Wednesday, December 16, 2009

What Makes Cities Great

Edward Glaeser, a Harvard economics professor recently posted a blog on the NY times entitled "What Makes Cities Great". For those communities who rest too much on a single laurel, there are some lessons to be learned here. The text of the blog is below along with the original links.

Was coal a curse to Pittsburgh? Did cars destroy Detroit? Does the dominance of a single industry destroy the innovation and entrepreneurship of a region?

If it does, then the economic crisis may have actually helped New York by enabling the city to avoid an over-concentration in finance.

For decades, economists have debated the “ Dutch Disease” and other ailments associated with too much success. The discovery of natural gas in the North Sea supposedly helped to de-industrialize the Netherlands by raising exchange rates and making Dutch manufacturing less competitive internationally. Almost 15 years ago, Jeffrey Sachs found a negative correlation between resource abundance and economic growth in the developing world, perhaps because those resources fueled conflict and enabled dictators.

Can some types of prosperity imperil cities as well as countries?

The American Rust Belt is full of places like Buffalo, Cleveland and Detroit that became rich a century ago because of access to natural resources and that are now less prosperous. But the examples of cities that were once richer than they are today proves only the vicissitudes of urban fortunes, not that resources lead to poverty.

Still, Benjamin Chinitz’s comparison of New York and Pittsburgh, which I referenced two weeks ago in a post on cities and entrepreneurship, suggested that Pittsburgh’s abundance of coal led to large, vertically integrated steel companies that proved to be incompatible with small-scale entrepreneurship. Chinitz claimed that an absence of entrepreneurs was responsible for Pittsburgh’s mid-20th century stagnation.

Was Chinitz right? Did an abundance of natural resources in the industrial age lead to manufacturing giants that crowded out smaller, more innovative start-ups?

There are myriad theories that could explain a negative connection between natural resources and subsequent urban innovation.

In my post two weeks ago, I described the evidence connecting employment growth with an abundance of small firms, rather than a few large establishments. Too much coal can, as it did in Pittsburgh, lead to the establishment of a few dominant companies, like the vast enterprises managed by Andrew Carnegie and Henry Clay Frick.

The problem of big companies becomes more severe if they are vertically integrated.

William Kerr and I examined the distribution of manufacturing start-ups and found that new establishments were particularly common in places with plenty of independent suppliers. If abundant natural inputs lead to vertical integration — a steel company combining with a coking operation, for example — then this can also crowd out subsequent innovation.

A resource curse can also occur if success of one sector eliminates industrial diversity.

Forty years ago, Jane Jacobs wrote “The Economy of Cities.” In it, she argued that new ideas that come from combining old ideas, and places with plenty of diverse old ideas are more likely to come up with big breakthroughs.

Michael Bloomberg’s success as an entrepreneur, for example, came from combining technological know-how and insights into the needs of financial services professionals. That combination was easier in New York City, which had both sectors, than in Silicon Valley, where computing innovators were more isolated. Twenty years ago, I was an author a paper that suggested that such cross-industry connections were important for growth.

Natural resources can also deter growth by lowering levels of education. Edinburgh is more prosperous today than Glasgow, in part, because it was less successful as an industrial town and therefore attracted fewer less-skilled workers.

An abundance of natural resources can also increase the opportunity cost of schooling. Two economists who looked across American states found that resource-rich states have done poorly, partially because of less investment in schooling.

As my colleagues Larry Katz and Claudia Goldin have shown, natural resources, like the rich black soil of Iowa, can lead to more schooling, especially when there is little work for children to do over winter months. But they also found that humming industrial cities were laggards in the American high school movement, at least until the Great Depression left their teenagers with little to do except for going to school.

The most important natural resources possessed by every old American city were waterways. Before the 20th century, the costs advantages of boats were so extreme that the location of all of America’s 20 largest cities from the oldest, like New York and Boston, to the youngest, Minneapolis, was determined by flows of water. Those waterways ultimately provided connections and connections were and are valuable.

New York was certainly not cursed by its harbor that gave it worldwide connections and that led to the growth of the garment industry, printing and publishing and financial services.

I’ve always thought that the resources aren’t really a curse, but relying on them too much is a mistake. As we look forward, it always worth remembering that America does not prosper because of its “amber waves of grain” but because the nation’s human capital, especially in its “alabaster cities,” thrives in a connected world.

1 comment:

  1. I recently moved my home from New York City to a suburb (still working in Manhattan). As we planned our move (during my gloomier moments), the words which kept coming to mind are "NYC is being crushed under its own weight". Granted, I was thinking about it at a time when I had been burnt-out by the worst elements of New York - the ones which cause seemingly endless re-do of tasks, where the effort and time to complete a task are essentially arbitrary. It's frustrating. I wish I had the perspective of history (I am a NY'er only 12 years, my wife 20 years) - but my gut feeling is that this particular urban center may have passed its prime. I gave it a chance, but believe it may be more practical to find opportunities in the increasingly urbanized suburbs of NYC, where life is just as diverse and interesting, but also easier.

    I know it's not for everyone - some of my friends could never imagine relocating. But I look forward to the day when a "real" New Yorker can hear someone is relocating to, say, New Jersey, and not exclaim, "Why?!?".