Thursday, October 22, 2015

Agglomeration, choices, actions

I want to elaborate my previous post. This is what Wikipedia says about agglomeration economies:
In urban economics, economies of agglomeration are the benefits that firms obtain by locating near each other ('agglomerating'). This concept relates to the idea of economies of scale and network effects. As more firms in related fields of business cluster together, their costs of production may decline significantly (firms have competing multiple suppliers; greater specialization and division of labor result). Even when competing firms in the same sector cluster, there may be advantages because the cluster attracts more suppliers and customers than a single firm could achieve alone. Cities form and grow to exploit economies of agglomeration.
'Diseconomies of agglomeration' is the opposite case. Additional competition drives down pricing power. For example, spatially concentrated growth in automobile-oriented fields may create problems of crowding and traffic congestion. It is this tension between economies and dis-economies that allows cities to grow while keeping them from becoming too large.
Agglomeration economies are closely associated with economies of scale and the network effects mentioned above. A positive outcome, agglomeration economies, will only be achieved if the benefits outweigh the disadvantages. The ultimate result of agglomeration economies is the formation and growth of a city.
The basic concept of agglomeration economies is that production is facilitated when there is a clustering of economic activity. The existence of agglomeration economies is central to the explanation of how cities increase in size and population, which places this phenomenon on a larger scale. This concentration of economic activity in cities is the reason for their existence, and they can persist and grow throughout time only if their advantages outweigh the disadvantages.
Left unsaid is how we measure all this. Agglomeration could be the residual in a Solow growth regression -- if we had adequate and plausible data for metropolitan areas.

The Wikipedia rendition is similar to what is found in urban econ literature. To get over the generalities and vagueness, ask what it is that real people do to make cities what they are. People engage in specialization and exchange. This means they form supply chains. Expand the idea by noting that there are supply chains for things as well as supply chains for ideas.  Supply chains for things involve transactions. Supply chains for ideas may or may not involve transactions. I may pay to take a class. I may choose to simply hang out in museums or cafes or among friends or at conferences to soak up the doings -- and thereby energize my thinking. Some people label this as "externalities." Others note "consumer" cities. The latter surely involves expanding one's outlook.

All people in all cities participate in many such supply chains. They do this as suppliers as well as demanders. They seek the locations that work best for them in light of these roles. It is understood that in evaluating and bidding (forming bids) for sites, they have to compete on urban land markets. The results are the cities we know. (Traditional urban economics derives whole cities from one supply chain, how people get to work.)

Site evaluation -- and eventually ending up at a place that facilitates success -- involves assessing the transactions costs, in light of all of the relevant supply chains, to be incurred by being at that site as well as the positive externalities realized and the negative ones avoided.

What difference does it make? Growth is essential. Cities are engines of growth.  What does that mean?  People have to form and manage the many supply chains in their lives.  They are most likely to do this if they can assess and choose sites with minimal interference.  Call it smart growth.  It is the polar opposite of the Smart Growth that so many planners and policy makers love.

My point is that, unlike the Wikipedia definition of agglomeration, mine emphasizes actions and choices of people.