Cities with new industries, like Oxford and Cambridge, have not expanded as much as they could have.
Recently we had the pleasure of having Professor Nick Crafts give the first of our series of City Horizons talks in the Shard. Nick looked at the varying performance of our cities over the last century, and the implications that this has for future growth.
One particularly interesting point was the often unseen costs that occur as a result of not expanding our most successful cities for the residents of those cities.
The costs of expansion are very clear to the electorate – new buildings swallow up green fields and block views, while more cars on the road increase congestion. What are much less clear are the benefits of increasing the size of a city, which result from increases in productivity. Nick used the chart below to illustrate how these costs and benefits play out.
Let’s say we have city called Smallville. For the types of industries Smallville has, it is perfectly sized at size Na. Any costs (such as congestion) of increasing the size of the city would outweigh the benefits (namely increased wages) leaving the residents worse off.
Then let’s say that a new technology is invented in Smallville, allowing a whole new set of industries to flourish. This changes the position of the net wage curve, increasing the net wage that workers earn from NW1 to NW2 on the chart. Unlike the past, increasing the size of the city will now bring benefits. In fact, the increase in productivity –and so wages – brought about by an increase in the size of the city outweighs the increase in things like congestion all the way to Nb (it’s worth noting that increasing scale makes public transport more viable, partly mitigating congestion pressures). In this example doubling the size of the city would bring benefits to its residents.
But there is opposition to expanding Smallville, and a small but vocal band of residents come together to oppose any such expansion. They don’t want developers to build on the green fields on the edge of town because it will block their view of the countryside. And they don’t want more cars going past their houses that results from more people living in the area.
The complaints lodged by this group win out, and the Smallville planning department turns down the planning applications to increase the size of the city. The loss aversion of this group leads them to protect what they already have. But overall they lose out because they don’t benefit from higher net wages. This loss is shown by the green box on the chart. And these are the losses that fall only on the current residents of the city – they do not include the costs that fall on people who live elsewhere who are prevented from taking advantage of the opportunities in the city because of its lack of expansion.
While this all sounds very theoretical, it can be seen in the development of our cities. During the industrial revolution, cities such as Manchester and Liverpool expanded rapidly as new technologies developed. This was a good thing for the people who lived there, as their net wage increased. But during the current knowledge revolution cities such as Oxford and Cambridge, which have been well placed to benefit from the birth of new, knowledge-based industries, have not expanded in the way that they could have. While wages have undoubtedly increased in these places, they most likely have not increased as much as they could have had they expanded more rapidly.
The implication is that the residents of Oxford and Cambridge are worse off than what they otherwise would have been.
Our second City Horizons event will be on Comeback Cities and will be given by Professor Ed Glaeser on 21 May. We’ll be announcing details of the tickets very soon.
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Paul Swinney
Thanks Xavier. It’s not that Oxford and Cambridge are better/worse off than Manchester and Liverpool, but that they are worse off than they themselves could have been because they haven’t expanded. And I don’t think that there’s anything vague about higher wages – this means a greater amount of opportunity for the people who live in and around the two cities, as well as those who would chose to move there.
Xavier Riley
The implication that Oxford and Cambridge are in any way “worse off” than Manchester and Liverpool needs examining. I suspect that, on any metric you care about, the boat racers fare better today. Property development is driven by day-to-day market values rather than long term economic need and NIMBYism can be useful in blocking unnecessary development in areas where large, expensive houses would be better placed in more economically active urban areas. To make the claim that we should abandon any micro objections in favour of a vague macro promise of “wage increases” doesn’t seem convincing to me.
Brian Quinn
An interesting perspective is many of the NIMBY objectors tend to be retired age property owners so they do not see the benefit of rising wages but only see the benefit of owning a scarce resource (housing) in a constrained city – hence they behave selfishly for the status quo. If they have younger relatives in the same place one assumes they might see the benefits outlined in Prof Crafts presentation.
Jim
Paul,
Thanks for explaining a key point in Nick Crafts’ presentation that he didn’t have time to himself. Just so I can check I understand it right, would it be correct to say that the residents of Smallville do benefit when the wage curve rises (with the benefit measured by the box NW1-NW2-A1-A), but they just don’t benefit by as much as they would if the city grew? So the green box is a loss in terms of welfare foregone, but there is still a welfare benefit for existing residents?
Paul Swinney
Yes that’s right. So the new technologies/industries increase wages, but the restriction on size limits further productivity gains, so the net wage doesn’t increase as much as what it otherwise could do.
Crucially, by blocking development, individuals are no worse off than they were before. It’s easy to see costs of development, but it’s much more difficult to see welfare foregone. And this has an impact on the way that people make decisions, because the costs are given too much weight.