2: Density Promotes Prosperity Posted January 19, 2006
Agglomerationists 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 and - clusters of private goods.
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…” 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,” 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. 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?  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.  Charles Tiebout, “A Pure Theory of Local Expenditures,” The Journal of Political Economy, 64(5) (Oct 1956), 416-424.  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.  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,
 Smith, Book 1, Chapter 3, para. 4.  Remarks to the Manhattan Institute, New York City, January 10, 2006.