The Efficiency and Scale of Cities

In finishing Ferguson’s The Great Degeneration, I came across a short section about the benefits of cities.  He discusses findings from the Santa Fe Institute about the efficiencies and scale benefits of cities.  Their institute’s studies have found that, on average, cities produce an efficiency of infrastructure needs that other forms of development do not, at a scale of about 15%.  This means that if a city doubles in size, growing by 100%, it will only need to increase its infrastructure network by 85% to provide the same level of service.  At the same time, measures of creativity increase in urban areas on an exponential scale, again at a scale of about 15%, meaning that a 100% increase in the size of a city increases its number of businesses, types of businesses, patents, economic growth, etc. by 115%.  This is why human history is also the story of urban growth.  We may never have known until recently that cities give us a 15% advantage either way, but we did figured it out over time and through experience that cities would give us the best chance to advance in life.

Of course, some cities do better than others, and some crash and burn.  The point of Ferguson’s book is to help explain why much of Western society, including many of our urban cultures, are declining.  He thinks it has a great deal to do with the decline of our traditional institutions, such as volunteer organizations and clubs, and the simultaneous growth of government.  I don’t disagree with him in many ways.  I think, as he says, the argument should not be about big government or small government but, instead, about good (effective) government and bad (ineffective) government.  After several years of studying and writing about health insurance and health care, I am one who thinks that there are too many information disparities between the different parties for a largely private system to work well.  Adverse selection is a freight train that has been slowly killing the industry in the U.S. for decades, and I don’t think it will survive another 20 years.  The pressures of the industry’s own survival instincts are going to kill it.  Eventually, the U.S. will reluctantly settle for what every other industrialized country has figured out actually (mostly) works.

On the other hand, the way big government relates to business (especially small business) and finance is running toward borderline catastrophe.  We just aren’t competitive anymore, and it has everything to do with too much bad (ineffective) government involvement at all levels.  And as far as welfare goes, I’m of Jacobs’ mind that it is a necessary evil with side benefits.  Welfare support always saps the economy involved (and perhaps others not so directly involved), but the politics of it makes its existence inevitable and even likely good economics.  I’ll flesh this out more when I get to her books on city economies.  And as long as we can contain the majority of poverty within the bounds of our urban areas (which we are not doing such a great job at lately), the efficiencies and scale gains of cities can help us solve the very problems they create.  That is, if we allow them to.

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