Urban Networks: Connecting Markets, People and Ideas

Why is Europe characterized by networks of mid-sized cities while the American urban landscape has long accepted the regional dominance of massive, consolidated metropolitan areas such as New York and Los Angeles? What might the future hold for each of these two models of urbanization? And what policy lessons should urbanizing countries, such as China, learn?

In their BSE Working Paper (No. 841), Urban Networks: Connecting Markets, People and Ideas, Edward Glaeser, Giacomo Ponzetto, and Yimei Zou review the pre-modern history of urbanization as well as developing a model of the exchange of goods, people and ideas within and between cities that allows them to analyze more recent developments driven by the innovation economy.

Historical urbanization: timing and transport costs

Before the development of modern railways and automobile transportation, moving food and other goods from place to place was very expensive, so more people tended to live close to the places where these things were produced. The size of cities was naturally limited by the amount of food that could be cost-effectively brought in. This means that places which urbanized while these high transport costs were in effect, such as Europe and, to a lesser extent, the Eastern United States, developed networks of smaller cities spread out over space.

As modern technology continually slashed the costs of transportation, it became possible both to link previously independent cities into integrated metropolitan areas, and for people to move away from some smaller cities and concentrate densely into the new mega-cities. These larger cities have been able to take advantage of increasing returns to scale in technology investment and idea creation and now hold a dominant place in the world economy. Places like the United States that urbanized mostly after transport costs fell mostly got mega-cities to start out with. The question for Europe, then, is what to do with the mid-sized cities it already has?

A question of amenities

In the urban economics literature, the word “amenities” commonly refers to all of the nice things a city has to offer other than money–beautiful buildings, parks, nice weather, and so on. It is widely believed that these intangible, location-specific benefits may play a large role in explaining why people choose to live where they do. For example, someone may pass up a higher-paying job in a big city because they really like to hike in the mountains near their home town. Or, conversely, big city amenities like dramatic architecture and exciting night life can draw people in even if their real income, in terms of what they can actually buy after paying for housing, is lower than what they could get somewhere else.

The authors argue that mega-cities have an advantage when it comes to what are called “endogenous” amenities, i.e. variety in food, high culture, good schools, and all the other things that follow people and money in the long run. This is partly offset by a disadvantage with respect to certain amenities that occupy space and cannot be easily moved, such as historical buildings and neighborhoods. Workers moving to a mega-city would need to abandon their historical buildings and neighborhoods, while the mega-city itself would have to bulldoze its own to make way for increased density. The authors argue that the presence of this legacy of buildings and neighborhoods may be one factor behind the “reluctance to build” in cities such as London and Paris that prevents them from becoming as dense as, for example, New York.

A further aspect of amenities which the authors explore is the possibility that different kinds of workers prefer different types of amenities. They argue that if highly-skilled workers put a higher value on endogenous amenities than lower-skilled workers, the question of whether to concentrate in a mega-city has important distributional consequences. Highly-skilled workers would prefer a denser city with more endogenous amenities, and would not mind paying higher rents to achieve this, while lower-skilled workers would prefer less dense, less lively, but more affordable cities.

The Economy of Ideas

It may also be beneficial to retain a network of smaller cities if local entrepreneurs are more inspired in their home towns. The flip side of this possibility, however, are the benefits that greater urban density are believed to have for innovation. It is a well-established idea in urban economics, well examined in theory and supported by the data, that face-to-face interaction between entrepreneurs helps them to be more innovative, and that this gives larger, denser cities an edge in the economy of ideas. So whether the benefits of local inspiration or the creativity-enhancing density of megacities are dominant has huge implications for the future of urban networks in the world economy.

Looking to the future

In closing, the authors cite research that indicates that the relationship between amenities and city size may be changing. A 2001 study by Glaeser, Kolko and Saiz found that during the 1970s in the United States, real wages were higher in the big cities, suggesting that the people living there were putting up with lower amenities in exchange for more money. The same study found, however, that by 2000 the real wage advantage of big cities had disappeared, and perhaps even reversed. This suggests that modern megacities, in addition to being engines of innovation, may be providing new types of intangible benefits that smaller cities cannot, and will continue to be a big draw for the young and the mobile.