The Importance of Agglomeration Effects in Urban Planning

Paul Romer went to Burning Man.

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Paul Romer went to Burning Man. A New York Times article chronicled his experience, particularly his ideas about how urban planning can learn from Burning Man. His main insight (largely inspired by Alain Bertaud and his wonderful book) is that cities are labor markets, which require effective transportation networks to function well. The corollary to this point, he argues, is that the role of planning in cities should be limited to delineating public spaces and private spaces. More specifically, planners should set the grid of a city, then let order emerge. 

Romer uses the New York Commissioner’s Plan of 1811 to illustrate his point. The New York state legislature appointed a commission to develop a plan for Manhattan, and the result is the grid which continues to define Manhattan today. Public spaces were explicitly defined in the plan, which in 1811 primarily meant roads, and later parks. Otherwise, the market was unleashed to cater to demand. 

While I am generally sympathetic to this perspective, and it is an important corrective to the over planning tendencies of the contemporary urban planning profession, it isn’t what I’d recommend to city developers today. In addition to planning the layout of a city, city planners should also consider the importance of agglomeration effects.  

Agglomeration effects are the benefits of concentrated economic activity. When there is concentrated economic activity, there is a large labor market for both skilled and unskilled labor, the accumulation of knowledge from the industry, and low transportation costs. The result is innovation, new businesses, and economic growth. 

It is not surprise that most tech firms start in Silicon Valley, that movies are produced in LA, or that New York City is the center for finance. Once the talent and know-how for an activity reside in a single place, that place often has a strong comparative advantage, as evidenced by Silicon Valley’s continued attraction despite an exorbitant cost of living, poor governance, high taxes, a significant homeless population, and high crime.

City developers would do well to think along these lines. While it is important to delineate public spaces from private spaces, it is also important to understand the comparative advantage of a city and target industries and firms. It isn’t 1811 anymore, where small and medium sized enterprises dominate commerce. 

Shopping malls offer a useful example. They offer both public and private space. However, they price discriminate based on the type of store. Department stores are charged less per square foot than restaurants of jewelry stores. Department stores bring in the foot traffic which then dines or buys jewelry. 

New cities face similar challenges. Attracting the first residents is difficult when there’s few jobs or amenities. A city developer who focused on attracting an anchor tenant to create the first 500 or 1000 jobs would make the city much more attractive, as at that scale entrepreneurs would be incentivized to provide other services, such as grocery stores or entertainment. 

Of course, there are numerous public choice challenges in such decision making. City and state governments have often used similar arguments to justify massive tax breaks for new stadiums and factories, which invite risks of a race to the bottom. However, the potential benefits of urban planning beyond the delineation of private and public spaces should not be ignored. In emerging markets where urbanization is most rapid, it would be a mistake for city planners to only build the grid.