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Friday, July 19, 2013

Markets as Cities

Why are a growing number of libertarians fascinated by cities and indeed pinning their hopes for a freer future on cities? Two examples of this just from recent Freeman issues are by Zachary Caceres on startup cities and the winner of the Thorpe-Freeman Blog Contest, Adam Millsap, responding to one of the articles in an entire cities-themed issue. 

There is a deep affinity between cities and markets, and indeed between cities and liberty. (As the old saying goes, “City air makes you free.”) Cities aren’t merely convenient locations for markets; a living city (which I’ll define in a moment) is a market, and the first cities probably originated as markets. Much has been written on this connection, but I’d like to point out another link between cities and markets—one that comes from the great 20th century urbanist, Jane Jacobs.

Consciously or not, Jacobs followed the tradition of the influential German sociologist Max Weber in seeing cities as essentially markets. Indeed, in her 1969 book The Economy of Cities, she defined a city, or what I like to call a “living city,” as “a settlement that consistently generates its economic growth from its own local economy.”

Moreover, I’ve written elsewhere that today’s economic phenomena of demand, supply, the price system, markets, externalities, public goods, and division of labor had their genesis in an urban setting. The fundamental (classical) liberal concepts of property rights, economic freedom, and the rule of law did not develop among wandering nomads, farmers, or in small villages but perforce from the interactions of strangers with diverse cultures and backgrounds interacting in dense proximity with one another.



In her great book of 1961, The Death and Life of Great American Cities, Jacobs first presented her argument that the key feature of any great city is its diversity. In that book, she meant mainly diversity of how urban space is used, but she also meant diversity of a great city’s inhabitants, especially their knowledge and tastes. For her, diversity is the key to the emergence and economic development of a living city. Such diversity is the result of large numbers of strangers coming together with vastly different backgrounds, and that city air allows them to benefit from those differences. (Jacobs tacitly assumed that all of this takes place in a system of economic freedom.)

Now, standard economics teaches us that the differences among economic actors allow them to specialize and trade for mutual gain. This principle is called “comparative advantage,” which is the idea that people should choose those lines of production in which they are the most efficient. That’s fine as far as it goes.

But more importantly Jacobs, and indeed most Austrian economists, see the essence of markets as not merely places that promote efficiency, but as places in which entrepreneurial competition spurs the discovery of new things. That discovery process entails fundamental changes in culture as well as in economic development. Joseph Schumpeter’s phrase “gales of creative destruction” better captures the essence both of living cities and of markets than the standard economic notions of efficiency, comparative advantage, and low-cost production, as important as those are in their limited context.

Living cites and successful markets bring intellectually and culturally diverse people together to their mutual advantage, but they also create conditions in which vast amounts of novel information—about science, technology, religion, music, the arts, and lifestyles—get dispersed very rapidly. That in turn allows all kinds of people, the ordinary and the extraordinary, to experiment and to make new connections among all that information, generating even more diversity and attracting even more people. In this way, cities become “incubators of ideas” and economic growth. The process is highly dynamic, but also very messy and, yes, in a sense inefficient. Most experiments fail. But someone who fails in a city, unlike her counterpart in less-urbanized cultures, need not starve as a result, and there is more likely to be some new opportunity just around the corner.  We see the successes that drive innovation, but the failures are important, too.


…and Cohesion

With all that diversity, why don’t things degenerate either into violent conflict or into forcing each of us to seal ourselves off in little bubbles? The remarkable thing about markets and cities is that not only do their successes depend on a wide range of differences, but they also depend on a high degree of cohesion. Things hang together, although sometimes just barely. 

Jacobs also wrote about what is responsible for that cohesion (again, in the context of cities), and coined the term “social capital” to describe it. A basic level of trust among strangers in a large settlement is a good example of social capital—“social” because its value resides not in a particular person but in the connections among various persons, and “capital” because those connections can be valuable inputs into production and innovation.

Social capital emerges from social networks founded on norms of trust and reciprocity. People who are initially strangers learn in markets and cities (again, under conditions of economic freedom) that being trustworthy and playing fair tend to create more and better opportunities in the long run than cheating and being opportunistic. That foundation encourages further networking—with new buyers or sellers, partners or backers—and lays the groundwork for greater trust, experimentation, and prosperity.

I think these days the Weber/Jacobs view of cities as markets is fairly well established in the literature. The perspective I’m trying to highlight here on the relation between cities and markets (which I’ve tried to do in a different way elsewhere)  is that, because of the centrality of diversity and cohesion both to successful markets and to living cities, we can say more than that a city is a market. It may be just as true to say that a successful market is also a living city.

Find a Portuguese translation of this article here.

  • Sanford Ikeda is a Professor and the Coordinator of the Economics Program at Purchase College of the State University of New York and a Visiting Scholar and Research Associate at New York University. He is a member of the FEE Faculty Network.