Friday, September 10, 2010

Agglomeration Is Forever

It's difficult to predict the future, but futurists and commentators who prophesied the demise of the city were way off.  Way back in 1954 Arthur C. Clarke predicted extreme globalization due to advances in communications technology.  More recently Thomas Friedman's book The World Is Flat saw location becoming increasingly irrelevant in economic activity.

There are two compelling reasons why the world will probably never be reduced to a "point" or become "flat" (pick your metaphor).  Firstly, increasingly expensive energy will severely curb the great driver of globalization: cheap international shipping.  Even though many products are made abroad very cheaply, increased transportation costs will change the economic calculus, bringing some production back.  Barring the development of teleporters, transportation costs will always create incentives to cluster at least some economic activity, which brings us to point number two: cities.

The discipline of urban economics (or economic geography) has long understood the huge benefits of clustering economic activity and labor.  The logic of the city revolves around the idea of increasing returns: a city is greater than the sum of its parts because of agglomeration effects.  These effects are numerous and include things like pooled creativity among workers, more mobile labor force, location of production closer to location of consumption, etc. etc.  For a good description of the role cities play in the global economy, check out The World Is Spiky by Richard Florida.

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