Cities, innovation & the economic case for density

You can read as published on City Metric here. Photographs by James Jasper

It was a time of extraordinary change. Cook had not long named New South Wales, the American Revolution was well underway, and in towns and cities of England, the Industrial Revolution was about to begin.

Rivers were taking industry out of cottages. Machines made possible through advancements in ironwork required greater scale, more people and more power, and so were being housed in purpose-built factories and mills adjacent to running water. Individuals who once were generalists, and who had owned production from beginning to end, became part of a process: specialists, narrowing what they did, becoming better at it, and producing more.

It was a process observed by the father of modern economics, Adam Smith. In his 1776 magnum opus The Wealth of Nations, Smith identified the key to increasing productivity as specialisation achieved through scale and density.

As populations swelled in cities, poets wrote of dark satanic mills, painters portrayed industry as hell incarnate, a new world formed of developed and developing nations. It was not the same scale nor pace as today, but it too was a period of great disruption.

TEOUCities and the economy of us

Much has changed in the quarter of millennia since.

Whereas cotton from the fields of the Mississippi delta was the raw material of the industrial revolution, and gold caused the rush across the states of Australia, in advanced economies, the raw material is us. It is our ability to generate work with our heads and not with our hands, our mind and not with what is mined, our knowledge and innovation capacity that is the main source of wealth.

Rivers are no longer the driver of density: replaced by the location of skilled workers, a steady flow of graduates, and the need to be close to likeminded firms. Specialisation which once took place within firms now takes place across firms, through clustering, benefitting through economies of agglomeration. Machinery to produce more tangible goods and drive economies of scale has been replaced by how efficiently we transport ourselves in and out city districts, producing more intangible goods.

These days we talk less of scale and specialisation, and more of cities as the manifestation of Smith’s fundamentals for a productive economy. Rightly so: as Dobbs, Woetzel and Manyika say in No Ordinary Disruption, with each doubling of population every city dweller becomes on average, 15 percent wealthier, more innovative, and more productive.

Half the planet’s population are city dwellers, but they generate three-quarters of the world’s GDP. In Australia, that figure rises to 80 per cent: it is one of the most urbanised countries in the world, with three quarters of the population living in cities of 100,000 people or more, compared to 68 per cent of Americans, 71 per cent of Canadians, and 62 per cent of Brits.

So, there is some evidence that Australia’s prime minister Malcolm Turnbull is asking the right questions with his newly formed portfolios on ‘innovation’ and ‘cities’.

CwA5Cities and productivity

Yet not all cities are good productive cities. Africa has the highest average city density of all continents yet is nowhere to be seen on global productivity tables. India has 8 of the world’s top 10 densest cities – yet none of them are close to being the most productive. Both have well-documented failings in infrastructure and connectivity.

In contrast Australia has some of the most productive cities in the world: Sydney, Melbourne and Adelaide placed 10th, 13th, 35th on GDP in the 2010 Global Urban Competitiveness report. Yet when looking at GDP per capita, this slips to 97th, 110th, 121st respectively; and on patent applications, it’s even worse, and those rankings are 281st, 237th, and 260th.

There are infrastructure problems, too. Enright & Petty declare in Australia’s Competitiveness: From Lucky Country to Competitive Country that Australia has “some of the worst exemplars of urban sprawl in the world”. The independent statutory body Infrastructure Australia estimates “congestion is likely to cost Australians $53bn by 2031.”

Meanwhile, in Mapping Australia’s Future, independent think-tank, the Grattan Institute, found that residential patterns and transport systems mean that central business district employers “have access to only a limited proportion of workers in metropolitan areas”.

The lesson here is that good productive cities require planning. Policymakers and politicians need to encourage density to increase the strength and scope of agglomeration economies, to develop skills matched to jobs being created, to support the local economy that benefits from both.

Good productive cities require high connectivity, too.

Policymakers and politicians to facilitate quality exchange through infrastructure and transportation – to connect firms with each other, to connect workers to firms, to connect consumers to the local economy, to build the economic competitiveness of human capital: the economy of us.

The better connectivity, the more exchange, the greater innovation, the greater productivity. This is why the 3m people living in Silicon Valley have an economy larger than the 90m living in Vietnam. It is what Venables from the London School of Economics described as the New Economic Geography – the value in interaction and exchange brought about by clustering of firms.

CwA7Innovation and the importance of exchange

“More densely populated cities are more attractive to innovators and entrepreneurs,” explain Dobbs, Wetzel, Manyika, “who tend to congregate in places where they have greater access to networks of peers, mentors, financial institutions, partners, and potential customers.” It is no coincidence that those who excel online and can locate anywhere in the world choose to neighbour offline, clustering in places like Silicon Valley, Bangalore, and Silicon Wadi in Tel Aviv.

Face-to-face exchange has been necessary for innovation in cities “since Plato and Socrates bickered in an Athenian marketplace”, explains economist Professor Edward Glaeser in his book Triumph of the City. “Innovations cluster in places like Silicon Valley because ideas cross corridors and streets more easily than continents and seas. Patent citations demonstrate the intellectual advantage of proximity.”

So innovation is about more than STEM graduates, the co-ordination of government and industry on R&D, the promotion of entrepreneurship: it is about cities that can develop and retain innovation through quality exchange; it is about cities where firms will choose to cluster because they can see the value in exchange and infrastructure is in place to facilitate it.

This is the fundamental difference between providing skills for ideas born elsewhere, or providing skills for cities where ideas are exchanged, innovation occurs, patents formed, and productivity increases.

It is why Malcolm Turnbull’s two new portfolios on ‘innovation’ and ‘cities’ must be intrinsically linked for long-term economic growth.

The more complicated the world becomes, the more value there will be in proximity to those who may have the answer; the more value there will be in exchange with those who may have the answer; and the more value there will be in connectivity to those who may have the answer.

The more complicated the world becomes, the more it will value cities with answers.

The challenge is to make them Australian.

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