Cities and traditional economics

Some cities are thriving while others struggle. Why? Many have been getting caught up in the details or the symptoms -- such as commenting that more hip entertainment districts are needed -- and miss the basics.

Craig Thomas, economist at Torto Wheaton Research (an investment real estate industry research firm), wrote a great essay a couple weeks ago that reduces a city down to its economic essence. Here are a few quotes.

So what is a city? What do these metropolitan areas do? They're not there to
look pretty, or because they're historical landmarks or because they're cool.
Cities are market-makers. ...

To succeed, he insists, cities main role is to provide a dynamic place for human, financial and physical capital to intermingle and flow -- what he calls liquidity.

Firms will form within or relocate to a city if it provides three things: the physical infrastructure that helps firms function, access to capital, and—most important these days—ample suitable labor with which to support production. Labor will come to the city if there is physical infrastructure to occupy, ample choice of vocations and employers, and access to capital. Developers and investors will provide physical and financial capital if there are adequate firms and households to occupy structures, and if there is a sufficient liquidity of capital when it is time to monetize these assets. All parties' motivation is to be as productive as possible, and they will go to the cities that allow them to trade their time and resources at the highest value.

Everything else happening in cities, he argues, is there to support the flow of labor and capital. Creating livable neighbourhoods is about attracting and retaining talent. Building infrastructure is about facilitating the flow of industry (capital) and jobs, as well as making the region function for the residents.


Better transportation options support both the liquidity of labor and of industry -- neither families nor industry are attracted to gridlock.

Environmental urban initiatives, therefore, will succeed when they help a city increase its flow of labor, financial capital and physical capital. And, these days, most of the time, Thomas notes that what's better for the environment is better for a city's people and industry and infrastructure.

Although I would argue that cities have a less market-centred past, his basic theory does fit current trends. He notes that in the modern, knowledge-based economy, the mobility of labor and industry is much higher than in the industrial economy. In the past, workers often signed onto a company for life and received a pension for their loyalty. Today, many people change jobs every few years, making them free to move to new cities. Industries too can move -- relocate a headquarters or research facility to a city with a better talent market, for example.

Looking at cities first as market makers provides a way (not necessarily the only way) to understand why certain cities are succeeding. It comes down to how easy it is for people and companies to flow into (and out of, ironically enough) the region.