The Economy of Cities

1. Cities Drive Economic Development, Not Agriculture

Cities are not ordained; they are wholly existential.

Cities as economic engines. Contrary to conventional belief, cities precede and drive agricultural development, not the other way around. The earliest cities arose from hunting and gathering societies, developing new technologies and economic activities that later spread to rural areas. This urban-centric model of development challenges the long-held notion of agricultural primacy.

Urban innovation spreads rurally. Cities serve as incubators for new economic activities, including agricultural innovations. Examples include:

• Çatal Hüyük: Early Neolithic city with advanced agriculture and crafts
• Medieval European cities: Developed improved agricultural techniques later adopted in rural areas
• Modern cities: Continue to innovate in food production and processing

Rural development as city export. Rural economies are essentially extensions of urban economies, with cities exporting their innovations, technologies, and economic models to the countryside. This pattern of urban-led development has been consistent throughout history and continues in modern times.

2. New Work Emerges from Existing Work, Multiplying Labor Divisions

D + A → nD

Innovation process. New work is not created in isolation but emerges from existing work through a process of addition and division. This can be represented by the formula D + A → nD, where:

• D: Existing division of labor
• A: New activity added to the existing work
• nD: Resulting new divisions of labor

Examples of work evolution:

• Brassiere manufacturing: Added to dressmaking
• Sandpaper production: Added to abrasive sand manufacturing
• Electronic hand: Developed from space program technology

Multiplication of labor divisions. As new work is added to old, it creates multiple new divisions of labor. This process leads to economic expansion and diversification, driving the growth of cities and economies. The more divisions of labor already achieved, the greater the potential for adding new goods and services.

3. City Inefficiencies Foster Innovation and Problem-Solving

To limit the sizes of great cities as is often advocated, because of the acute problems arising from size, is profoundly reactionary.

Inefficiency breeds innovation. Large cities are often criticized for their inefficiencies, but these very inefficiencies create opportunities for innovation and problem-solving. The challenges posed by urban growth spur the development of new technologies and solutions.

Examples of urban-driven innovations:

• Water supply systems
• Waste management technologies
• Transportation networks
• Public health initiatives

Problem-solving as economic driver. The process of addressing urban challenges leads to economic growth and technological advancement. Cities that successfully tackle their problems often export these solutions to other urban areas, creating new economic opportunities.

4. Import Replacement Fuels Explosive City Growth

Wherever cities grow at all, they experience growth explosions of astonishing power.

Import replacement process. Cities grow rapidly by replacing imported goods and services with locally produced alternatives. This process creates new jobs, stimulates local innovation, and leads to economic diversification.

Stages of import replacement:

1. City becomes a good market for imported goods
2. Local production of these goods becomes economically feasible
3. Production shifts from imports to local manufacturers
4. City can now import other goods, expanding its economy

Multiplier effect. Import replacement creates a powerful multiplier effect, leading to explosive city growth. As more goods are produced locally, more jobs are created, increasing local demand and further stimulating economic activity.

5. Large Cities Generate Exports Through Local Economies

A city's basic wealth is its productive capacity, created by the practical opportunities people have had to add new work to older work.

Local economy as export foundation. Large cities generate new exports primarily through their diverse local economies. The process typically follows three paths:

1. Adding export work to other people's local work
2. Adding export work to one's own different local work
3. Exporting one's own local work

Examples of export generation:

• Ford Motor Company: Started by assembling parts from local suppliers
• Electronics industry: Many companies began as local suppliers before becoming exporters
• Service industries: Local services often become exports as cities grow

Importance of local diversity. The more diverse a city's local economy, the greater its potential for generating new exports. This diversity provides the necessary foundation for innovation and economic expansion.

6. Development Capital Originates in Cities, Not Rural Areas

To say that underdeveloped countries must be financed from abroad is equivalent to saying that they are to be "developed" as inert colonial dependencies, not self-generating economies.

Cities as capital sources. Contrary to the belief that rural areas provide basic capital, development capital originates in cities. As cities grow and diversify, they create financial institutions and services that become essential for economic development.

Capital as producers' goods. Development capital should be viewed as a form of producers' goods, similar to other resources necessary for economic growth. Cities that grow into industrial and commercial centers also become important financial centers.

Self-generating economies. True economic development requires that countries generate their own capital rather than relying solely on foreign investment. This self-generation of capital is a key characteristic of developing economies.

7. Discriminatory Capital Use Hinders Economic Progress

People who are prevented from solving their own problems cannot solve problems for their cities either.

Barriers to development. Discriminatory use of capital, particularly against marginalized groups, creates significant barriers to economic development. This discrimination prevents potentially innovative individuals and communities from contributing to economic growth.

Examples of discrimination:

• Racial discrimination in access to capital and business opportunities
• Gender-based restrictions on economic participation
• Class-based limitations on access to financial services

Economic consequences. Discriminatory practices not only harm the targeted groups but also hinder overall economic progress. By limiting the pool of potential innovators and entrepreneurs, discrimination reduces a city's capacity for problem-solving and economic growth.

Need for inclusive development. To achieve sustainable economic growth, cities must ensure equitable access to capital and economic opportunities for all residents. This inclusive approach maximizes the potential for innovation and problem-solving across the entire urban population.

Last updated: April 24, 2025