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Too often accused of being a breeding ground for poverty and inequality, cities are actually a catalyst for innovation, entrepreneurialism and social mobility

Around the world, average incomes in countries that are more than 50% urbanised are at least five times higher than those in countries that are less than 50% urbanised. Infant mortality rates are three times higher in the less urbanised countries. Per capita productivity in Greater London is 50% above the UK average. Cities remain so productive, despite email and the internet, because they foster the creation of knowledge and new ideas, which are especially valuable when they form the basis for the entrepreneurship that is the mainstay of economic growth.

Humankind’s greatest asset is our ability to learn from people around us. We have evolved over millions of years into a social species with a remarkable talent for picking the brains of our neighbours, and cities cater to that talent. Historically, cities have enabled the collaborative chains of entrepreneurship and invention that are responsible for civilisation’s greatest achievements, such as the industrial revolution.

The industrial revolution began with the mechanical production of clothing, and one of its central steps – spinning thread with metal rollers – began with a Birmingham-based collaboration between a mechanic, John Wyatt, and the eccentric Huguenot entrepreneur Lewis Paul. Paul was a child of the Enlightenment (his father had been the doctor to the philosophical Earl of Shaftesbury) who had acquired capital by marrying a lawyer’s widow. His early success came from ‘pinking’ crepe. Paul offered Wyatt £2,000 for the secret of his metal file-cutting machine, and together they developed a machine for spinning thread with rollers that drew on Wyatt’s knowledge of metal machinery and Paul’s earlier work with fabrics.

In 1738, Paul received a 14-year royal patent for “a machine or engine for the spinning of wool and cotton in a manner entirely new”. While others would make fortunes with roller spinning, Paul and Wyatt could not keep the machine running smoothly and their partnership failed. Yet their idea spread across the wool-making towns of England and, in the 1760s, Thomas Highs, a reed maker in Leigh, on the outskirts of Manchester, started to work on his own spinning machine. Like Paul, Highs enlisted the aid of a mechanically minded partner: clockmaker John Kay. They worked for long hours in secret, until they had radically improved the process of roller spinning by using two pairs of rollers that operated at different speeds.

Highs lost control of his idea when Kay’s loose lips transferred his knowledge to yet another entrepreneur, Richard Arkwright, a thriving wig maker. Arkwright had hired Kay to do a few odd jobs and, after a few drinks, Kay told him about roller spinning. Arkwright came to the clockmaker’s bedside the next morning and asked him to build a model of the machine. Arkwright took the model and its maker to Nottingham, a city of hosiery makers that had abundant demand for thread and few thread-making competitors. He decided to use water, rather than mules, to power the machine. Arkwright was a great entrepreneur, but his big idea was the result of a chain of urban invention.

While cyber-seers predicted that electronic communications technology would make cities obsolete, cities have lost none of their power to induce innovation during the modern age. The legal cases that surround Facebook’s founding echo the epic legal case against Arkwright, because Facebook’s story is also replete with close-quarters exchanges of ideas.

The great 19th century economist Alfred Marshall wrote that, in dense clusters, “the mysteries of the trade become no mystery but are, as it were, in the air”. Modern economists have found statistical support for Marshall’s ideas. People in dense metropolitan areas earn substantially more than their non-metropolitan counterparts, but workers who come to these areas do not suddenly see their wages skyrocket. Instead, there is a steady pattern of faster wage appreciation in big cities. The metropolitan wage premium is three times larger for workers with more than 15 years of labour market experience than for workers with less than five years’ experience. This pattern suggests that dense cities are enabling the accumulation of human capital: the knowledge that leads to higher wages.

That knowledge can become particularly valuable, both for the individual and for the area, when it forms the basis for a new enterprise. The self-employment rate is higher in big metropolitan areas, and big cities have long provided homes for entrepreneurs, from UK industrialists to US automobile manufacturers.

Competition and collaboration

New concepts often come from combining two ideas: cars, for instance, are carriages with engines. Detroit had engine companies, such as Detroit Dry Dock, that catered to the Great Lakes’ vast shipping trade and there were plenty of nearby carriage works that took advantage of Michigan’s abundant forests. While the core engineering of the automobile had been worked out in Cologne, Mannheim and Stuttgart by Otto, Benz, Daimler and Maybach, Detroit’s entrepreneurs figured out how to make cars cheap. A great cluster of automotive genius, including the Dodge brothers, the Fisher brothers, David Dunbar Buick and Henry Ford, competed and collaborated in Detroit. Entrepreneurship was abetted by an abundance of small suppliers that made it easy for start-ups to get going.
Modern work on manufacturing entrepreneurship finds that the presence of input suppliers is still linked with rates of entrepreneurship. As in early Detroit, entrepreneurship is closely tied to having independent suppliers that can readily work with small start-ups. Detroit’s great tragedy is that the success of Ford and General Motors squeezed out the smaller suppliers that could have worked with new entrepreneurs. As they expanded, the city changed from a centre of enormous entrepreneurial energy to a place practically synonymous with industrial stagnation.

Silicon Valley, in the 1950s and 1960s, was another cluster of entrepreneurial energy, but its strength was smart people, not parts suppliers. In the modern world, capital is fairly mobile but labour is more fixed, and workers may be particularly wary about moving elsewhere to work. My work with William Kerr on manufacturing entrepreneurship finds that an abundance of appropriate employees is key to local entrepreneurship, and those employees helped make Silicon Valley.

Under Frederick Terman's leadership, Stanford University’s engineering programme was turning out plenty of intelligent, capable engineers. Terman also helped bring William Shockley, one of the inventors of the transistor, to Stanford Industrial Park. Shockley proved a perfect placemaker because he first attracted and then repelled great workers with his capriciousness. Talent fled from his firm, first to Fairchild Semi-Conductor and then more widely. Shockley’s early employees would eventually start Silicon Valley giants such as Intel and Kleiner Perkins.

Silicon Valley’s success reminds us that new technologies seem to be making face-to-face contact - something that cities offer - more valuable than ever. It is no accident that the most famous example of an industrial cluster today specialises in high technology. Silicon Valley’s software engineers could certainly connect via cyberspace, but they choose to work close to one another. They recognise that there are huge gains associated with being at the centre of the action. In Silicon Valley, the returns for being intelligent are incredibly high, and we are a social species that derives its intelligence from being around other intelligent people. Decades of technological progress cannot supersede the millions of years of evolution that have made us good at communicating in person.
History offers little support for the view that long-distance communication technologies will make cities less important. The printing press was a more significant improvement in communicating knowledge than any 20th century revolution, but the changes wrought by the press only created a more interactive, knowledge-intensive and urban world. There is, similarly, no evidence that the telephone made cities less vital. Cities continue to have an edge in communicating ideas, and entrepreneurs continue to benefit from being close to new ideas.

Successful entrepreneurs need skills, but the most important entrepreneurial abilities are often learnt in the real world, not the academy. Fifty years ago, economist Benjamin Chinitz argued that New York City was proving to be more resilient than Pittsburgh because its garment industry had created a culture of entrepreneurship. It was easy for people to get started in the garment business – you only needed a few sewing machines – but who in his right mind would challenge US steel? As a result, Pittsburgh produced company men (as Detroit later did), while New York created entrepreneurs. Many of these – including real-estate developer AE Lefcourt and financier Sanford Weill – were later to enjoy success in completely different fields.

Entrepreneurial cities thrive, in part, by allowing energetic, entrepreneurial people to connect with one another and form productive networks of innovators. AnnaLee Saxenian, dean of the UC Berkeley School of Information, argues that part of the reason why Silicon Valley surpassed Greater Boston’s Route 128 as a technology hub was that the Californian entrepreneurs interacted more with one another, often after work. Networks spread knowledge about who is buying and selling, and create the trust that is critical to establish long-term relationships. Entrepreneurs’ ability to nurture one another explains why some areas become hubs of entrepreneurship while others do not.

Perhaps the most entrepreneurial place I have ever visited is the Dharavi slum in Mumbai. The area offers access to Mumbai’s many consumers and workers, and attracts energetic migrants from throughout India and Pakistan. Dharavi reminds us that urban poverty can often be a sign of success, not failure. Dharavi has so many poor people not because it lacks economic opportunity, but because its abundance of economic opportunity attracts them.

The pioneering development economists Abhijit Banerjee and Esther Duflo have found enormously high levels of entrepreneurship among the urban poor in many developing countries. About 50% of poor urban households in Indonesia, Nicaragua and Pakistan have their own businesses. In Peru, the figure is 70%. The scale of these enterprises is tiny, both because these people lack capital and because entrepreneurs can slip through the tight regulations that are often imposed on formal businesses in these countries.

In many cases, urban entrepreneurs in the developing world cater to the most basic human needs. In Hyderabad, Banerjee and Duflo found that 8% of the poor-owned businesses sell fruit and vegetables, 6% sell milk and 17% operate small general stores. The scale of these opportunities is tiny, and most of these entrepreneurs will never become wealthy or even solidly middle class, but these small operations are far preferable to rural poverty. It is easy for wealthy world visitors to be overwhelmed by the poverty of urban India or Brazil or Africa, but that deprivation needs to be compared with the rural poverty of the same countries.

Kolkata is often thought of as poor, but the poverty rate of that city is 11%, compared with 24% in rural West Bengal. More than 10% of West Bengal’s rural residents have faced food shortages in recent years; fewer than 1% of that region’s urban residents have experienced such shortages. Lagos’ extreme poverty rate, which corrects for higher prices in the city, is less than half the rate in rural Nigeria. About 75% of Lagos’ population has access to safe drinking water, while the norm in the rest of Nigeria is, typically, less than 30%. While 90% of Rio residents earned more than US$85 a month, only 30% of people in the rural north-east were above that poverty line, according to a recent study that used 1996 data.

Prosperity through proximity

Cities such as Kolkata or Rio create prosperity by enabling connections. They connect workers with employers, and entrepreneurs with customers. Cities are conduits across countries: Shanghai and Bangalore, for instance, contain the firms that then sell to the rich markets of the developed world. Bangalore’s software entrepreneurs and the manufacturing magnates of China are an elite part of their countries, but their success drives the employment of workers who then buy the goods being sold by the food-selling entrepreneurs of the slums.

The economic advantages of urban connection should lead us to question land-use rules that make it difficult to deliver density in economic successful cities such as Mumbai. For years, Mumbai restricted building heights to one-and-a-third storeys, on average. These restrictions were meant, in part, to limit the growth of the city, but they have mainly ensured that space is too expensive and sprawl too extensive. If a growing city does not build up, it will build out. The entrepreneurs of the developing world do not need huge amounts of space, but they do need to be close to one another. They buy from one another and sell to urban markets, and their success hinges on being at the heart of the action. Policies that restrict the growth of cities such as Mumbai make it difficult for those entrepreneurs to succeed; they would be far better served by policies that embrace density.

The economic vitality of developing-world cities and improvements in agricultural efficiency mean that rural populations will decline in the developing world. This will increase prosperity in those areas, as farmers will have more land available to them. The poverty that is endemic in the rural areas of the developing world makes it hard to see much sense in fighting this trend, either by artificially limiting urban growth with land use policies or by artificially boosting rural areas.

The smarter approach is to worry more about fighting the downsides of density. The same proximity that enables people to exchange ideas face to face enables the spread of disease. If people are close enough to buy and sell some milk, they are also close enough to rob one another. If there are too many drivers on a road, traffic comes to a standstill.
Cities need functional governments to manage the social costs that people can create when they are near one another; today, too many of the challenges that poor countries face are a result of government corruption. These challenges become more costly in dense areas, whose public sectors do both too much, such as over-regulating entrepreneurship and new construction, and too little, such as not providing enough clean water.

Something worth fighting for

One response to these governmental problems is just to wish that cities would go away, but this will leave the developing world locked in rural poverty. A better response is to continue working on urban governance, fighting the slow, tough fight for cleaner water, safer conditions and less congestion. The crowded streets in the developing world could benefit from congestion charging as much as London and Singapore. After all, Singapore was hardly the rich city that it is today when it imposed its first congestion-pricing scheme in 1975.

Singapore has been remarkably successful at transforming a once ordinary third-world city into a clean, efficient and safe place to live, but for many cities, it can be difficult to raise the money needed to invest in infrastructure. In the 1790s, New York City decided to save itself money by providing water through a public-private partnership that subsidised itself by running a bank. Unfortunately, banking proved more remunerative than providing clean water, and New York was later obliged to spend public dollars on the Croton Aqueduct.

In the developing world, rural areas should not be taxed to pay for cities’ infrastructure, but cities need enough autonomy to raise their own taxes to pay for these investments. Managing all that money can, however, be problematic in countries that are plagued by corruption. Fighting  corruption requires strong central control: leaders who have the responsibility for good government and who have the power to punish. Theodore Roosevelt, who fought corruption both at the city level (when he helped run New York’s police department) and at the national level, believed that “in most positions, the ‘division of powers’ theory works unmitigated mischief”. That view may be extreme, but the former Singaporean prime minister Lee Kwan Yew would have been far less successful in his fight against corruption if his hands had been tied more tightly.

Finally, managing cities requires controls on individual behaviour: traffic needs rules and urban crime needs effective policing. Density magnifies the impact that individuals have on their neighbours and, unfortunately, this means that city dwellers have to sacrifice some of their liberty, as Londoners did when they put up with Peel’s police force. Singapore has plenty of rules and, while some may be extreme, the chaos that exists in many developing cities is far worse. The big challenge is to enforce these rules effectively, which requires better government than currently exists in much of the developing world.

The urbanisation of the developing world does, however, offer hope for political change. The American Revolution began in the dense streets of Boston, which brought John Hancock, who badly wanted to change British trade policies, together with Sam Adams, who could conjure the crowds to push Hancock’s preferred policies. Cities enable the kind of mass coordination that forced change in Paris in 1789, in St Petersburg in 1917 and in Cairo in 2011. The toppling of Hosni Mubarak may be known as the Facebook revolution, but change would not have come if people had just tried to block Mubarak from their Facebook pages. It came because people gathered in a central urban spot and made the case, day after day, for reform.

The eventual outcome of Cairo’s uprising is still uncertain, and history is full of examples of urban revolutions that ended badly. Yet in many countries, there is relatively little hope in the political status quo. When people come together in cities and push for reform, they at least create some chance for major political improvements. The old German proverb, Stadtluft macht frei (city air makes you free), may not always be true, but it does offer hope to the rapidly urbanising nations of the developing world. That hope suggests, at least to me, that the benefits of urban growth may actually be largest in those places where the current government is most problematic.

Neither political change nor economic progress comes from isolated innovators. Even Newton, who was more isolated than most, emphasised his debt to others. Cities bring us together and enable us to do more. They enable poor migrants to earn more by becoming small-scale entrepreneurs or urban employees. They enable the coordinated political changes that create democracy and reform. They even enable the chains of creative brilliance, such as the Florentine Renaissance or Athenian philosophy, that are responsible for the high points of civilisation. In these times, we need cities more than ever.