Density Is Destiny” is a way of summarizing this work.
These economists have argued that the average wage of workers in a city is a good measure of prosperity, as it is a key determinant of a city’s overall economy (its “gross city product”). The average wage of workers is in turn linked to population density or employment density and especially skill density, commonly defined crudely as the share of the population with a college degree. The work of these economists implies that the main effort of government officials seeking prosperity for their communities should be to attract, train and keep skilled workers.
[1] John Allison, Chairman and CEO of BB&T Corporation in Charlotte, N.C., said: “The idea that a citizen’s property can be taken by the government solely for private use is extremely misguided, in fact it’s just plain wrong." Paul Nowell, AP, "Bans Loans to Builders if Eminent Domain Used," The New York Sun, Jan 26, 2006, 8.
Density Promotes Prosperity (Posted January 19, 2006)
Agglomerationists[1] argue that a dense city population with a high level of skills encourages work force productivity and higher average wages. People cluster together (“sort”) based on a search for:
- government-provided goods, as argued by Charles (“voting with one’s feet”) Tiebout[2] and
- clusters of private goods.[3]
The idea of agglomeration is linked to Adam Smith’s concept of specialized skills requiring a critical mass of market size or extent: “As it is the power of exchanging that gives occasion to the division of labor, so the extent of this division must always be limited by… the extent of the market. When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment… A country carpenter deals in every sort of work that is made of wood…”[4] A city’s size creates demand for specialized services.
What first determined a city’s size? Adam Smith noted the importance in his time of water transportation. He noted that European cities grew up because they could trade with one another in the sheltered harbor of the Mediterranean. He also noted that:.“[I]n our North American colonies the plantations have constantly followed either the sea-coast or the banks of the navigable rivers,”[5] because water transportation was then the cheapest form of moving goods and people. Harvard Professor Edward Glaeser observes that in 1990 the 20 most populous U.S. cities were all on water.[6]
As railroads opened up the interior of the United States, railroad terminals became as important as ports. Manufacturing located near the terminals, so that as late as 1950, says Glaeser, seven out of the eight largest cities, including New York, were manufacturing centers based on employment concentration relative to the nation.
With the spread of national highways and car ownership, the railroads diminished in importance. People moved inland to sun and sprawl, to what Glaeser calls “consumption cities” designed for leisurely living. By 1990, manufacturing had decentralized (and shrunk), to the point where six of the eight largest U.S. cities had a lower-than-average share of manufacturing employment. City size is no longer being determined by the cheapness of water transportation, or the importance of railway terminals, or the existence of manufacturing.
Next: What determines city size and prosperity today and tomorrow?
[1] For a survey of this literature, see S. S. Rosenthal and W. C. Strange, “Evidence on the Nature and Sources of Agglomeration Economies,” in J.V. Henderson and J.-F. Thisse, eds., Handbook of Urban and Regional Economics, Vol. 4. Amsterdam: Elsevier, 2004, 2119-2172.
[2] Charles Tiebout, “A Pure Theory of Local Expenditures,” The Journal of Political Economy, 64(5) (Oct 1956), 416-424.
[3] Joel Waldfogel, Wharton School, Univ. of Pennsylvania, “The Median Voter and the Median Consumer: Local Private Goods and Residential Sorting,” Preliminary Draft, November 22, 2004, 25-26. Types of restaurants indicate nearby clientele.
[4] Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations. Edwin Cannan, ed. Book 1, Chapter 3, “That the Division of Labor is limited by the Extent of the Market,” para. 1. www.econlib.org/library/Smith/smWN.html,
[5] Smith, Book 1, Chapter 3, para. 4.
[6] Remarks to the Manhattan Institute, New York City, January 10, 2006.
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