Why Big Cities Matter More than Ever
The information revolution, we
used to hear, would break the shackles of geography and make cities irrelevant.
Thanks to e-mail, the Internet, and an ever-widening array of technological
devices, you would be able to work just as effectively in South Podunk as in
the Big Apple. A new, post-metropolitan era would open in which creative and
flexible firms could locate their operations anywhere. The age of the big city
would come to an end.
But that hasn’t happened. Big cities have continued to grow. In rich
nations today, urbanization levels are on the order of 80 percent or higher.
China and India are urbanizing at breakneck speed, with Shanghai and Bombay
racing each other to become the world’s largest metropolitan area and eclipse
Tokyo (currently 33 million strong). Why is it that cities have lost none of
their powers of attraction, despite the new freedom that information technology
brings individuals and firms? The economic advantages of cities—of urban
“agglomeration,” in the language of the people who study these things—are
difficult to measure precisely and not the same for all firms. But they are
quite real, and we can capture them in what I call the Seven Pillars of
Agglomeration.
Let’s start with the most basic
pillar, one that has historically supported the great manufacturing economies
of big cities: economies of scale in production. That is, as the
scale of production increases, unit costs fall. That basic rule of economics
makes it profitable for firms to manufacture goods in just a few large
factories, rather than in many smaller ones. And if you’re going to have just
one or two big plants, it makes sense to locate them where you can find a lot
of workers: densely packed urban areas. This logic explains the growth of large
manufacturing cities like Detroit in the earlier part of the twentieth century.
Nowadays, though, it applies most readily to midsize cities, because real
estate in larger cities often costs too much to build big factories (see the
sidebar below).
Smaller Cities Matter, Too
Consider a remarkable fact: over the long run, the
growth rates of American cities in various size groups tend to be about the
same. That is, over the last century, the country’s distribution of small,
midsize, and big cities has remained stable. This stability intrigues economic
geographers. Why aren’t all cities converging toward one ideal size—whether
large or small?
Part of the answer is that the attributes that make
big cities attractive to some industries make them less attractive to
others—and every industry gravitates to locations where its comparative costs
are lowest. For example, providing environments for rapid, diverse,
face-to-face contacts is a comparative advantage of big cities, while physical
space is more readily available in smaller ones. If the demand for face-to-face
contacts increases, real-estate and wage costs will rise in the largest cities,
crowding out industries for which those costs carry—comparatively—less weight.
We understand intuitively that Manhattan isn’t a good location for
manufacturing airplanes or laptops. But it’s excellent for management
consulting and producing operas. So urban systems have a self-regulating
nature: certain industries emerge (or centralize) in the largest cities; others
move to smaller ones.
So small cities, no less than large ones, fill an
essential economic need. The more attractive big cities become for some
industries, the more alluring small cities will be to others.
The second pillar, however, tends to push firms back to larger cities: economies
of scale in trade and transportation. Just as larger factories lead to
lower unit costs by making manufacturing more efficient, fully loading a truck,
an airplane, or a cargo ship leads to lower unit costs by making delivery more
efficient. And filling up those trucks, planes, and ships—both coming and
going—is generally easier if they’re delivering to the largest ports, airports,
and other distribution centers. That means the bigger urban areas.
Reinforcing this tendency is the third pillar of agglomeration: falling
transportation and communications costs. Throughout history, transportation
costs—not only monetary outlays but also lost time and the frustration that can
come with trading with distant partners—have been a barrier to market
expansion. It follows that a fall in transportation costs will stimulate trade,
enabling the lowest-cost producers to improve market share. And the steeper the
drop in transportation costs and the greater the weight of scale economies in
production, the greater the potential for centralizing production in one or two
places. Henry Ford could locate automobile production in Detroit because paved
roads and railways allowed him to reach the entire American market.
Indeed, if scale economies are infinite and transportation costs are close
to zero, all production will be centralized in one place, with the first
(lucky) producer to have arrived on the scene. Such an extreme case probably
doesn’t exist in the real world, but the film industry comes close. Scale in
the industry is vitally important, with its enormous sound studios and vast
budgets. It costs little to ship a film—and even less if done electronically.
The centralization of the film industry in Southern California is the result.
With transportation costs removed as an economic factor, competitors had no way
to match the scale economy that Hollywood had established early in the
twentieth century.
What about the argument that falling communications costs actually
undermine urban concentration? For example, didn’t the existence of e-mail
encourage Silicon Valley companies to outsource computer programming to
Bangalore, India? The truth is that this shift did foster urban
concentration—in Bangalore. Think of communications costs as tariffs:
competition intensifies when they fall. If one city is already more efficient
at producing a particular good and then the barriers are removed, that city’s
market share will expand accordingly.
The centralizing influence of technology is consistent with history. The
advent of the telegraph—as revolutionary in its time as the Internet is
today—not only failed to slow the growth of London and New York; it enabled
financial firms and corporate offices in those cities to extend their reach.
The arrival of radio and television in the twentieth century replaced a lot of
locally produced entertainment with programs produced in New York or Los
Angeles.
Scale economies are only part
of the urban-expansion story. Most city dwellers work not in massive plants but
in small and midsize firms in a wide array of industries: legal services,
shirt-making, financial counseling, and on and on. Why should these companies
set up shop in cities? Pillar four—the need for proximity with other firms
in the same industry—provides part of the answer.
Proximity brings numerous advantages. To name just one: face-to-face
contacts remain essential for the most valuable and sensitive information.
Finance, among the most spatially concentrated of industries, is an obvious
example. Trust must be constantly renewed; millions of dollars will be
committed based on a brief encounter. The greater the risks and sums involved,
the greater the need for relationships built on something more than e-mail
exchanges. Body language, facial expressions, and eye contact are among the
signals that financial workers use to judge others.
Personal contact is also crucial in industries where creativity,
inspiration, and imagination are vital inputs. For firms working in these
rapidly evolving industries—high fashion, say, or computer graphics—the surest
way to stay on top of the latest news is to locate near similar firms. The more
that information can be transmitted electronically, it seems, the more valuable
becomes information that cannot be so transmitted. Electronic and face-to-face
communications tend to be complements; business travel, for example, has
accelerated since the advent of the Internet. The more people communicate, the
more they want to meet in the flesh.
Lower recruitment and training costs are additional advantages of
proximity, particularly in highly specialized fields. A firm clearly benefits
if it can hire from a pool of available workers with relevant training acquired
at previous employers. The chances of finding a first-rate, experienced
screenwriter will be a lot better in Los Angeles than in Baton Rouge.
Companies that require a wide
array of talents, across a broad range of industries, will be drawn to big
cities as well. Thus pillar five: the advantages of diversity.
Consider advertising, a field whose products are constantly changing and come
with no blueprint. Successful ad firms must rapidly assemble dizzying
combinations of expertise and talent according to various clients’ needs. Each
ad campaign, after all, is unique: one may call for animation, another for
symphonic music, a third for trained chimpanzees. Where better to find the
necessary components than in big cities, with their myriad industry clusters?
Of the world’s top ten advertising agencies, it is no surprise that three are
in New York, three in Tokyo, and two each in London and Paris. The
entertainment industry, publishing, and many other fields feel the same pull.
Firms—above all, general-service businesses, for which customer access is
important—naturally want to locate in the geographic center of their markets,
which brings us to pillar six: the quest for the center. What
economic geographers call “centrality” varies by industry, however. For
companies with low-scale economies—a gas station, for instance—a central
location can simply be a busy street, where the potential number of customers
driving by is sufficient to ensure profitability.
But the centrality principle also holds at the national and international
levels, and it makes large urban agglomerations particularly appealing. The
performing arts are a good example. Broadway, the largest cluster of theaters
in America, is in New York City not only because of the sizable local
population but also because of all the potential theatergoers within a
manageable distance of the city. Greater Philadelphia, with more than 5 million
residents, is a mere 90-minute drive away; and don’t forget Gotham’s many rail,
air, and bus links to other cities (including distant ones), which bring in
countless more potential theatergoers. Centrality is often a legacy of history.
Paris, shaped by many centuries of investment in roads, rail, and other
transportation modes converging on the capital, remains the undisputed center
of the French market.
Finally, there’s pillar seven: buzz and bright lights. Talented
and ambitious people benefit from being in a big city, just as firms do—in part
because the companies can hire talented and ambitious workers. Some people move
to cities not just because they need to make a living (though being in a
metropolis does offer all the advantages of a diverse labor market) but also
because they want to be where the action is. Ambition, dreams, the need for
recognition—all are powerful forces in human behavior. Many a young man or
woman will ask: Where are my chances best of meeting the right people and doing
exciting things? The answer, for good reason, will often be the big city. Why,
indeed, are some people willing to spend small fortunes for apartments on Fifth
Avenue or homes in Beverly Hills if not to feel that they are truly at thecenter?
Cities face many challenges in
the coming years: municipal debt, onerous taxes, the cost of living, and
crumbling infrastructure, among others. But whatever the genuine threats to
urban prosperity, human contact is more important than ever in the age of
information technology, and people will continue to seek places where they can
share ideas, make transactions, and pursue their dreams. There’s nowhere better
to do these things than big cities.
