The 5 essential economies of cities

Cities are inherently engines of economic development. By their very nature, cities bring a diversity and critical mass of people, ideas, energy and material inputs into close contact to generate enormous value.

If we hope to make good decisions about how to plan and manage our city, we need to understand how cities fulfill that role. Cities provide five essential economies that work together to enable the chain of creativity-invention-innovation that drives economic growth.

1. Economy of Scale

Economies of scale are well understood. Quite simply, a larger market means fixed costs of production are divided among more customers. By bringing large numbers of people together, cities make it easy to enjoy economies of scale.

At the same time, cities make it possible to cultivate and target niche markets.

2. Economy of Agglomeration

It is common for multiple firms in the same business to locate close to one another. This might seem to increase competition, driving margins down, but firms that cluster get to enjoy the benefits that come from sharing suppliers, specialty suppliers and shipping nodes.

The cluster of firms draws a larger, more expert pool of employees, and local schools start to specialize in training for the required skills.

In short, the economy of agglomeration generates positive feedback loops that more than compensate for the increased competition.

As Richard Florida puts it in his book Who’s Your City?, “Creative people and companies cluster because of the powerful productivity advantages, economies of scale, and knowledge spillovers such density brings.”

3. Economy of Density

Density means doing more with the same footprint – in other words, building up rather than out. When you increase the density of land use, the unit costs for infrastructure go down: roads, water, wastewater and power.

Communications costs also go down: courier, phone, cable, broadband, wifi, and so on. This allows communications providers to deliver more service for the same money. In fact, density provides a cost-effective way to introduce new communications infrastructures that are eventually rolled out to less dense markets once costs start to fall.

More important, density means that destinations are closer, and more destinations are nearby. That means transportation costs also go down, and you have a wider choice of what mode to use to get where you’re going: walking, cycling, transit, or driving.

Richard Register puts it best in his book Ecocities: “The shortest distance between two points is moving them together; every trip from then on is shorter. That’s an efficiency multiplied thousands of times.”

4. Economy of Association

This may be the least well understood but most powerful economy: by putting more (and more diverse) people into contact more frequently in settings that are both formal and informal, both planned and serendipitous, cities provide the ideal conditions for creating new ideas.

With the exponential increase in the variety and efficiency of ways to collaborate, the economy of association drives innovation. The evidence bears this out: by a variety of measures, the innovation rate is higher in cities that are larger and denser and bring a variety of people into contact.

This allows for cross-fertilizing ideas from one intellectual domain to another; asking open-ended questions; challenging orthodoxies; forking a project into separate groups that progress independently; and merging forked developments to integrate their best features.

5. Economy of Extension

Finally, by allowing organizations to grow big and efficient, cities provide a platform from which those organizations can expand into new markets. It is to take advantage of the economy of extension that cities tend to develop around ports.

The economy of extension also allows cities to share innovations. An idea that is developed, implemented and battle-tested in one city can expand to other cities once it is proven to work.

These five economies are well understood, so as a city we need to ask: what can we do from a planning and city management perspective to take better advantage of this?

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