Monday, February 18, 2008

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?


Tim Harford said...

Kevin, Thank you. I am in one of the world's great cities, Singapore, and it is the middle of the night Tim Harford time. I'll try to respond sensibly as soon as I can...
Best wishes, Tim Harford

Tim Harford said...

A few more thoughts.
Kevin, I agree that housing restrictions probably do appropriate some surplus from the rich (although the government, which imposes the restrictions, does not benefit much under most tax systems). But knowledge spillovers have to be important: witness the research (Glaeser and Mare: I cite on the way that the wage premium seems to vary according to the number of years a person has lived in a city - regardless of whether they still do. That suggests that people learn a lot in cities. (How much is a spillover? Not proven.)

Re: failing cities, I think they do not generate many spillovers because they attract people who are already desperate, unemployed, less educated.

As for Lagos, an excellent point. Having visited Lagos several times I honestly cannot say whether it counts as a succes or a failure. It is chaos, and full of human misery, but compared with rural Nigeria? I do not know.

As for whether distance may finally be fading in its importance, not much sign of that so far. But in support of Kevin's point, here is research too new to have appeared in the book: Set against it the new research on microgeography coming out of Google, also too new for the book:

Kevin, thanks for the thoughtful comments - and the kind words. I appreciate it.
Best, Tim Harford

Angus said...

Thank you Tim, for your reply. by the way, I saw you on the Colbert Report. That was comedy gold!

I don't deny there are spillovers. Glaeser(and you)are convincing. What I was having trouble seeing was how they explained your puzzle that prices were too high relative to wages to be explained by amenites. Now upon reflection, I believe that you are saying there is an extra factor in the demand for living in big cities, viz. getting access to the spillover and that explains why prices are bid up more than wages and amenities would predict. Have I (finally) got it?

I agree that failed cities don't generate these spillovers anymore for the reasons you describe, but I was asking for a reason why they failed to begin with. I'm saying they must have been generating spillovers at one point to become "great", and wondering what killed/blocked them? Can an Olsonian "rise and decline of nations" story be told about (some) cities?

Also, it seems if the demand to access the spillovers is what bids up prices then the appropriate policy would be to tax property owners (who are getting the rents generated by the spillover) and subsize firms/workers.

Erich said...

I hope I'm not too late to the party...

Re: The zoning restrictions angle sounded good, though a quick eyeball test suggests maybe it doesn't mean that much.
From what I understand, Houston's zoning law history is relatively light, but from the looks of condo prices, they seem to be middle of the pack.
Google cache of non-academic real estate comparison (Condo cost by city):

Maybe Houston sucks (I've never been there), or maybe cities are more winner-take-all, but based on this whiff of evidence, I'm not that confident in zoning's importance.

Re: Research
A more complete view may be to look at all researchers, public & private. Sure, the public lot of you is distributed across the universities of the land, but where does the private lot end up? I'd suspect most of them are near cities like San Francisco (silicon/biotech) and New York (pharma/finance).

On a personal note, this chapter proved to be especially interesting to me as a mobile suburban youth. Perhaps I smell a Dear Economist... I've read your material singing the praises of cities (Culture! Women! Goodbye Green Guilt!), but am wondering how much of the spillover benefits are lost given a natural state of introversion? Are cities better off for extroverts and are extroverts better off for cities?