Tuesday, December 10, 2013

Wealth and spatial order of cities

Chris Webster and Lawrence Wai-Chung Lai published their Property Rights, Planning and Markets: Managing Spontaneous Cities in 2003.  They highlight the various "orders" they see relevant to cities, including "spatial order".  In describing the latter, they note the economics of land markets and also the possibilities of externalities as well as their internalization.

I went back to Webster and Lai because I just came across Glaeser and Gottlieb's "The Wealth of Cities: Agglomeration Economies and Spatial Equilibrium in the U.S." Here is their abstract:
Empirical research on cities starts with a spatial equilibrium condition: workers and firms are assumed to be indifferent across space. This condition implies that research on cities is different from research on countries, and that work on places within countries needs to consider population, income, and housing prices simultaneously. Housing supply elasticity will determine whether urban success reveals itself in the form of more people or higher incomes. Urban economists generally accept the existence of agglomeration economies, which exist when productivity rises with density, but estimating the magnitude of those economies is difficult. Some manufacturing firms cluster to reduce the costs of moving goods, but this force no longer appears to be important in driving urban success. Instead, modern cities are far more dependent on the role that density can play in speeding the fl ow of ideas. Finally, urban economics has some insights to offer related topics such as growth theory, national income accounts, public economics, and housing prices.   
They mention density thirty times throughout the article but they do not say much about it. Cities are cities because they are more dense than non-city areas. And we know that this is beneficial -- otherwise cities would not be the "engines of growth."  But there are many possible densities and there are many densities within each city.  In other words there are complex spatial patterns that matter.  How do we get the patterns that work? the ones that enable cities to continue to compete for labor and capital (especially entrepreneurial capital)?

I think that Webster and Lai are on the right track. There are emergent spatial orders. In fact, although they do not say so in so many words, the spatial patterns that succeed are the ones that manage to internalize many of the possible positive externalities -- while  creating enough distances to avoid many of the negative ones.  Profitable locations include ones that deal with externalities this way.

This is how the land market process is essential. This part is much more interesting and complex than just "density".  It also highlights the fact that there are more than just the standard textbook ways (Pigouvian taxes or Coasian rights trades) to internalize externalities.This is part of spatial order. It is part of how cities create wealth.