Tuesday, August 14, 2012

Cities and growth

David Emanuel Andersson has ably edited The Spatial Market Process, which includes various efforts (including one by me) to apply Austrian Economics to cities. Jane Jacobs is cited often.

Everyone has seen footpaths worn over lawns in places where the designer should have built a path, but did not. Whereas, markets help to align quantities supplied with quantities demanded, getting highway networks that align supply with demand is a peculiar problem. There are many highway links that are over crowded and occasionally ones that are over capacitated. And on some lawns we even get spontaneously developed links.

All of us participate in various supply chains, including various networks which I have called “supply chains for ideas”. We form the demands and occasionally also lend a hand on the supply side.

For physical entities, route choice, mode choice, trip frequency choice and trip scheduling are mostly in our hands. When it comes to highways, the supply side is out of our hands; when it comes to social networks, we create the demands as well as the network at the same time.

Moving things usually involves transactions. But we also interact in ways that do not involve transactions. These are the negative and positive externalities. They do not involve networks, but they do involve nearness because they dissipate with distance. What we call “the technology” forms the necessary conditions for an externality, but propitious locations determine which ones become realized.

When the dust has settled, there are patterns of location (land use), network flows of people and goods and ideas -- and realized positive as well as negative externalities. All this is selected from a huge combinatorial space.

This is a very big order, made much bigger and much more interesting because the dust never settles. It is always agitated.

We get economic growth (including the formation of good ideas) when and if the pieces are continuously re-oriented beneficially. The pieces do this best when price signals are clear and when a clear rights regime is in place. And even in our world of second-best, we usually manage to move ahead.

All of this is way beyond abstract theories of cities. Rather, it applies the best economic theories to understanding cities.