Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Cities Theory Crash Course


Published on

This is a group of lectures on urban economic topics

Published in: Education
  • Be the first to comment

Cities Theory Crash Course

  1. 1. Urban Economics Crash CourseBy Charles-Albert RamsayDawson CollegeEconomics DepartmentWestmount, Qc.© 2012The following lecture notes explain why cities exist, and whymost of our economic activity is linked to city work.The lectures are based on a shortlist of seminal texts from AlfredMarshall, and Jane Jacobs.The lectures do not cover an exhaustive review of urbaneconomics literature, and they are not a complete course inUrban Economics. These lectures were presented as a subtopicin the course Advanced Studies in Economics (Fall 2012).Diagrams and Summary Tables were created by the author aspedagogical tools for the student. Any errors are my soleresponsibility.Contents1. Agglomeration Economies ....................................................................................................... 22. Hub Cities and Transport Costs ............................................................................................... 63. Jacobs’ Urban Economics ...................................................................................................... 104. City Instabilities ..................................................................................................................... 155. Jacobs’ Spectrum of Regions ................................................................................................. 206. Innovation in Jacobs’ Agglomerations ................................................................................... 297. Appendices ............................................................................................................................. 32
  2. 2. 1. Agglomeration Economies- Why Should I Care?Production tends to locate in cities, which are an inescapable reality ofeconomic life since their inception 10,000 years ago. This leads tomany problems such as pollution, and traffic. Understanding howcities work helps understand everything else.- This Lecture Has 2 Parts  Economies of Agglomeration  Problems Created by Cities- What are Agglomeration Economies?Producers can save money by locating in the same area as othercompanies. This is similar to economies of scale, but in this case thecompanies don’t necessarily produce more.  Economies of AgglomerationAlfred Marshall (1920) proposed three reasons why producers cansave money when locating their plants near those of other companies. A) Shared pool of labour B) Input sharing C) Knowledge spilloversThese three reasons are still used today to explain why cities exist.The first reason has to do with the lower cost of acquiring labour inthe city, where companies can “share” labour. For example, aerospacecompanies would benefit from being in Montreal because the cityalready hires many specialists in this field. The city will probably trainmore people in this field, so it will be possible to hire young recruits,or even poach some older workers from competitors.Second, producers would benefit from a larger market for rawmaterials. Since Montreal produces airplanes, it is easy to find inputssuch as aluminium and specialized electronics in Montreal. Thisattracts even more aerospace companies. Cities often offer a hub oftransportation networks, ports, airports, highways, which reduce thetransportation costs of inputs and outputs.Third, producers can learn from one another in the city. Somecompanies really do not want this, as their need for secrecy isimportant. They would rather isolate themselves. Most companies
  3. 3. would probably benefit from this. These knowledge spillovers happenin many ways, by hiring an employee from a competitor, by havingaccess to local experts and scientists, through specialized local media,or by word-of-mouth.These three advantages create “economies of scale” which can bebeneficial to even small organizations that don’t have a large scale ofproduction. It allows small companies to reduce their costs as if theywere a big company.Cities have taken this ball and have run with it. Today, most people onearth live in large cities. Economies are wealthier and more urban thanever. Urban economies are also more innovative. In Quebec, threequarters of patent activity is attributed to the Greater Montreal area,which only represents half of Quebec’s population.What can non-urban economies do? It seems they have had to focuson offering low-cost inputs such as labour, or natural resources. Whenso endowed, think of potash in Saskatchewan, or cheap labour inChina, these may prosper. However, their lack of diversity will leavethese economies vulnerable to foreign demand shocks.  Problems Created by CitiesCities also create many problems. Successful cities grow sometimesuncontrollably, creating havoc for its citizens. Traffic, pollution, andcrime, are just some of the problems that can become unbearable inlarge cities.Scarcity of food, and energy, are also major problems. Montreal couldprobably never be able to produce all the food Montrealers need to eatand thrive. And once all the wood on the island has been cut to buildhouses, where will the energy come from to heat them for the nextdecades and centuries?One solution cities come up with is to import materials, food, andother products, from the hinterland, and other cities, to satisfy itswants and needs. This builds the economy of neighboring regions.Another solution cities are likely to use is to invent new ways ofdealing with its problems. Cities have (probably) invented things like:  Corn, a more productive food plant.  Tractors, a more productive earth moving technology.  Sewers and Aqueducts, more effective water management.  Electricity, a cleaner and more convenient energy source.  Cars, Trains, Planes: faster, cleaner, and more productive than horse and buggy.
  4. 4. Many authors such as Jacobs (1969) argue that a city’s ability toinvent, and innovate, and solve urban problems is the key to constanteconomic development and growth. What helps a city solve problems?There is no one answer to this. Diverse and inventive cities have beendubbed Jacobs’ agglomerations. Jacobs believes cities should try tomaster all the elements of the urban ecology, which are:Good markets, the right kind of urban planning, strong science, apropensity to reinvest profits, a propensity to invest productively, adiverse industrial base, openness to new ideas, and the ability toreverse-engineer key imports.Cities can constantly create new problems, which can be salutary inthe sense that these problems create opportunities to generate newsolutions. These new solutions can spur new industries and fueleconomic development and growth.However, cities can become vulnerable to these problems and fail.Many, many, cities have fallen in history due to inadequate economicgrowth and crushing social problems such as pollution and crime.- Think PieceThink of one thing you love about city life, and one thing you despise. Submit 1 page essay in-class.- Wrap-UpCities exist because of three advantages they bring together, whichrural locations cannot offer, these create savings for companies, thatwe call economies of agglomeration.Marshall (1920) identified these three advantages as being a sharedlabour pool, a shared pool of other inputs such as materials andspecialized services, and knowledge spillovers between firms.Cities also create problems which can become opportunities for futuregrowth. Cities have invented technologies such as corn and electricity,which have solved important urban problems such as scarcity of foodand energy.To be innovative, cities should favour a mix of economic and politicalfactors. Cities often fail when problems are left unsolved.
  5. 5. - Cheat Sheet with Memory HelperEconomic Agglomeration: A place where producers locate next to each other, even with competitors.Agglomeration Economies: Three advantages that cities can offer companies to reduce their costs.- References and Further ReadingJacobs, J. (1969). The Economy of Cities. Vintage.Marshall, A. (1920). Principles of Economics. London: MacMillan.
  6. 6. 2. Hub Cities and Transport Costs- Why Should I Care?- This Lecture Has 2 Parts  Transport Costs a. Theory  Criticism- What is a Hub City?Cities are usually transportation hubs. Places where boats and trucks,meet planes and any other mode of transportation. Producers wholocate near these hubs reduce transportation costs, as long ascongestion is not too important.  Transport CostsJacobs (1970) argues that cities, being where the consumer market is,are natural locations for producers. However, cities can becomecongested, which seems inefficient for producers who leave to lowerdensity locations.Jacobs argues the issue is more complex than this. She argues thatcities also reduce the transport costs of inputs to production. Inputsare diverse, and may need to be imported from a variety of locations.Being centrally located, and endowed of transportation hubs, citiesreduce the overall transportation cost of gathering these inputs.The key to understanding what this means is to consider the diversityand variety of inputs that go into the production of even simpleproducts.
  7. 7. a. Input Location-Transport Cost Theory Definitionsa. Four resources are located in isolated regions.b. The resources are used to produce 1 product.c. The four regions are equidistant from each other.d. Roads link the four regions together in all directions.e. The manufacturer must produce in 1 location only. Assumptionsa. The manufacturer prefers to reduce all transportation costs.b. There are no tax breaks at any locations.c. The roads are flat, and uncongested. Predictionsa. Manufacturing will locate at E (hub location).InterpretationImagine a simple economy where 1 good is produced, such as anoffice chair. The product is made with four inputs. Each input islocated in a different region. Wood is in the North. Plastic wheels arein the South. Labour is West. Leather is East.If there are six roads (straight lines) that link these regions, the hub ofthose regions will naturally be chosen as the manufacturing andassembly site, as it reduces the overall transportation costs of theinputs. The manufacturer has to locate next to a road. There are thusfive possible locations (A, B, C, D, and E).Assuming the transport costs are equivalent between the inputs, thecheapest production location is E.Input Location-Transport Cost Diagram Wood A C E Labour Leather D B Wheels
  8. 8.  CriticismYou may object that companies must also consider the transportationcosts of the final good to the market.In this case most of the chairs would be sent West, and some to theother three regions. The final location decision might be E, orsomewhere between C and E.You may also object that a company would not locate in anunpopulated area. This is reasonable.However, as E becomes the natural location of production, labour willmigrate to E, and a settlement will form. We can postulate that othermanufacturing activities would also migrate to E because ofagglomeration economies discussed earlier. This would create apositive feedback loop for the E location.- In-Class ActivityImagine you are the CEO of Bombardier, Inc. You wish to producemedium-sized commercial airplanes. Consider the following elementsand their transport costs.Aluminium (for wings) from Saguenay by BoatElectronics (for navigation) from Britain by BoatLanding Gear (wheels) from Montreal by TruckWood (for furniture) from Worldwide by BoatFinal Plane to New York City flown by clientDraw a map, and decide where in Quebec you would locate yourmanufacturing plant, as you try to reduce the total transportation costsof production and delivery?Is there missing information you would need to make the bestdecision?- Think PieceThe transport cost model argues that big cities are actually cheaperproduction locations than small cities because their “central” locationdecreases transportation costs. Would you argue this argumentcounters the higher costs associated to big city congestion and delaysin delivery? Submit 1 page essay in-class.
  9. 9. - Wrap-UpCompanies are always trying to reduce their production costs. Holdinglabour, land, and capital costs constant, transportation costs are animportant factor in the location decision of producers.All else equal, producers will choose to locate in the city, or region,that minimizes their transportation costs. Jacobs argues that one mustconsider the transportation costs of bringing inputs to the factory, andthe costs of distributing outputs to market.According to Jacobs, cities do both. First, cities are central locationsrelative to the diversity of natural and capital resources that are neededfor production. Cities also provide a local pool of labour. Second,cities are markets in themselves for the products, so they also reducethe distribution costs.According to a simple model, the hub – even uninhabited and notendowed of resources – will become the natural production locationbecause it reduces the overall transportation costs.- References and Further ReadingJacobs, J. (1970). The Economy of Cities. Vintage.
  10. 10. 3. Jacobs’ Urban Economics- Why Should I Care?Cities are the heart and lungs of the economic system. But they arehard to understand because we don’t have specific data to analysetheir core economic functions. There is however a radical theorywhich does help to understand cities, innovation, and prosperity.- This Lecture Has 3 Parts  Import Replacement  Diversity Feedback  Measurement- What is Jacobs’ Urban Economics?After explaining how urban neighborhoods should be designed in herlandmark 1959 book The Death and Life of Great American Cities,Jane Jacobs wrote a formal theory on how city economies work as asystem, in her next book, The Economy of Cities, published in 1969.The theory holds on one key concept. A self-reinforcing feedback shecalled the “import-replacement cycle”, which she has observed theworld over, and which she documents using historical examples.  Import ReplacementJacobs refers to trade (exports and imports) between cities, as opposedto most economists who refer to trade between nations.In a nut-shell, the idea of import-replacement is quite simple. Insteadof consuming imports, city entrepreneurs will produce locally whatwas once imported from another city or region.Why do this?Import replacements are usually better suited to the local market,provide appreciated variety to consumers, reduce transport costs, andare not subject to tariffs.First, some imports may not be well-suited to the local market. Forexample, American magazines are less appealing to Québécois readers
  11. 11. for linguistic and cultural reasons. It is reasonable to see anopportunity for a local magazine market in Quebec.Second, consumers have a preference for variety in consumption.Imports contribute to diversifying their basket of goods. Better yet, areplaced import is often modified to suit local preferences. Consumersnow have more choices.Third, imports may be overly expensive due to transport costs. Forexample, Asian-built cars are more expensive in Canada than carsbuilt in Detroit, USA, or Oshawa, Ontario, because they need to beshipped half way around the world.Finally, import tariffs increase the price of foreign products. Forexample, Canada imposes a tariff on European cars. Locals may find itinteresting to produce because consumers appreciate lower prices.How does this work?Before the import-replacement process begins, an economy must beable to afford the imports in the first place. Jacobs argues mostforward cities had started as successful supply regions. The exportrevenue generated the capital needed to import consumption goods.Let’s run through a hypothetical example from a cattle supply regionwe will call Cattaliana.  Cattle exports generate capital for Cattaliana economy  Wine imports are ordered and consumed in Cattaliana  Local cowboy breaks away from cattle ranch to launch winery  5% of the wine imports are replaced by local wine  Wine is “new work”, creates local jobs  Wine is sold locally at first.  Cattaliana starts to export wine to neighboring settlements  Wine exports generate capital for Cattaliana economy  Imports of shoes, umbrellas, and books are orderedWe see the cycle has the potential to be self-reinforcing. Localentrepreneurs may copy the first “breakaway entrepreneur”, and startto replace shoe imports with local production.Of course, if local economic agents are content with their supplyregion status, they may not engage in import-replacement.
  12. 12.  Diversity FeedbackIt’s important to note that import-replacement automatically increasesthe industrial diversity of the city. This has five positive effects on theeconomy.First, diversity of local production reduces costs for most producersof old work. The city economy grows in scale, and scope. This meansthere are more inputs available locally, more specialized tools,machines, materials, knowledge, etc, which benefit producers ingeneral.Second, workers are not the same. Each worker has individualstrengths, preferences, interests and training. A greater diversity oflocal production therefore increases labour productivity by allowinga better allocation of labour according to individual strengths.Third, diversity of local production also increases innovationopportunities, as different industries learn from each other. Thetransmission of knowledge is more important when differentindustries share the same banks, schools, and other specializedservices.Fourth, the export revenue generated by import-replacement brings afollowing of new and fresh imports. Remember that consumers prefervariety. When sailing in far away places, shippers often pick up a widerange of foreign goods which may find a market back home.Thus, the new import wave will bring a variety of novel wares. Thismeans there can be a multiplier effect to import-replacement. Asexport revenue grows, so does the quantity, and variety of imports.Hence, the opportunities to replace these imports multiply with eachround of import-replacement.Finally, industrial diversity reduces economic volatility. Industrycycles are smoothed over as their relative weight within the localsystem is reduced. A foreign demand shock for cattle in Cattalianawon’t be as hard to take if the economy also produces wine and shoes.  MeasurementHow can one observe the import-replacement phenomenon?It is difficult. Ready-made available data for city economies is not thefirst priority of government agencies such as Statistics Canada.But there are three ways of doing it.First, an anthropological-type study using fieldwork can be useful. Bytravelling in the city, interviewing entrepreneurs and bankers, one will
  13. 13. be able to identify new work activities, and try to link them toprevious imports.The researcher will look for activity in the core, but also to see if anyworkshops, or factories, have migrated to the city region, whichincludes suburban residential areas, and the immediate hinterland ofthe city.Second, one may have access to Export-Import data from a statisticalagency that represents a metropolitan area. According to Jacobs’theory, bursts in exports would precede increases in imports. Importswould grow in both quantity and variety. These bursts in importswould then be followed by bursts of new-work exports.Exports and Imports would be constantly catching up, and passing,each other, as both grow continuously. A trade deficit (X<M) wouldbe associated to slow growth overall. But this is not a bad thing as thecity recharges its batteries with fresh ideas from new imports.A trade surplus (X>M) would be associated to a growth spurt, fuelledby new work as old imports are replaced.A third measurement of this phenomenon would be to break downGDP figures by industry to try to see the apparition of new work in thedata. This is difficult as new work, which is truly innovative, is oftenpoorly categorised by statisticians, and lumped in to “other”categories. Another difficulty is the absence of detailed industrybreakdowns for scarce “metropolitan” GDP data.- In-Class ActivityDraw a 3-part flow chart depicting the evolution of contemporaryChinese cities. Use the following elements.Supply Region: RiceImport replacement 1: ToysImport replacement 2: TelevisionsImport replacement 3: Automobiles- Think PieceWhat would David Ricardo say about this theory? Submit 1 page essay in-class.
  14. 14. - Wrap-UpEconomic growth according to Jacobs is due to the replacement ofimports as local production. This is added to old work, and generates apositive feedback of economic prosperity and increased trade.The cycle is directly related to trade with other regions and cities.Jacobs believes a built-in correction mechanism leads to the inevitabledecline of cities, which opens up room for the rise of other cities.Import-replacement automatically increases the industrial diversity ofthe city. This has five positive effects on the economy.The phenomenon is difficult to observe empirically. One must usefield work, interviews, or data mining (GDP and trade data), to verifyif this actually happens. City-states may have more relevantmacroeconomic data, than nation-states.- References and Further ReadingJacobs, J. (1970). The Economy of Cities. Vintage.
  15. 15. 4. City Instabilities- Why Should I Care?Cities are the heart and lungs of the economic system. But they havetheir weaknesses. Inherent built-in instabilities will eventually bringdown even the world’s most powerful cities.- This Lecture Has 6 Parts  Congestion and Pollution  Labour Reducing Process Innovations  Obsolescence  Old-Work Transplants  Non-productive Capital Outflows  National Currencies- What is a City Instability?Instability is a built-in mechanism that will cause disruptions in asystem’s path. For Jacobs, instabilities are built-in forces that will hurtan economy’s capacity to innovate and grow.  Congestion, Pollution, and CrimeThese instabilities are the easiest to understand. As cities grow, theybecome congested, which increases transportation costs. Thecongestion can also lead to pollution.In older cities, overcrowding led to water pollution and poorsanitation. Nowadays, brine water is treated, but congested roads leadto air pollution.Economic agglomeration and population overcrowding can lead toincreased crime levels. This is an important stress factor on cities, andmay accelerate a decrease in economic activity into an irreversibledecline.
  16. 16.  Labour Reducing Process InnovationsBeing innovators, city economies also lead to improvements inproduction processes. Not only do cities invent new products, theyalso get old work done more efficiently. This is one of the negativeaspects of Schumpeter’s “Creative Destruction”.Cities tend to invent machines, robots, automated technologies,electronics, etc., that reduce the number of workers needed. Thesetechnologically unemployed workers create a problem for the city. Ifthey are left idle they will need resources which could be invested togrow the city instead.  ObsolescenceAnother aspect of Creative Destruction is the generally inevitableobsolescence of what we produce. Good are replaced on the market bya newer product. For example, the type writer is no longer beingproduced as the new substitute of personal computers has made itobsolete.Cities that produce obsolete goods will feel the brunt of this drasticchange in the economy.  Old-Work TransplantsAn important aspect of Jacobs’ theory is that rural work istransplanted city work. When city work becomes mature, the work istempted to leave the city to reduce its production costs.City Regions and Transplant Regions will benefit from the arrival ofthis work. But the city core may lose out if it does not find new workfor its idle labour.  Non-productive Capital OutflowsCity economies are not independent of social, political, and culturalphenomena. Jacobs’ argues that cities may be negatively affected bynon-productive capital outflows if they are part of larger nation-statecountries, or worse, federations of nations.The higher-order government, whether central, or federal, will imposeincome, corporate, and consumption taxes on the population, whereverit is located. The strong cities will end up paying most of the levies,but may not be enjoying most of this spending.On top of that, governments are not always good at investing moneyproductively. A productive investment is an expenditure that generatesa higher return. Economically, production investments will generatemore production and work.
  17. 17. Now we must note that State functions such as the justice system,including contract, real estate, and patent tribunals, are crucial to theexistence of market economies.Jacobs argues that governments tend to prefer “largesse” expenditures,aimed at redistributing wealth across the land. As much as theseprogrammes are sound on a moral level, they do tend to transfer fundsfrom the city to benefit poorer, more backward regions.Government regulations of crucial “club good” industries, can also bedetrimental to larger cities. For example, price regulation imposes“national” prices to letter postage services, airfare, train service,telephone companies, and television distribution companies.One example, the Canadian government granted a monopoly to theBell Telephone Co. at the turn of the 1900’s. In exchange for this, Bellwas expected to service all of Canada, including rural areas, at noexchange charge to the consumer. Urban dwellers ended up payinghigher prices on telephone services, to subsidize rural Canadians.Jacobs argues that lower prices in Montreal and Toronto, would haveleft money in these cities, which – maybe – could have found moreproductive uses.  National CurrenciesWhen Jacobs realized the importance of city trade for the creation ofnew work, she then realized that a city currency can greatly enhancethe trade feedback. A city currency will smooth over business cycles,especially if they are related to trade.When a city has a trade deficit (X<M), it could fall into a recession.However, a free floating city currency would depreciate beforeproduction levels are affected. This will bolster the foreign price ofcity export goods, without affecting local prices and wages.Foreign demand for the city currency would be perfectly aligned withthat city’s exports. The feedback information of the exchange ratewith other currencies would be perfectly useful information for thecity economy.Inversely, when a city has a trade surplus (X>M), it could go intooverheating, which generates inflation. On strong foreign demand forcity exports, the city currency will appreciate, making the exportseven more expensive. This will have two effects.First, exports sales will slow down, reducing inflationary pressuresfrom shortages on factor markets, such as the job market, or the steelmarket.
  18. 18. Second, the city’s purchasing power for imports will rise. This willfuel a new round of importing, which – hopefully – will in turn feed anew round of import replacements.Some city-states still exist. And they are some of the fastest growingeconomies in the world. Singapore is a fast growing city-state that hasinsisted on using a local city currency.Few economies still use city currencies. Most states have“nationalized” currency printing under a central bank. According toJacobs, this has concentrated the currency trade information feedbackon the largest, incumbent cities, of their nation. Hence, many countriesnow have only one major city (ex: Paris, France).Another problem with national currencies is that it may exacerbate adisconnect between an important supply region and a metropolis. InCanada, the exchange rate is very high because of the strong demandfor Alberta oil.This is hurting the urban areas, whose economies are not based onnatural resources, but on manufacturing and services.Nowadays, a city currency in Montreal would probably be worth lessthan the Canadian dollar, to help it sell exports, and bolster itseconomy. A regional currency in the West would still be strong, withno negative impact on the Alberta resource economy.Until the past century however, Jacobs (1985) argues most currenciesin human history were city currencies. Imperial currencies haveexisted but many empires tolerated and encouraged city currencieswithin their military realm.The European Union did not follow Jacobs` advice when they createda continental currency in 2000. The eliminated their nationalcurrencies to merge them into the Euro. Advantages of a CurrencyBloc include lower transaction costs across borders, no more exchangerate risk, and increased political integration mitigating the futurepossibilities of war in Europe. This project was a long-time coming,being a dream of German and French leaders for centuries, such asNapoleon.- Think PieceMontreal used to be top-dog in Canada. Now it’s n.2 since politicalinstability sent so many headquarters to Toronto in the 1980’s. On topof that, Canada is one huge federation that sucks money out of citiesto spread over its immense territory. Add to that the Canadiancurrency which is too strong for Montreal’s manufacturing industries.
  19. 19. Would a city currency for the Greater Montreal Area be beneficial toits economy? What are drawbacks? Submit 1 page essay in-class.- Wrap-UpImport-replacing cities have built-in destruction mechanisms that willslow its growth and reverse that into a decline.First, agglomerations lead to congestion, crime, and pollution. If theseproblems are not addressed, they may lead to the decline of the city.Second, cities improve technology and processes, which usuallyreduces the need for labour. New jobs must be created or else the citywill decline.Third, city work may become obsolete, as competitive substitutes areinvented in other cities.Fourth, cities cannot stop producers from relocating in lower-costlocations. New work must be created to fill the gaps left by the exodusof old work.Fifth, cities are subject to taxes from higher-order governments whomay use the money in non-productive ways. The money is often spentin “largesse” efforts towards other less wealthy regions.Sixth, national currencies tend to counter the “natural” trade cycle ofimport-replacing cities. This reduces the growth of the city, and theinflux of imports, which hinders future growth.- References and Further ReadingJacobs, J. (1970). The Economy of Cities. Vintage.Jacobs, J. (1985). Cities and the Wealth of Nations. Vintage.
  20. 20. 5. Jacobs’ Spectrum of Regions- Why Should I Care?Some economies are regional, and some are cities. Some regions arethriving and others are not. Some cities are thriving, and others arenot. Jacobs provides five categories of regional economies to explainwhere the wealth is, and where it is not.- This Lecture Has 5 Parts  The Forward City  The City Region  The Supply Region  The Transplant Region  The Backward City- What is a Spectrum of Economic Regions?A spectrum is an axis that follows one variable. In this case, we willcompare cities according to their capacity to be dynamic economies,capable of innovation and adaptation.Jacobs (1970, 1985) theory explains how city-economies adapt to eachother, in relation to geography, trade, government, and businessforces. She presents five types of economic regions: The ForwardCity, the City Region, the Supply Region, the Transplant Region, andthe Backward City.In this text, these categories are aligned from one extreme to another,from the most dynamic (forward city) to the least dynamic (backwardcity).Jacobs categories of economies is constructed from her own theory ofeconomic growth, which is grounded in her visits of cities across theglobe, economic history, anthropology, and a critical evaluation ofmacro-economics.The five categories are differentiated according to variables such asdensity, industrial diversity, resource endowment, company size, the
  21. 21. import-replacement function, product innovation, process innovation,employment, price levels, and immigration patterns.  The Forward CityA “Jacobs Agglomeration” is a city which is diverse, growing, andinventive. It is an inductive conclusion based on several criteria. Sucha city tends to create opportunity for migrants and youth, tends toinvent new products and industries, and tends to be very open to tradeand science.We will call these economies “Forward Cities” for their uniquecapacity to constantly innovate, generate new products, and adaptsmoothly to changing trade patterns. This quality is what makesForward Cities the economic heart and lung of the rest of the system,and provides technology improvements, and prosperity to many othereconomies.NOTE – Jacobs never used the terms Jacobs’ Agglomeration, orForward City. She used the term “import-replacing city”.Economic literature now uses the term Jacobs’ agglomeration and theterm “forward city” is original to this text. It serves to illustrate theeconomic development quality of these cities, and to differentiate themfrom “backward cities”, since they are opposites on the Jacobsspectrum of economic regions.Forward Cities can be large or small. But they do grow rapidly atsome point in time. Most of them are now quite large, and are thusoften dubbed as a “metropolis”, or “economic capital”.Jacobs identifies Detroit, of 1910, as an example of a forward city.The density of Detroit at the time was relatively high, compared tosmaller rural settlements of that period. The city was then bustlingwith hundreds of car design and manufacturing companies, a newindustry that was in a phase of rapid development and expansion.The industrial diversity of the city was growing at the time, as Detroitwas replacing German automobile imports, into local production.As most forward cities, the geographic location of Detroit did notconfer any particular resource endowments such as minerals or oil. Asthe name of city indicates, the city was a natural location for amaritime port, although set well inside the North-American continent;a natural link between Great Lakes waterway. The city was also at thehub of road transportation between the US Midwest and southernOntario.Economic history literature indicates that 1910 Detroit hosted avariety of small and medium sized automobile companies. It came tobe known as “Motor City” for this reason. Of the hundreds of
  22. 22. carmakers, the industry eventually consolidated into three largemultinationals (GM, Ford and Chrysler) whose headquarters are stillin Detroit.According to Jacobs, Detroit’s growth is due to its “import-replacement”. Detroit did not invent the automobile, which was aGerman invention. However, Detroit was the birthplace of thisindustry in North America, and greatly contributed to the refinementand improvement of both the product, and its production process.This led to a strong demand for labour, high employment in the city.This attracted people to the city, whose population grew.The exports of cars enabled the city to import many higher-ordergoods, and the wider variety of local production helped keep overallprices low. The price of cars themselves was continuously decreasing,as the technology, and processes improved, and as scale increased.Instabilities associated to forward cities are: o Unaddressed congestion, pollution, crime o Eventual loss of work to lower cost regions o Obsolescence o Capital withdrawals from nation-state policy o National currencyRisk factors associated to forward cities are: o To gradually stop import-replacing. o To stop indigenous innovation.What can governments do to help these economies? o Provide positive feedback mechanisms such as city currency. o Avoid non-productive capital outflows by nation-state. o Invest in productive investments such as new products, and science. o Encourage Breakaway Entrepreneurship. o Address pressing problems of urban life. Solutions may become opportunity to invent new industries.  The City RegionGrowing cities have a direct impact on their surrounding areas, oftenrural, and sparsely populated at first. Analysts now speak of “GreaterDetroit Area”, or of Metropolitan Areas, which include “OuterSuburban Rings”.Once the metropolis grows outside its initial borders, these areasbecome engaged in the intricate network of the city economy. Their
  23. 23. production diversifies as old-work is transplanted outside the nowcongested core city. City regions directly benefit from theinventiveness of the core city, without having to deal with thecongestion and pollution.The density increases, but remains low. The industrial diversity can bevery high, surprising to many. The structure of this economy remainsdiverse in production, scale, and scope.The area does not need any particular natural resource endowment,other than land to build factories, houses and office space.The area is indirectly engaged in import-replacement, but this is due toits integration with the city economy.City Regions can be product innovators, or not. This is becauseproducers transplant production here to save on costs, not out of acreative need to constantly invent new products.Thus, these producers are very much interested in cost-saving processinnovations, especially labour-saving technology.The level of employment is high and growing, which attractsmigration from other regions, further out from the city.Price levels tend to be low, as cost-saving measures, and diversity oflocal production, are the norm.Instabilities include: o The eventual loss of work to lower-cost regions o A reduction in arrival of new work from a decline of the city o Obsolescence o Capital withdrawals from nation-state policy o National currencyPolicy prescriptions: o Agree to what is best for core city. o Invest in cost-cutting process innovation.  The Supply RegionMany Supply Regions – also known as resource economies – are quitewealthy, as they are usually endowed with a highly demanded naturalresource.But Jacobs argues they are inherently fragile, and lack a capacity toadapt to changes in trade patterns. She qualifies them of being
  24. 24. “backward” economies, along with Transplant Regions, and BackwardCities.An example of a Supply Region near Detroit is the Ohio iron oreregion, which saw the rise of the Cleveland Cliffs mining company.Naturally endowed with a key mineral for making steel, widely usedin making automobiles, the rise of the Detroit economy created whatJacobs calls a solvent market for Ohio’s iron ore, and steel founderedin Cleveland. The mining area of Cleveland Cliffs is not a denselypopulated area, and its economy is highly concentrated in iron oremining. Without the iron ore, one can wonder how much economicactivity would take place there.The mining industry is typically consolidated, made up of a few largecompanies. They are content in supplying other regions and do notengage in import-replacement. Generally, they are not known forproduct innovation.Supply regions are focussed on reducing production costs, andimproving processes. The job market can grow at first, but usually isvery stable or declining as labour-reducing technology is introduced.Prices can be high as most consumer goods need to be imported.However in this case, Ohio mines are relatively close to importantcities such as Detroit and Cleveland, so prices here would be relativelylow.Migrants would be attracted to the area when the mines are beingconstructed, but immigration would be halted after their normaloperations level-off.Supply regions that are struggling often find a way to receive fundsfrom wealthier supply regions, or from wealthier forward cities. InCanada, the federal government transfers equalization payments topoor provinces, which are generated from taxes collected in wealthyprovinces such as Alberta (wealthy supply region), or Ontario(Toronto is wealthy forward city). These capital injections may not beeconomically productive, as they can generate a disposition ofdependence toward wealthy areas. Politically, the transfers may beargued to be moral. But many economists believe these transferscontribute to keep poor regions in poverty.Another structural problem that supply regions may face is if they arepart of a currency union with other supply regions specialized indifferent industries. The exchange rate will follow the trends of theindustries with the largest trade volume, and these patterns may nothelp the smaller supply regions. For example, Alberta’s oil patchdictates fluctuations in the Canadian exchange rate. However, the oilindustry cycle may not match the cycle for coal, which is the mainmineral export of Nova Scotia. The Canadian dollar may be hurtingthe Maritime economy more than it helps.
  25. 25. Instabilities: o Capital injections from nation-state policy o National currency disconnectRisk factors are: o A sudden drop in “foreign” demand o New competition from lower cost region o Introduction of a new substitute good which reduces demand o Introduction of a new production substitute which clears population o National currencyPolicy prescriptions: o Diversify industrial base to reduce foreign demand risk. o Constantly invest in cost-cutting process innovation. o Avoid monopsony power on local labour that discourages breakaway entrepreneurship.  The Transplant RegionThis type of economic region is similar to the Supply Region in manyways. However, its inception occurs differently.The Transplant Region is brought to life by the transfer of work froma congested city to a lower-cost production area. Its role is to supplycities and other regions with a specialized product.However, its economic raison d’être has nothing to do with naturalresources. It can be anywhere on earth, as long as transport and labourcosts are lower than in the city.Under the umbrella of the Detroit automobile industry, a city such asFlint, Michigan, is a perfect example of a Transplant Region, alsoknown as a “company town”.Flint is where General Motors was created in 1908, an automobileconsolidator that swallowed Buick and Chevrolet, along with dozensof other Detroit-based carmakers.GM had decided to set up in Flint to avoid the high costs of the then-bustling Detroit. The city was less than two hours away, so GM couldbring workers over to this specialized area and continue to benefitfrom knowledge spillovers from the Detroit economy.As most Transplant Regions, the city never diversified out of carmaking. GM eventually built its headquarters in Detroit, but Flintremained a key manufacturing location for a long time. However,
  26. 26. lower cost locations appeared over the last century and eventually,Flint lost one plant after the other. Finally, in 1999, GM decided toshut its last plant in Flint, which made large Buick sedans that hadgone out of fashion with SUV craving consumers.The density of Transplant Regions is usually low, on purpose, toreduce overall costs of living, wages and transportation.At first, the absence of industrial diversity is not a problem, as thislarge, single-company, transplant comes “out of nowhere”. It is seenas a “godsend” by local townspeople of a previously poor region.However, over time, the region may lose this work as the factory istransplanted again, to an even-lower cost region.A Transplant Region usually does not engage in import-replacementbecause the local employer is alone, very large, and dominates thepolitical and economic culture of the region. This kind of monopolyon the labour market is called a monopsony, and research indicatesthey tend to discourage breakaway entrepreneurship and any form ofcompetition for local labour.The factory’s strategic management decisions are not made locally,they come from a head quarter located outside the region. In this case,GM’s Flint plants would follow orders from Detroit. Local initiative islimited to process innovations, and product innovations are notexpected. If foreign demand is strong, the transplant region will enjoygrowing demand for labour, and worker migration toward the region.Risk factors are the same as for supply regions.  The Backward CityTo be dubbed “backward” is insulting. Jacobs actually writes thatmost cities in the world, and throughout history, have a backwardeconomy. The good news is that a Backward City can evolve into amore forward economy.Most people would say a backward economy is in decline, or is non-competitive. They may be shielded from other, more competitiveeconomies, by subsidies, import tariffs, or other barriers to trade.Modern-day Detroit has definitely become a backward economy. Itspopulation is declining, neighborhoods are abandoned, and houses areboarded up. Poverty and crime tend to be rampant, and especiallydifficult to live with, in high density cities in decline.The size of companies tends to vary within the city. In the case of adeclining city, many large companies have probably left, leaving agaping hole in the fabric of the economy. In the case of stagnant smalltowns, companies are generally small and not growing.
  27. 27. This city is not import-replacing. It is not inventing new products. Itprobably is not very good at process innovations either. Because of allthis, consumption goods need to be imported at a high price, and thenon-competitive local producers output is overly expensive.A note: Jacobs insists that price levels must be considered as relativeto local wages. A foreigner travelling to a stagnant city may findprices are lower than what he is accustomed to at home. But that doesnot mean the locals can afford these prices.Jobs are scarce and population is declining. Survival depends moreand more on the local stock of natural resources and less and less ontrade and productive investment.The risk for this type of regional economy is that things get worsebefore they get better. A population exodus can relieve the city of thestrain of providing for everyone. Remittance from expatriated workersmay become the only capital inflow to the city.Jacobs recommends that these cities avoid direct competition withlarge dynamic economies. They should start to construct a localsymbiotic network of workshops and small factories that replace low-technology imports. This new production usually can be sold to other,neighboring backward economies.- In-Class ActivityAssociate each city to an economic category. Work in groups.Use the internet if possible.Montreal 1985 Montreal 2007Magog LavalVal d’Or Saint-JérômeKingsey Falls ValcourtToronto MarkhamSudbury Gaspé- Think PieceThink of your home town and think of a place you could establishyourself in the near future. Associate them to an economic category.Where would you probably enjoy the most prosperity? Submit 1 page essay in-class.
  28. 28. - Wrap-UpEconomies can be analyzed under five categories, according to theirability to grow, evolve, and adapt to changing conditions.The Forward City is the strongest economic category. These areimport-replacing cities where employment is high, and prices are low.They are usually very diverse economic systems, where symbioticnetworks of small and large companies interact.The City Region is the immediate neighbor of the Forward City,where overflow production is located. Many factories are transplantedhere as the core becomes congested and expensive. Employment hereis high and prices low.The Supply Region is a resource-based economy. Local consumptiongoods are imported, using funds from specialized export work.Employment may be high, but usually dwindles, and prices are high aswell.The Transplant Region is manufacturing-based (or services) townwhere mature city work was transplanted to reduce land, and labourcosts. Employment can be high, but this economy is vulnerable toforeign demand shocks.The Backward City is a declining economy, which may in the pasthave been a successful supply region, or transplant region.Employment is low and declining. Prices are high and rising.- References and Further ReadingJacobs, J. (1970). The Economy of Cities. Vintage.Jacobs, J. (1985). Cities and the Wealth of Nations. Vintage.
  29. 29. 6. Innovation in Jacobs’ Agglomerations- Why Should I Care?Jacobs’ agglomerations don’t just replace imports, they also nurtureproduct and process innovations. This is the key to understanding thegeography of Schumpeter’s Creative Destruction.- This Lecture Has 2 Parts  City Inventions  Diversity trumps Specialization- What is Innovation in Jacobs’ Agglomerations?Jacobs (1970) argues that cities are natural environments for economicchange because imports come through the cities. This is because citiesare located around ports and other transport hubs. Cities can afford toimport new and innovative goods from foreign economies with themoney earned from their exports.But who invents the new things others will import?Cities, answers Jacobs.  City InventionsJacobs theorizes cities invented almost everything that came to amarket. Even agriculture and farming technologies.Consider the previous example of office chairs. A share of theproduction will eventually be exported from E-City as foreignersbecome aware of the existence of the product. This export, brings inextra money to E-City, who can use it to import goods from abroad,which are not produced locally. Let’s assume E-City imports fancydinner chairs from abroad.Most economists would believe this trade is a good thing and theseeconomies should specialize in the fields where they hold a relativecomparative advantage. This is the Ricardo view.Jacobs argues most cities don’t behave this way.
  30. 30. Jacobs argues that cities copy each other, to everyone’s benefit. E-Cityhas got wood, leather and plastics. It can use “reverse-engineering” tocopy the imported good and produce it locally. The import becomes aknowledge spillover between economies.Further, the added local production also increases money stocks in E-City, which enable its citizens to import more fancy products. This is apositive feedback loop directly related to trade.Trade brings in new ideas to cities that often copy the importedproducts and thus increase their local production levels. Furthermore,Jacobs argues that cities use imports as inspiration. These imports fuelinnovation.Consider the imported dinner chair example. Not only will E-Citystart producing dinner chairs. But E-City might also invent a wholetype of chair, inspired by the fabrics, the assembly techniques, and theoverall design of the imported good.As producers act on the profit incentive, and as consumers love new,different, and better products, market-oriented cities become thenatural location for inventive companies. The trade cycle generates asecond positive feedback loop of invention and innovation.  Diversity Trumps SpecializationMost Jacobs’ agglomerations are typically very diversified economies.Think of Tokyo, Montreal, Singapore, Shanghai, New York, SanFrancisco, Mexico City, etc…These kinds of cities are now considered to be the engines ofeconomic growth by modern macroeconomists.But this observable fact flies in the face of orthodox economic theorywhich argues that Ricardian comparative advantage should lead toeconomic specialization and increased production.What does diversity mean?Industrial diversity refers to the variety of goods and services whichare produced in a city, a region, or a metropolitan area.Some cities such as Montreal are very diverse. Our metropolisproduces a variety of final goods such as transformed food products,chemicals, airplanes, pharmaceuticals, refined petroleum, cardboard,etc. Montreal also produces a variety of services such as TV, radio andprint media, finance, insurance, law council, accounting, health, andeducation.
  31. 31. Diversity has two main advantages, according to Jacobs (1970). First,it reduces vulnerabilities to foreign trends.Second, and more importantly, diversity increases innovationbecause science and technology spill over different industries withgreater ease when these industries share the same city.Solutions to technical problems can be useful in very differentindustries. For example, the clothing industry has come up withVelcro technology used in shoes and other garments. This technologyhas proven to be very useful in wide array of industries, such asaerospace. Surprisingly, wings are attached to the fuselage of someplanes with hard-pressed Velcro-type technology.Jacobs’ point is that in a diverse city, very different industries canlearn from each other. In diverse cities, technology and knowledgewill spillover more quickly from one industry to another. Economistshave dubbed this phenomenon cross-industry knowledge spillovers.In the end, you can ask yourself if diverse cities are wealthier thanspecialized regions. They can be. Studies show that Jacobsagglomerations typically grow at a more steady and constant pace,which over time trumps the typically rocky path of high-flyingresource economies.- Think PieceThe 2008-09 recession was much harder on Toronto, than it was onMontreal. Toronto’s economy is specialized in the automobileindustry, which was the focal point of the economic slowdown.Borrowing from the idea of “resilience” in psychology, would youargue that politicians and policymakers should focus on making theireconomies as “resilient” as possible? Submit 1 page essay in-class.- Wrap-UpJacobs agglomerations are more dynamic economies in the sense thatthey are more diverse and innovative than others.Jacobs argues that trade will increase the strength of the hub city, asimports offer opportunity for new ideas. Cities often copy imports andproduce them locally, adding to the local production level.Jacobs also argues that trade fuels the innovative nature of companiesin cities, because that is where the imports are first seen by nationals.Urban producers use imports as inspiration to invent new products.
  32. 32. Jacobs agglomerations tend to be more diverse because they inventnew industries that add to previous activities. Jacobs argues thisdiversity is enviable because A) it protects the economy from violentforeign demand cycles, and B) it leads to cross-industry knowledgespillovers which generates more innovation and economicdevelopment. If trade is the fuel of innovation.Specialized economies can be very wealthy, but studies show theireconomic cycles to be more pronounced and overall generate less Does free tradeprosperity than diverse cities. make innovation free?- Cheat Sheet with Memory HelperHub City: A city located on a transportation hub, such as a crossroads of highways or railways, a deep water port, or a major airport, or all of the above.Company Town: An economy dominated by a large employer, such as a mine, or a manufacturing plant.Cross-industry Spillover: The phenomenon of one industry adopting technology designed in a very different industry.- References and Further ReadingHall, P. (1966) The World Cities. McGraw-Hill.Jacobs, J. (1970). The Economy of Cities. Vintage.Jacobs, J. (1984). Cities and the Wealth of Nations. Vintage. 7. AppendicesThe Jacobs Summary Table, and the Import-Replacement Diagram areon the next five pages.
  34. 34. TYPES OF ECONOMIES Forward Cities City Regions Supply Regions Transplant Regions Backward CitiesPRODUCT INNOVATOR YES EITHER NO NO NOPROCESS INNOVATOR EITHER YES EITHER EITHER NO creative destruction, capital outflows dependency money, dependency money, dependency money nation-state capital monopsony power monopsony powerINSTABILITIES outflows, congestion, pollution To gradually stop That "old-work" is lost Foreign demand shock. Foreign demand shock. It cant get worse. import-replacing, to transplant regions. New consumer New consumer It can only get better. or to stop indigenous That newer "old work" substitute shock. substitute shock. innovation. stops flowing from the Introduction of a new Introduction of a newRISK FACTORS core city. production substitute production substitute which clears population. which clears population. New competition from New competition from lower cost region lower cost region Avoid non-productive Agree to what is best Diversify industrial base Diversify industrial base Start replacing "simple" capital outflows by for core city. to reduce foreign to reduce foreign imports to sell toPOLICY PRESCRIPTIONS nation-state. demand risk. demand risk. neighboring backward cities. Invest in productive Invest in cost-cutting Invest in cost-cutting Invest in cost-cutting investments such as process innovation. process innovation. process innovation. new products, and science. Encourage Breakaway Avoid monopsony Avoid monopsony Entrepreneurship power. power. Solve urban problems.
  35. 35. STEP 1 - NORMAL TWO-WAY TRADE Money is sent back for clothes French Fashion exported to Montreal Money comes inMontreal, New France Beaver pelts exported to FranceMontrealers huntbeavers for pelts PARIS, FRANCE France makes beaver felt hats
  36. 36. STEP 2 – IMPORT IS REPLACED Some of the Less money is sent clothes money back for clothes diverted to local producer Less French Fashion exported to Montreal New workshop makes clothes Montreal, New France Montreal skins Beavers for peltsAdvantages: Beaver pelts exported to FranceNo transport costs, no shipping delays. PARIS, FRANCECustom work is possible.Create local jobs.Generate demand for neighboring supplycities (textiles, buttons).
  37. 37. STEP 3 – EXPORT TO OTHER CITIES Clothing workshop Beaver pelt trade Montreal, New France PARIS,Trois-Rivières, FRANCENew France Montreal fashions are now exported to neighboring cities such as Trois-Rivières. This trade nurtures a second wave of export-funded imports to Montreal, which may come from Paris, or any other city in its trading circles. The import-replacement cycle can thus start all-over again with whatever Montrealers decide to import, and produce locally.