The Benefits of Urbanization on Innovation

Stephen DeAngelis

August 01, 2013

People continue to flock to cities. Although some migration is forced (see, for example “China’s Great Uprooting: Moving 250 Million Into Cities,” by Ian Johnson, New York Times, 15 June 2013), most of it is voluntary. Many analysts believe there are good reasons that people prefer urban life (like better use of resources and better access to services), but Jim Russell isn’t sure. He writes, “Greater population density drives innovation and productivity. Albeit a theory, urbanists rally around the idea. I’m skeptical of the claim. The conclusion supports the preferred geography, raising a red flag.” [“The Magic of Cities,” Sustainable Cities Collective, 9 June 2013] Russell states, however, that a new study by MIT researcher Wei Pan is tempering his skepticism. He cites an article by Emily Badger in which she interviews Pan. [“The Real Reason Cities Are Centers of Innovation,” The Atlantic Cities, y June 2013] She begins her article by writing:

“It’s obvious from human history that people have long found unique value in living and working in cities, even if for reasons they couldn’t quite articulate. Put people together, and opportunities and ideas and wealth seem to grow at a more powerful rate than a simple sum of all our numbers. This has been intuitively true for centuries of city-dwellers.”

In the information age, however, intuition is seldom satisfactory. Badger continues:

“There have been plenty of theories. Adam Smith famously figured that people become more productive when we’re able to specialize, each of us honing a separate area of expertise. And when lots of us elbow into cities, we’re able to specialize in ways that we can’t when a rural farmer must also double as his own butcher, accountant and milkmaid. Other economists have suggested that cities become great agglomerators of industry when factories cluster together around economies of scale and communal access to transportation.”

Pan and his associates (Gourab Ghoshal, Coco Krumme, Manuel Cebrian, and Alex Pentland), attempt to move beyond theory in a study entitled Urban characteristics attributable to density-driven tie formation. That’s a title only an academician (or an academician’s mother) could love. The study’s abstract is just about as dry:

“Motivated by empirical evidence on the interplay between geography, population density and societal interaction, we propose a generative process for the evolution of social structure in cities. Our analytical and simulation results predict both super-linear scaling of social tie density and information flow as a function of the population. We demonstrate that our model provides a robust and accurate fit for the dependency of city characteristics with city size, ranging from individual-level dyadic interactions (number of acquaintances, volume of communication) to population-level variables (contagious disease rates, patenting activity, economic productivity and crime) without the need to appeal to modularity, specialization, or hierarchy.”

In the paper, the authors write, “One of the enduring paradoxes of urban economics concerns why people continue to move to cities, despite elevated levels of crime, pollution, and wage premiums that have steadily lost ground to premiums on rent.” Why indeed? Pan told Badger, “We think there’s an underlying completely different way of thinking here, which is very different from the economist’s way of thinking.” The study builds on previous work by researchers at the Santa Fe Institute that proved “the math behind the power of cities: As they grow in population, all kinds of positive outcomes like patents and GDP and innovation (and negative ones like STDs and crime) grow at an exponential factor of 1.1 to 1.3. This means that all the benefits (and downsides) that come from cities don’t just grow linearly; they grow super-linearly. Badger writes:

“As for why this happens, … Pan pushes aside theories about the location of manufacturing or the specialty of trade. ‘It’s more fundamental than that,’ he says. ‘Cities are about people. It’s just that simple.'”

Manufacturers and retailers certainly see cities in that fundamental way. As they view the future, they want to know how to reach the billions of people that live (and will live) in urban environments. Only big data analytics can help sort out the diversity, preferences, and locations of future urban consumers. Pan and his colleagues “argue that the underlying force that drives super-linear productivity in cities is the density with which we’re able to form social ties. The larger your city, in other words, the more people (using this same super-linear scale) you’re likely to come into contact with.” Pan told Badger, “If you think about productivity, it’s all about ideas, information flows, how easily you can access ideas and opportunities. We believe that the interaction mechanism is what drives the productivity of the city.” Badger continues:

“It’s not possible for scientists to measure your social ties in the same way they can measure GPD or crime incidents or STD infections (despite their best wishes, they can’t put sensors on all of us). But this study examined a proxy for the same idea: The researchers looked at phone logs between anonymized telephone numbers all over the country, in search of the number of people who we communicate with inside our own metropolitan statistical area. ‘If you look at the interaction patterns of cities,’ Pan says, ‘You will see that they grow super-linearly with population with the same growth rate as productivity, as innovation, as crime, as HIV, as STDs.’ All of those facets of urban life have appeared until now to share a somewhat mysterious mathematical relationship. But this research suggests that this particular super-linear growth rate is directly tied to how dense cities enable us to connect to each other. As cities grow, our connections to each other grow by an exponential factor. And those connections are the root of productivity. ‘What really happens when you move to a big city is you get to know a lot of different people, although they are not necessarily your “friends,”‘ Pan says. ‘These are the people who bring different ideas, bring different opportunities, and meetings with other great people that may help you.'”

Russell, however, isn’t convinced that density is the most important factor when it comes to spurring innovation in urban environments, he believes it is migration. He writes:

“The magic of big cities is migration. A sprawling residential pattern doesn’t dampen the effect. Talent can live in the core or super-commute into downtown. Concerning innovation, better to be an immigrant than work in [the] Big City. Migration matters more, much more, than density.”

Other recent work, however, seems to support the density theory proposed by Pan and his colleagues. Economists Neil Lee of Lancaster University Management School and Andres Rodriguez-Pose of the London School of Economics conducted a survey “of roughly 1,600 small and medium enterprises across the United Kingdom.” Their results indicated, “U.K. firms located in the city were indeed more likely than those in rural areas to report both new products (52 to 46 percent, respectively) and new processes (43 to 34 percent).” [“Cities Are Innovative Because They Contain More Ideas to Steal,” by Eric Jaffe, The Atlantic Cities, 12 June 2013] Jaffe concludes:

“The city environment, ripe with chance exchanges and interactions, might only explain a sliver of new product development. Some complex combination of other forces (e.g., creative inspiration or specific demands or more approaches to problem-solving) is also involved. When it came to new business processes, however, the urban advantage seemed to rely almost entirely on ideas learned from neighboring firms (as opposed to original ideas). Here the city itself would appear to play its greatest role in innovation. Greater proximity to other firms, and perhaps also greater employee movement from company to company, no doubt increases the flow of outside information and leads to new ways of working.”

In other words, density (i.e., greater proximity to other businesses) plays and important role in urban innovation. That doesn’t mean that migration, as proposed by Russell, doesn’t also matter. The bottom line is that magic does occur in cities and it is the result of increased opportunities for interactions between people.