by Ryan Avent 04:46 AM Sep 28, 2011
"Hell is other people," wrote Jean-Paul Sartre. He nonetheless spent much of his life in Paris, the better to interact with other French intellectuals.
Cities have long been incubators and transmitters of ideas, and, correspondingly, engines of economic growth.
That has never made the crowds less annoying. Maybe that is why people try to tame the city by chaining it down and limiting who can build what where along its quieter streets. We lobby leaders to fight development, aiming to protect old buildings and precious views, limit crime and traffic, and maintain high-quality schools.
But what makes a city a city and a not-city a not-city is the fact that a city is dense and a not-city is not. The idea of it may chill a homeowner's heart, but the wealth supported by urban density is what gives urban homes their great value in the first place.
And when it comes to economic growth and the creation of jobs, the denser the city the better. How great are the benefits of density? Economists studying cities routinely find that after controlling for other variables, workers in denser places earn higher wages and are more productive.
Some studies suggest that doubling density raises productivity by around 6 per cent while others peg the impact at up to 28 per cent.
Some economists have concluded that more than half the variation in output per worker across the United States can be explained by density alone - density explains more of the productivity gap across states than education levels or industry concentrations.
Put two workers with similar skill levels in cities of different densities and the one in the denser place will be more productive, according to two decades' worth of research from economists.
THE TROUBLE WITH NIMBY
The resistance to greater density slows job creation in productive places. Take, for instance, the San Francisco Bay Area, a beautiful place, blessed with outstanding climate, scenery and culture. It is also an economic juggernaut, hub of the country's tech industry and home to some of America's highest wages.
In 2009, the average Silicon Valley household earned about US$85,000 (S$109,440). Despite this, over 500,000 residents of the Bay Area moved elsewhere in the 2000s. Many of them left for places like Phoenix, which attracted over 500,000 residents from other American cities, despite wages 40 per cent below Silicon Valley levels.
Factors like taste and taxes account for some of the migration, but the biggest reason for the shift is housing costs. The average Phoenix home is worth about 30 per cent of the price of a house in San Jose. Every year from 1992 to 2009, Phoenix granted permits for two to three times as many new homes as did the San Francisco and San Jose metropolitan areas combined.
Around the San Francisco Bay, neighbourhoods dead set against change successfully squeezed the housing supply, just as OPEC limits the supply of oil when it wishes to raise its price.
The "Not in My Backyard" philosophy sometimes, though by no means always, supports a high quality of life. Yet the effect is to raise housing costs and make rich cities more exclusive.
Real trouble occurs when the idea-generators in cities with that NIMBY approach become so protective of their pleasant streets that they turn away other idea-generators, undermining the city's economic role. And that is happening. Entrepreneurship rates in Silicon Valley were below the national average during the tech boom because firms couldn't attract enough skilled workers.
MORE INTERACTION, MORE WEALTH
Density is not a magic elixir. One cannot create wealth just by crowding people together; otherwise the super-dense metropolitan areas in emerging Asian countries would be richer than American cities.
Density simply facilitates interaction. Interactions translate into wealth when a population is educated and local institutions support private enterprise and entrepreneurship.
The world's richest places tend to be dense, with well-educated residents and a free-market orientation (or tax havens or oil-rich) - think of New York and the Bay Area, of Singapore, Hong Kong and the Netherlands. Without a stock of skilled workers and a relatively open marketplace, density's impact on growth and productivity will be limited.
What is it exactly that dense cities are doing? Consider a simple example. Suppose that within a population one person in 100 develops a taste for Vietnamese cuisine, and suppose that a Vietnamese restaurant needs a customer base of 1,000 people to operate profitably.
In a city of 10,000 residents, there are not enough people to support a Vietnamese restaurant. The only restaurants that can operate profitably are those appealing to considerably more than one in 100 people - restaurants offering less daring fare. In a city of 10,000 people, there is little room for specialisation, and less for experimentation.
A city of 1 million people, by contrast, can support multiple Vietnamese restaurants. Not only will this larger city enjoy a speciality cuisine unavailable in less populous places, but its ability to support multiple producers of this cuisine allows for competition, improving the price and quality.
A city with multiple Vietnamese restaurants may attract sellers of the fresh ingredients used in Vietnamese cooking, who then invest in distribution of those products in the larger city. This, in turn, attracts the sort of discerning eaters who favour authentic, high-quality Vietnamese food, reinforcing the concentration of Vietnamese eateries.
The larger market facilitates competition, which again boosts quality and reduces prices. This is good for consumers. But competition also means better service from suppliers and growth in the consumer market, which is good for the restaurants.
The result is a stronger, more productive and higher-quality microeconomy than in the city of 100,000, where only one Vietnamese restaurant can survive, or the town of 10,000, where there is none at all.
TALENT AND JOB INSURANCE
Density does not work without talent.
A small market may only support restaurants producing food that caters to a broad range of tastes. These restaurants will have to hire generalists - cooks who can produce a broad range of cuisines. Specialisation and fine-tuning of one's skills aren't rewarded; too few patrons will have the specific taste for the particular cuisine to appreciate the quality.
In the larger market, supporting multiple niche cuisines, the calculus is different. Because there may be multiple Vietnamese restaurants competing for patrons, mastery of that specific style is necessary to maintain an edge against the competition. This is particularly true as the concentration of Vietnamese restaurants is likely to attract devotees of the cuisine with a well-developed knowledge of and taste for it.
Hence, the larger marketplace pushes for, rather than against, specialisation.
Meanwhile, a worker hoping to make a living as a Vietnamese chef will have a much easier time in the larger city. Labour turnover may be greater (if there's only one Vietnamese restaurant in a town, then head-chef spots may only rarely open up) and so the odds of finding employment are higher.
The larger city also provides insurance against bad fortune. If you are a Vietnamese chef working at the one Vietnamese restaurant in a town and it goes bankrupt, then you are obviously in a tough economic situation. You must either take another job for which you are less qualified, which may mean a reduction in compensation, or move. In the larger city, by contrast, competing restaurants can absorb and re-employ the labour and resources of defunct competitors.
This insurance function is important. It reduces the risks associated with specialisation and therefore encourages more of it. By allowing workers to focus on tasks at which they're relatively better than others, specialisation helps drive economic growth.
It is also an engine of innovation. As workers focus on a specific task, they may well find better ways to do it. They might better schedule their days or invent something entirely new - software code written to expedite repeated tasks, or a machine that automates portions of a task.
Of course, existing companies can be resistant to innovation. Dense cities, by acting as a source of insurance, enable workers with good ideas to take risks and start new businesses. If they succeed, the task of staffing the company is made easier by the existing pool of talent, and odds are good that customers and suppliers are close to hand, as well.
Big cities provide a climate in which innovation can flourish, and in which innovators have the resources they need to exploit new ideas. THE NEW YORK TIMES
Ryan Avent is an economics correspondent for The Economist and author of the Kindle Single, The Gated City, from which this essay is adapted. This is an abridged version of the essay.
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