The Land of Digital Opportunities

Refraction_through_glasses_090306This week, the Economist makes an interesting inroad into what they call “The paradox of soil”: Land, the centre of the pre-industrial economy, has returned as a constraint on growth. They refer to academic analyses implying that lifting all the barriers to urban growth in America could raise the country’s GDP by between 6.5% and 13.5%—about $1 trillion-2 trillion.

Central to this debate is the fact that the digital revolution has restored cities as the hotbeds of innovative activity and growth in modern economies. The economies and populations of metropolises like London, New York or San Francisco have rebounded after years of decline around the middle of the 20th century.

Apparently knowledge-intensive industries such as technology and finance thrive on the clustering of workers who share ideas and expertise:

Before the 1980s there was no statistical link between the skill-level of a city’s workforce and its tendency to create new kinds of work. From the 1980s on, by contrast, new job categories appeared with much greater regularity in places with highly skilled workers than in those that lacked them (…) It seems that workers accumulate knowledge faster in cities with lots of idea industries.

Thor Berger and Carl Benedikt Frey nicely illustrate this with the story of Silicon Valley, where frequent job-hopping has facilitated the reallocation of skilled workers towards firms with the most promising innovations:

Only a year after William Shockley founded Shockley Semiconductor Laboratory in 1956, several engineers left the company to form Fairchild Semiconductor, of which two would go on to found Intel. In the same way, the abundance and adaptability of educated workers has recently attracted a new generation of leading companies, spurring the creation of entirely new industries: Google, Facebook, eBay, LinkedIn, Bloom Energy and Tesla Motors, are all based in Silicon Valley. (Thor Berger and Carl Benedikt Frey, “Industrial Renewal in the 21st Century: Evidence from U.S. Cities”)

Today, cities are responsible for a disproportionate amount of the world’s output. The high price of land in cities is in part a consequence of their success, but regulatory limits on the height and density of buildings artificially constrain supply and inflate prices. According to the Economist, employment in the Bay Area around San Francisco would be about five times larger than it is but for tight limits on construction. As the Economist also says, the good news is that the world’s urban-land scarcity is largely an artificial problem.

In view of this, I have two observations:

  1. If innovation is all about putting more skilled people together, and the cost of building is today a limitation for larger agglomeration economies, the debate on how to foster “smarter cities” might simply boil down to the solution of a very old conundrum: optimal land use. Yes, it certainly sounds like a paradox. And certainly troubled waters, but worth exploring after seeing the figures in the economist’s article.
  2. That information technologies favour more concentration instead of a more distributed economy is completely counter-intuitive. Why would social networks and cheaper communications make cities more attractive? Why do new ideas still need face to face interaction to develop in the era of the web and the all-mighty smartphone? Are our current digital tools not rich enough yet? Is this only a temporary effect and cities will eventually vanish in a future of perfect tele-presence services?

I have managed to gather a pile of literature on these questions, but I feel I would lose my sanity if I had to go through it like Don Quixote through his chivalric novels, so I would very much appreciate to hear clarifying ideas.

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