Sunday, February 12, 2012

Thinking about growth: the seventh "killer app"

I just returned from the 51st annual meeting of the Western Regional Science Association where  I was privileged to deliver the presidential address.

What to talk about?  Economic growth, of course.  I took off from Niall Ferguson's six killer apps.  What's missing?

We know that ideas matter and ideas are spawned in cities.  But the popular and conventional density explanation is too simple and cannot do all the "heavy lifting" (as Sandy Ikeda puts it).

Cities afford "agglomeration" economies that are congenial to all sorts of supply chains.  But the same can be said of the less visible supply chains for good ideas.  We rely on the adjacent possible.  Actually, the propitious adjacent possible. 

I like this much better that "creative cities" and "creative class" people. This is how I wound up:

We know that places grow because they remain vital by attracting and maintaining and facilitating the activities of talented people. But talented people come in all sizes and shapes; they are not simply the selected occupations itemized in recent “creative class” writings. Many of these people want affordable homes with space for family; they end up in suburbs and that is where most of the urban growth has been. But doesn’t that sound like more “sprawl” and traffic? Yes and no. Urban growth vitality would quickly disappear if only costly growth were possible. So what is the explanation?
It must be that land uses (users) find ways to arrange themselves such that positive agglomeration and networking economies remain available while the costs of agglomerating are kept in check. When discussing agglomeration economies (including externalities), we must recall that most of them attenuate with distance; transactions and transactions costs are simultaneously determined. Likewise, most externalities are potential externalities; they become realized externalities in light of specific spatial arrangements.

Just as networks create opportunities, making locations and interactions endogenous, so realized externalities are endogenous. A successful (competitive) urban form is likely to be one in which the positive realized agglomeration economies dominate the negative realized agglomeration economies.

We could not get competitive growth or advancement if we could not get spatial arrangements that are suitable or congenial. In this light, city-size debates are meaningless.  It is all about how places are laid out – and whether we allow them to find competitive spatial arrangements.  This is unlikely to happen in any top-down fashion.