In his famous 2010 Ted Talk Matt Ridley points out that a growing human population has facilitated increasing standards of living because more people means a faster growth rate of innovation. He explains that humans’ propensity to exchange means that as a society we all benefit from each other’s ideas. No single person knows how to make a pencil from scratch, but we can all benefit from pencils (and much more complex tools) because collectively we have the knowledge to produce them.
Ridley describes technological progress as a product of the collective brain — the space where our “ideas have sex.” Ideas “meet and mate” perhaps most obviously on the Internet, where the best encyclopedia in human history is crowd-sourced. This process is constant in the analog world also. The story of Microplane — a company that went from making printer parts, to woodworking tools, to kitchen gadgets and instruments for orthopedic surgeons — illustrates the innovations that come from ideas meeting and mating across entirely different industries.
Cities provide the ideal location for these meetings because they bring together people from varied industries, backgrounds, and priorities. In The Death and Life of Great American Cities, Jane Jacobs identifies four qualities that are necessary for diverse neighborhoods:
- At least two primary land uses;
- Small blocks;
- Buildings of diverse ages and types; and
- A high density of buildings and people.
These characteristics facilitate an urban environment in which people of different professions, interests and income levels come into contact with one another as they go about their daily routines. In turn, this human contact puts people in an ideal position for innovation and entrepreneurship. Sandy Ikeda describes the entrepreneur’s environment as the “action space.” Today, an action space could be in a suburban home for an entrepreneur who creates a digital product that’s sold online. While action space doesn’t necessarily need to be a place of high density, this face-to-face element remains a key part of the world’s most productive action spaces.
Firms reveal the importance of the urban action space by paying a premium to their workers who live in expensive cities. They could relocate to a less expensive place to save money on wages and rent, but their workers wouldn’t be as productive without the opportunity to innovate based on what they learn from fellow city residents within their industry and other industries. Efforts to restrict population density and city size impoverish us by reducing this potential for connectivity.
Well-known cluster economies demonstrate the importance of geographic proximity for innovation. For example, the Homebrew Computer Club played a crucial role in the development of personal computers. The group started in 1975 as an outlet for computer tinkerers. The programmers, engineers and inventors who attended the club’s early meetings would go on to revolutionize computing by taking what they learned from one another back to their companies. The club was only possible because these enthusiasts all worked for semiconductor companies that had attracted them to the Bay Area, enabling their proximity.
As transportation costs have fallen and telecommunications have made long-distance collaboration easier than ever, some theorists argue that “distance is dead.” In the face of these improvements, however, firms and individuals are demonstrating their willingness to pay increasing premiums to locate in large, dense cities. This is because face-to-face communication carries more information than any other form of communication. We’ve evolved to gain information through being in the same space as others and by seeing their facial expressions. Because cooperation and trustworthiness are essential to success within a firm and in transactions between individuals, face-to-face reduces transaction costs and facilitates exchange.
Economists Ed Glaser and David Mare posit that cities create learning environments that are particularly attractive to highly-skilled young people. They find that young people, particularly those with college degrees, choose to live in cities because they have the opportunity to grow more quickly in their careers when they’re surrounded by other educated people. Some have predicted that the technology that makes email and video chats possible will cause the decline of cities as productive centers. According to this hypothesis, people will find it less valuable to locate in cities over time. However, Glaeser and Mare’s findings provide reason to believe that as employment in knowledge-based jobs increases, the returns to living in cities and benefiting from tacit knowledge spillovers will increase for firms and individuals.
In addition to providing the best possible action space for innovation by facilitating face-to-face interaction, cities also facilitate trust, which is a crucial component of successful exchange. In The Economy of Cities, Jane Jacobs explains that residents of diverse cities gain extensive experience interacting and transacting with out-groups. The environment that brings diverse people together creates the chance for positive interactions with members of out-groups, creating a population with higher levels of social trust.
Evidence on patent use shows the importance of cities in facilitating the space for entrepreneurship. American patents are more likely to be cited by firms within the same state and within the same Metropolitan Statistical Area. People and firms located near one another are more likely to learn from one another through casual interactions and labor market mobility. The positive externalities that firms provide within a metro may explain why individuals and businesses pay this urban premium.
San Francisco, San Jose, and New York City are the most productive cities in the country, but housing supply restrictions in all three cities mean that their population growth is restricted. By preventing people from living where they can be most productive, rules that limit urban growth also limit the growth of our collective brain.