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Posted May 10, 2018, 8:10 PM
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Join Date: Jul 2012
Posts: 7,457
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Excerpts from Urban Economics by Arthur Sullivan:
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THE ROLE OF CITIES IN THE ECONOMY
... Cities facilitate creative thinking and innovation. One of the vital inputs to creativity is personal communication between people sharing common interests. Face to face communication is the most effective means of transmitting the subtle ideas that lead to the development of new products and production
processes. A city provides many opportunities for people to interact with people with common interests, and thus promotes creative thought. In the language of urban economics, the city provides opportunities for knowledge spillovers...
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They go on to cite like five studies beginning in the 1860's and going through the 20th century observing correlation between patent productivity and city size and other indicators proving the knowledge spillover effect.
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LEARNING IN CITIES
... Cities provide more contacts with workers performing similar tasks, facilitating learning that increases productivity...
Some evidence for learning in cities comes from data on wages for migrants (Glaeser, 1999). The average wage in cities exceeds the average wage outside of cities, reflecting the higher productivity for city workers. However, when a worker migrates from a rural area to a city, her wage does not jump immediately to the higher city wage, but instead increases over time. This observation is consistent with the idea that a city worker learns over time, increasing her productivity and her wage. In addition, when a worker leaves a city, her wage doesn't drop to the rural wage rate. This means that learning in cities causes a permanent increase in productivity...
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This is literally a study of exactly what we are talking about here. People moving into the city experience exponentially more rapid productivity growth (which is the main driver of economic growth mind you) than those in less dense areas. This is again due to interactions with increasingly more specialized peers. This same effect occurs both for workers wages, but also for their consumption:
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CONSUMPTION IN CITIES
Cities also provide consumers with a wide variety of goods and services. Consider a product with a low per capita demand (e.g. live theater). Suppose that 2 out of every 100 people attend a live theater performance in any given year. In addition, suppose that to break even, the theater must sell 20,000 tickets per year. To survive, the city surrounding the theater must have a population of at least one million people (1,000,000 times 0.02= 20,000). In general, the larger the city, the larger the number of products it can support. In larger cities, you can buy all of the goods that are available in smaller cities, as well as other goods that have a relatively low per capita demand.
Does the greater consumer variety available in cities matter? There is some evidence that the value consumers place on variety has been increasing. In the last few decades, cities with the greatest variety of certain consumer goods have grown most rapidly. In the United States, the most rapidly growing metropolitan areas were the ones with relatively large numbers of restaurants and live performances per capita...
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Here's my favorite chapter:
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WHY DO CITIES EXIST?
Cities exist because it is efficiant to produce some goods on a large scale. An activity is subject to economies of scale if the average cost of production decreases when we scale up the operation and produce more output. The way to exploit economies of scale is to concentrate population in a small number of sites. Because workers can economize on travel time, cities develop around these production sites...
To fully exploit scale economies in transporatation, a trading firm must collect and distribute a large volume of output. A trading firm will locate at a place convenient for the collection and distribution of goods (COUGH COUGH CHICAGO COUGH), causing the development of marketplaces at crossroads, ports, river junctions, and other transshipment points.
The location decisions of traders cause the development of market cities. People employed by the trading firms will live near the marketplace to economize on commuting costs, and will bid up the price of land near the marketplace. As the price of land increases, residents will economize by occupying relatively small lots. In other words, the population density around the marketplace will be higher than in the rest of the region. A city is defined as a place with a relatively high population density, so the combination of comparative advantage and scale economies in transportation causes the development of a market city.
The market city develops because three conditions are satisfied. First, productivity is high enough that people outside the city produce enough bread and shirts for themselves and the urban traders. The agricultural surplus feeds and clothes the urban workers. Second, the differences in productivity that generate comparative advantage are large enough to offset transportation costs, so trade occurs. Third, there are scale economies in transportation (THINK TRAINS), meaning that intermediaries are more efficient at transporting and marketing goods, generating central marketplaces.
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This touches on why Chicago is my favorite city. It's entire built environment was created during the era of industrialization, but before much in the way of regulation. It is also built on a totally flat plain with only one natural obstacle to distort growth patterns (the lake). As a result you can almost perfectly see the patterns of growth described above. Density (lot size) falls exponentially as you leave the city center. The only exception to this rule is along the lake which perfectly demonstrates what happens when a city does encounter a natural barrier and attraction. Our skyline is literally a bar graph of land values, that's why it's so perfectly peaked, land values spike near the central hub (Michigan and the river), near the commuter stations in the near West Loop (Sears et al), and where the main retail district meets the wealthiest residential district (Water Tower).
Finally, agglomeration economies:
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LOCALIZATION ECONOMIES AND INDUSTRY CLUSTERS
One puzzling feature of an urban economy is the tendency of firms producing the same product to locate close to one another. The clustering is puzzling because dispersing into separate territories would reduce competition for workers and perhaps bring the firms closer to their dispersed customers. There are some subtle benefits from clustering, and for many industries these benefits dominate the more obvious costs. We'll explore three types of benefits: sharing the suppliers of intermediate inputs, sharing a pool of labor, and sharing information. In all three cases, the production cost of an individual firm decreases as the total output of the industry cluster increases...
Some industry clusters occur because firms in a particular industry buy and intermediate input from the same supplier. Firms will cluster around a common input supplier if two conditions are satisfied:
1. The input demand of an individual firm is not large enough to exploit the scale economies in the production of the intermediate input.
2. Transportation costs are relatively high. If demanders and supplier interact in the design or fabircation of the intermediate input, face to face contact between buyer and seller is necessary, and proximity to the input supplier is important...
There are many other examples of clusters that result from scale economies in the provision of intermediate inputs.
1. Corporate headquarters produce a wide variety of outputs. An executive may supervise the development of a new advertising campaign one week, pick a location for a new plant the next week, and develop a strategy to fend off a lawsuit the following week. Most corporations hire advertising firms because the scale economies in producing advertising campaigns are large relative to the advertising demand of an individual corporation. Corporate executives need to be close to the advertising firm because the executives assist in the design of the advertising campaign; face to face time is required. In general, the clustering of corporate headquarters allows corporations to exploit scale economies in the production of intermediate goods (advertising, economic consultants, legal services, etc) for which face time is an important part of the production process.
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This is literally what we see with McDonalds who actually is such a large firm that it's suppliers followed it to Oakbrook and set up around just McDonalds because they were a big enough customer that the costs of disbursed sales centers catering just to MCD was worth it to the suppliers. Now all those vendors are following them to the West Loop where they very well might pick up new customers other than MCD.
Then there is the labor pool, why is McDonalds moving downtown again? Oh yeah, because they can't get fresh labor in Oakbrook:
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SHARING A LABOR POOL: VARYING DEMAND FOR LABOR
If a firm is uncertain about the quantity of workers it will hire or the skills of its workforce, it will have an incentive to cluster around other firms and draw from a common labor pool...
Workers in the cluster have relatively low job search costs because (1) information about job openings is spread through informal channels (casual conversation at restaurants, bowling alleys, and baseball games) and (2) prospective employers are nearby, making formal job searches relatively easy. Second, because of physical proximity of employers, moving costs are relatively low; workers can easily switch to a different firm in the same city...
SHARING A LABOR POOL: MATCHING
... The firm doesn't know what type of worker will be most appropriate for next year's production, but must pick a location now and then hire workers that provide the best match of labor skills. The firm must choose now between and isolated site and the industry cluster. The difference is that the cluster has more workers and thus a greater variety of skills...
SHARING INFORMATION: KNOWLEDGE SPILLOVERS
A third type of localization economy arises from the sharing of information among firms in the same industry. As we saw in Chapter 1, a disproportionate amount of innovation occurs in cities, especially the largest cities. A city provides opportunities for interactions among people with common interests and thus promotes creative thought.
A cluster of firms in the same industry promotes innovation by bringing together people producing similar goods with similar production technology. In the words of Alfred Marshall (1920):
"When an industry has chosen a locality for itself, it is likely to stay there long; so great are the advantages which people following the same skilled trade get from near neighborhood to one another. The mysteries of the trade become no mysteries; but are as it were in the air, and children learn many of them unconsciously. Good work is appreciated, inventions and improvements in machinery, in processes and in the general organization of the business have their merits promptly discussed; if one man starts a new idea, it is taken up by others and combined with suggestion of their own; and thus it becomes the source of new ideas"
The opportunity to exchange ideas occurs in both formal and informal settings. A cluster of computer makers produces a large concentration of computer scientists and engineers who can exchange ideas while they work and play...
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Again, sound familiar? A bunch of people working at Google in the West Loop makes Chicago more attractive for Amazon because those workers might encounter their workers at Au Cheval and come up with new ideas. This is also why MCD wants its workers lounging at Lone Wolf after work soaking up ideas from some guy they just met who works at Publican.
Finally, to drive the point on density home, there's Urbanization (i.e. agglomeration) economies:
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URBANIZATION ECONOMIES
A second type of external scale economy occurs if the production cost of an individual firm decreases as the total output of the urban area increases. Urbanization economies differ from localization economies in two ways. First, urbanization economies result from the scale of the entire urban economy, not simply the scale of a particular industry. Second, urbanization economies generate benefits for firms throughout the city, not just firms in a particular industry.
There is a large volume of economics literature examining the extent of external economies, both localization and urbanization economies. In searching for evidence of localization economies, researchers focus on the effects of industry concentration on (1) worker productivity (2) the number of new production plants (plant births) and (3) growth in industry employment. If there are localization economies, we expect industry clusters to generate higher productivity, more births, and more rapid employment growth. In contrast, if there are urbanization economies, what matters is the size of the urban economy, not the size of a particular industry, so expect larger cities to generate higher productivity, more plant births, and faster employment growth...
How local are localization economies? The Rosenthal and Strange study (2000b) shows that the benefits associated with localization economies (sharing input suppliers, a labor pool, and information) fall rapidly with distance. They compute the percentage drop-off of the localization effect for a one-mile move away from a cluster. ON AVERAGE THE LOCALIZATION EFFECT PETERS OUT AT A RATE OF ABOUT 50 PERCENT PER MILE. (emphasis mine). The rapid attenuation of the localization economies explains the local in "localization economies".
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50% less benefits gained from locating near other firms for every mile away from the cluster. That means that the benefits to firms and to Chicago in general disappear logarithmically towards zero as you move away from the city core. This is not indicative of a "zero sum game" when it comes to locating in the suburbs vs the core.
Mic drop. I've got another 500 pages of economic whoopass if you want to continue this debate, but I think I've thoroughly demonstrated that this isn't made up mumbo jumbo, but accepted fact in the world of economics.
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