One of of the thriving areas of economics in recent times has been the study of urban economies. This year brought Ed Glaeser’s terrific book, [amazon_link id=”0230709389″ target=”_blank” ]The Triumph of the City[/amazon_link], which serves as an excellent route into the research. Although all work on cities acknowledges the influence of Jane Jacobs, in [amazon_link id=”0679600477″ target=”_blank” ]The Death and Life of Great American Cities[/amazon_link] and [amazon_link id=”0394729110″ target=”_blank” ]Cities and the Wealth of Nations[/amazon_link], he revival of economic geography more generally dates back to work by Paul Krugman in the early 1990s, such as [amazon_link id=”0262610868″ target=”_blank” ]Geography and Trade[/amazon_link] (1991) and [amazon_link id=”1557866988″ target=”_blank” ]The Self-Organizing Economy[/amazon_link] (1996). Fujita, Krugman and Venables captured much of this work in a 1999 textbook, [amazon_link id=”0262561476″ target=”_blank” ]The Spatial Economy[/amazon_link]. This strand of research in economics has entwined fruitfully with the work of urban theorists and economic geographers.
A very interesting new book, [amazon_link id=”1442611529″ target=”_blank” ]The Evolution of Great World Cities: Urban Wealth and Economic Growth[/amazon_link] by Christopher Kennedy, takes the logical step of connecting the study of the economic growth of cities themselves with the contribution cities make to the growth of the economy. It is – or should be – an obvious point: growth is not abstract, it happens somewhere, and mostly where it happens is in cities. If you want to understand growth, you need to think about making it happen in cities. If the UK economy needs to grow faster, that growth will have to occur in Manchester, Bristol, Edinburgh and Cardiff as well as London. So the question arises as to the transmission mechanisms between the urban economy and national outcomes.
Kennedy argues that successful cities follow a path from commerce to innovation and industry to finance, with the development of key infrastructure as the catalyst for this evolutionary process. Thus for example the investment in the Erie Canal, widely criticised at the time as a waste of a huge sum of money, was vital for New York City, and decisive in making it, rather than Philadelphia, America’s financial centre and wealthiest city. This emphasis on communications infrastructure chimes with the instincts of everybody involved in city government, but is rather at odds with much economic analysis. Economists tend to be a bit sceptical about the benefit-cost ratio of ambitious transport projects – see for example the eminent Henry Overman of the LSE on the current debate about HS2 – but it is possible that economists’ normal approach under-estimates the size of dynamic (and therefore hard to quantify) benefits – as long as the investment pays off. A thorough assessment of Kennedy’s argument on this point would need to look at why so many big transport infrastructure investments do not transform urban fortunes.
He has a neat point that residential housing wealth is one of two main components of a city’s wealth, because the amount people will pay to live in the city captures most of the external benefits they derive from being in that location rather than another. This means that other assets – town halls, parks, museums, tram lines – need not be counted. The second main component is the financial wealth of the city’s inhabitants. His argument about the links between financial markets and specific urban economies lost me rather, in particular an unconvincing point (on the face of it) that there is a conservation principle when it comes to wealth – if shares go down some people lose out but others will have gained and will put their money in some other asset such as god. Obviously there is a buyer for every seller, and investors face a portfolio of options, but this does not seem to imply an inevitable global ‘waterbed effect’ in asset values unless one defines an ever-expanding set of assets – when it becomes true by definition and not necessarily interesting.
However, the more general point about the role of finance in major cities is an interesting one, and this area would repay further study by economists. It doesn’t feature as strongly as one might expect in the literature.
The book is also a good, fluid read. The argument is made through many historical examples, some familiar, others new to me, all helping keep up the pace and interest. I rather agree with the conclusion that there are two main tasks for urban leaders: direct budgets to the most important big projects; and set out a future vision of the city to co-ordinate the expectations and activities of the millions of people who live there. Kennedy shares the increasingly prevalent view of cities as a more or less organic complex system, with citizens best placed to look out for their own wealth.
[amazon_image id=”1442611529″ link=”true” target=”_blank” size=”medium” ]The Evolution of Great World Cities: Urban Wealth and Economic Growth[/amazon_image]
Meanwhile, I’m reading Philip Coggan’s [amazon_link id=”1846145104″ target=”_blank” ]Paper Promises[/amazon_link] to review it for 
Or that banks’ lending to the private sector, households and businesses, has not increased at all and is in fact negative – that means we are paying money back to the banks.
As Andy Haldane in his recent