Agglomeration revisited

Ed Glaeser, earlier noted here, has more on agglomeration effects and growth. Glaesar recently edited a volume on agglomeration economics which I've yet to pick up; fortunately, he's now blogging some of it for the New York Times.

Contra the usual story, the internet isn't a substitute for physical location, it's a complement.

If cities serve, as I believe, primarily, to connect people and enable them to learn from one another, than an increasingly information-intensive economy will only make urban density more valuable.
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Other essays in the volume focus on the changing nature of agglomeration economies. Jed Kolko writes about services, which now dominate most United States urban areas.

Mr. Kolko highlights a fundamental difference between manufacturing and services. For manufacturing firms it doesn’t much matter if suppliers or customers are in the same ZIP code or the same state. Goods are cheap to move. But services seem tied to suppliers and customers that are in the same ZIP code. Since face-to-face contact is so much a part of service provision, they are drawn to the extreme densities of cities.

In the penultimate essay in the book, Giacomo Ponzetto and I ask, “Did the Death of Distance Hurt Detroit and Help New York?”

Improvements in transportation and communication costs made it cost-effective to manufacture in low-cost areas, which led to the decline of older industrial cities like Detroit. But those same changes also increased the returns to innovation, and the free flow of ideas in cities make them natural hubs of innovation. Since the death of distance increased the scope for new innovation, idea-intensive innovating cities were helped by the same forces that hurt goods-producing cities.

Humanity is a social species and our greatest gift is our ability to learn from one another. Cities thrive by enabling that learning, and they have become only more important as knowledge has become more valuable. Understanding what makes cities work is more important than ever.

If this is right, then New Zealand is set for long term decline. Some folks argue that New Zealand's poor performance relative to Australia comes down to the Aussies having taken a different path to reform than the Kiwis. I'd worry more about agglomeration effects. Melbourne alone has roughly as many people as New Zealand. While population differences are a level effect across the countries, increased returns to agglomeration with technological change interacted with population ought be a growth effect.

If Glaeser's argument holds, then even the best policy in the world couldn't help us catch Australia, barring Australia doing anything monumentally stupid. That's not an argument for not trying, but rather for being realistic in expectations and for not damning reforms should they fail to help us catch Australia. It probably also points to dairy and agricultural production becoming more rather than less important relative to the tech sector. My confidence intervals around any of this are too wide for useful prediction, but I put a fair bit of weight on Glaeser having things basically right.