Paradigm shift for economies: The siren song of mega cities

The Great Lockdown in response to COVID-19 has altered billions of people’s perception of geographic space. For weeks, social and professional interactions were mediated by digital technologies that compressed physical distance and blurred the boundaries between the digital world and the real one. This unprecedented socioeconomic experiment is likely to have lasting effects, potentially transforming many aspects of our lives, and ultimately inducing people to rethink where they want to reside. The hierarchy of urban core and periphery, predominant in the Western world since the first Industrial Revolution, could be upended. Economists have long tried to understand what makes cities so special. Over a century ago, Alfred Marshall argued in Principles of Economics that proximity creates an ideal atmosphere for firms operating in the same industry. As he put it, there is something “in the air” that allows ideas to flow freely from one firm to another, continuously inspiring new inventions through a process of imitation and innovation. Moreover, manufacturers within the same district tend to have ready access to a large pool of skilled labour and specialised suppliers of intermediate inputs.

Of course, historically, entrepreneurs did not choose at random where to locate. Though they benefited from the proximity of peers, they also wanted to minimise their costs by locating close to the markets where their key inputs were produced or their products were sold – or somewhere in between. For his part, Marshall was thinking about Victorian-era manufacturing hubs like the Lancashire textile district in northwest England, where climatic conditions were ideal for producing cotton goods. In the United States, meatpackers clustered in Chicago, because that was the conduit through which cows and pigs were shipped from the agrarian west to the urban east. Inevitably, as a city flourishes and attracts more talent and capital, many other cities become less economically relevant. That is why there have 

always been clearly discernible urban hierarchies, which in turn correspond to disparities in wealth. But this pattern is not uniform across the board. In a highly centralised country like France, for example, most economic activities are concentrated in Paris, whereas in a federal country like Germany, they are more evenly distributed across regions.

In any case, large cities have continued to prosper and grow, even as globalisation and the decline in transportation costs have led many firms to diffuse their production capacity around the world. The reason for this continued urban expansion is simple: knowledge-based jobs in technological and financial hubs depend to a large extent on face-to-face interactions that allow those who hold them to stay ahead of the curve. This is why patents are positively correlated with city size.

But new technologies could well reduce the incentive to cluster, thereby altering urban hierarchies. Digital platforms, in particular, provide opportunities for remote social and professional interactions. Teleconferencing, virtual collaboration tools, dating apps, and many other innovations have all proven effective in reaping some of the benefits of agglomeration from a distance. The potential, apparent before the pandemic, now is being realised on a massive scale.

If demand for face-to-face encounters were to decline permanently, the agglomeration costs of crowded, polluted, expensive cities could start to outweigh the benefits, pushing even qualified professionals toward smaller towns, where they would enjoy greater purchasing power and a higher standard of living. After all, many of the professional and leisure opportunities that make cities like Paris, New York, and London unique are disproportionately enjoyed by a small elite with the means for discretionary spending. It is this narrow cohort that has the strongest incentive to keep such cities populated.

To be sure, a structural shift away from highly concentrated mega cities would have no historical precedent. In the past, when people left a declining city, it was to follow the capital and job opportunities to the next major hub. But now, the movement could run in the opposite direction: from rich urban areas to economically depressed ones, where those with disposable income can enjoy a significantly better life while maintaining jobs that are headquartered elsewhere. This would represent not just a rearrangement but also a flattening of traditional urban hierarchies.

This is not to suggest that the “death of the city,” or anything like it, is on the horizon. Virtual life will never be a perfect substitute for the real thing, and most of the movement would not be toward a hermit-like existence in the countryside but rather to smaller and mid-size towns.

Moreover, labour markets will still impose hard limits. As of now, roughly one-third of jobs in the US and Europe can be performed remotely, and many are in professions that will still benefit from the networking effects offered by vibrant urban areas. Ultimately, the cities where the jobs are formally based will retain relatively more economic power than other locations.

Nonetheless, even a partial, gradual repopulation of less-developed areas could bring far-reaching benefits, not least by helping to close regional divides that have been exploited by populist politicians across Western countries in recent years. According to economist Enrico Moretti of the University of California, Berkeley, the introduction of one high-skilled job in a local economy tends to create at least five lower-skilled jobs, thereby helping to raise living standards for all living in the same area. Thus, over time, the inflow of skilled workers into previously marginalised cities could create more dynamic and resilient local economies, preparing the ground for a more geographically and socio-economically balanced growth model.

Governments should seek to facilitate such a transition by building adequate digital infrastructure in peripheral areas, providing tax credits for relocation, and expanding the incentives for remote-working arrangements. In Europe, where thousands of towns with centuries of history have been completely depopulated, the benefits of such policies would be enormous – not least that they would reduce geographic disparities far more effectively than imposing higher taxes on the urban elite would. Until a few months ago, mega cities were the future. But in a post-pandemic world, the medium-size town will have much to recommend it.