MR Book Club: Special Okie Edition! Chapter 7 of "The Logic of Life"

Today we are discussing Tim Harford's chapter on cities, called "The World is Spiky". Special thanks to MR readers for swinging over to this dusty corner of the interwebs. Let me start by saying that Tim must be right, because the opposite position is “The World is Flat” and Thomas Friedman is always wrong! Secondly, this is a very fun book, highly recommended for the intelligent layperson (yes we economists are ordained in a secret ritual) or student of economics.

Here is my summary of Tim’s argument. Cities are expensive, and that expense is above and beyond paying the necessary rents to gain access to their unique amenities. Cities are marked by knowledge spillovers, a positive externality (don’t get mad Bryan) where human capital grows faster when one is around more humans. And the internet, rather than reducing the positive effects of cities on productivity, actually enhances them. Thus, rather than subsidizing rural areas, perhaps we should consider subsidizing cities.

Luckily for Tim and his prospective book sales, he tells this story in a much more entertaining way than I just did. But I still have some questions, suggestions, and quibbles.

The claim is made that salary differences don’t match up with cost of living differences and the reason for this is knowledge spillovers, but it is not spelled out exactly how that would work. An alternative seems to me that zoning restrictions create these big rents and pre-existing property owners are sucking a lot of the consumer surplus out of people with high valuations on cool experiences. There are a lot of experiences that are simply unavailable outside of a big wealthy city.

Tim discusses “failing cities” and describes (correctly I think) why people still live there, but gives no explanation for why they failed if indeed cities produce these positive externalities. There is no discussion of some of the very biggest cities in the world; Mexico City, Lagos, Jakarta. It would be nice to know where the argument works, where it doesn’t and how to know which is which.

In discussing the advantages large cities have in producing quality services (another reason why mechanical cost of living comparisons are not very accurate), I would suggest that Tim consider work like Murphy Shleifer & Vishny’s “The Allocation of Talent” which shows how the most able entrepreneurs will run the largest firms (which for services would be located where the largest populations are concentrated).

I don’t think the case of how the internet affects the advantages of cities is open and shut either. In my own profession, isolated researchers have benefitted greatly from technological advances and our journals show an increasing flow of work from outside the traditional East Coast Bastions.

Anyway, thanks to Tim for writing such a fun book and to Tyler for subcontracting this chapter out to me. What do you guys think of cities, prices, and spillovers?