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Urban Economics and
Real Estate
Theory and Policy
Second Edition
John F. McDonald
Roosevelt University
Daniel P. McMillen
University of Illinois at Urbana-Champaign
Daniel
For Mary, Katie, Steve, and Rob
This book was set in 10.5/12 Times Roman by Thomson Digital, and printed and bound by Hamilton Printing Company. The
cover was printed by Hamilton Printing Company.
Copyright # 2011, 2007 by John F. McDonald and Daniel P. McMillen. All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying,
recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without
either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the
Copyright Clearance Center, Inc. 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com. Requests to the
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HT321.M348 2010
330.91730 2–dc22 2009052152
Preface v
Acknowledgments vii
iii
iv I Contents
This textbook has been written primarily for under- research, but that she or he can conduct a study that
graduate and master’s degree students who wish to is informed and well organized. One implication
learn about the field in which economic analysis is of this purpose is that, although many policy issues
applied to urban areas and urban real estate. The are examined, a complete catalog of urban social
title of the book has been chosen with care. The problems is not included. In the first edition of the
emphasis is on economic theory (primarily micro- book the examples and data all pertained to urban
economic theory), empirical studies that are based areas in the U.S. In this new edition we have added
in economic theory, and the policy lessons that can throughout the book material on urban areas around
be drawn from the use of economics to understand the world, including a new Chapter 2, ‘‘World
urban areas. The book includes a group of chapters Urbanization.’’
on urban real estate. We believe that the economics The book is written presuming that the student
of real estate markets and real estate investment and has a background that, at a minimum, includes a
development are essential to a course in urban strong course in the principles of microeconomics
economics. No other urban economics text includes and the ability to handle algebra. The student needs
the extensive coverage of real estate such as that to feel comfortable with the use of basic mathemat-
included in this book. This new edition of the book ics because economic analysis cannot be done
includes coverage of urban areas around the world. without it. The book does include a few mathemati-
A course in urban economics with a strong cal derivations that are more than two or three lines
real estate component would use the chapters in in length. Students who have had a course in
the book in the order in which they are presented. intermediate microeconomic theory will find that
An alternative is to use the book for a course in most of the mathematical and economic concepts
urban real estate with strong economics and public in the book are quite familiar. The book does not
policy components. In this case the course would require that the student has studied calculus. All of
begin with Chapters 9–13, the chapters on real the mathematical concepts used are covered in the
estate and urban housing. Students would then appendix at the end of the book. However, the
read Part I (Economics and Urban Areas) and student who has had a course in basic differential
Part II (Location Patterns in Urban Areas). The calculus (e.g., math for business and economics)
remainder of the course should include Part IV will find that the math is easy.
(Government in Urban Areas) and Part VI (Urban The book can be used in (at least) two ways. It
Growth). Part V (Urban Social Problems) would can serve as a text for students who are majoring in
be optional. economics. These students wish to learn about the
Those who study this book should be able to subject matter of urban economics, but they also
conduct economic studies of an urban area. We do need to gain more practice in the use of economic
not mean that the student can do original academic theory and the underlying mathematical techniques.
v
vi I Preface to the Second Edition
Several more advanced sections and appendices Statistics) and state departments of labor or employ-
have been included for these students, and they ment security. Data on urban real estate markets can
should review the appendix to the book while be obtained from private sources which often have
they are reading the first five chapters. The book free web sites. Also, most of the county tax asses-
can also serve as a text for students in related fields, sors now provide data on real estate parcels on the
such as real estate, urban planning, and urban web. Data on urban areas around the world are
geography, who do not intend to become experts provided by the World Bank and the United
in economic analysis, but who wish to apply their Nations.
knowledge of microeconomics to the urban econ- We normally require that the student read other
omy. These students can omit some of the more books and write a book review. Recommendations
mathematical appendices to the chapters. If we were for books to use are made along the way in the text.
teaching students in this category, we would allo- Here we make a few suggestions of books that are
cate some time in each of the first few weeks of the readable and insightful. They are:
course to covering the material in the appendix to
William Cronon, Nature’s Metropolis,
the book.
The book begins with five chapters that intro- W. W. Norton, 1992
duce urban economics as a field of study and discuss Anthony Downs, Still Stuck in Traffic, The
the origins and functions of cities. The rest of the Brookings Institutions, 2004
book consists of sections organized around these Anthony Downs, Real Estate and the Fi-
topics: nancial Crisis, Urban Land Institute, 2009
Location patterns in urban areas Joel Garreau, Edge City, Doubleday, 1991
Real estate and urban housing Edgar Hoover and Raymond Vernon, Anat-
Government in urban areas omy of a Metropolis, Harvard University
Press, 1959
Urban social problems
Jane Jacobs, The Economy of Cities, Ran-
Urban growth
dom House, 1969
We have been teaching urban economics to John McDonald, Urban America: Growth,
undergraduate and graduate students for many Crisis, and Rebirth, ME Sharpe, 2008
years, and this book draws upon that experience. Saskia Sassen, Cities in a World Economy
Our experience also tells us that students need to do
(3rd edition), Pine Forge Press, 2006
more than read the textbook and attend lectures.
Thomas Stanback, The Transforming Met-
They need to learn about the main data sources in
the field, they need to write, they need to read other ropolitan Economy, Center for Urban Pol-
books, and they need to go out and observe the icy Research, Rutgers University, 2002
urban area in which they live (since most of them do William Fischel, The Homevoter Hypothe-
live in an urban area). sis, Harvard University Press, 2001
The main data sources in the field are available
on the World Wide Web, and chief among the We also heartily recommend the Blackwell
relevant web sites is that of the U.S. Bureau of book of readings edited by Richard Arnott and
the Census (census.gov). We recommend that the Daniel McMillen titled A Companion to Urban
instructor show the student how to surf census.gov. Economics. These readings make a fine comple-
Another important data source is County Business ment to our textbook treatment of the subject. The
Patterns, which provides detailed employment data only supplement to this text is a web site hosted by
by industry for all counties in the U.S. Other labor Daniel McMillen. There you will find any necessary
market data can be obtained from the web sites of errata, updates, some new examples, and directions
the U.S. Department of Labor (Bureau of Labor to useful web sites.
!
ACKNOWLEDGMENTS
We owe a debt of gratitude to seven scholars who good return on his investment. And we would be
reviewed a draft of the proposal for the revised book remiss if we failed to note that Wiley-Blackwell has
and the seven who reviewed draft chapters. They a large program in urban economics, real estate, and
made many valuable suggestions. related subjects. All students and scholars in these
We also owe much to our editor George Lobell fields are in their debt.
of Wiley-Blackwell who suggested this revised
edition—including the material on urban areas John F. McDonald, [email protected]
around the world. We hope that we will provide a Daniel P. McMillen, [email protected]
vii
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!P A R T
I
ECONOMICS AND URBAN AREAS
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!
C H A P T E R
1
I N T RO D U C T I O N TO U R BA N
ECONOMICS
I A. THE NATURE OF URBAN AREAS The field of urban economics is closely related
AND URBAN ECONOMICS to other fields such as regional economics and real
estate. Regional economics is the study of regions
Urban economics is the study of economies that are that are much larger than a single urban area but are
organized as urban areas. An urban area can be smaller than an entire nation. Regional economists
defined as a place with are interested in the economy of the Midwest, the
– a very high population density, compared to Southwest, etc. But both urban and regional econ-
the surrounding area, and omists are interested in the variety of economic
experience that can occur within a single nation.
– a total population greater than some mini- Both study economic units that are defined geo-
mum number (to distinguish urban areas graphically, as opposed to industry units, demo-
from small towns). graphic groups, occupational groups, or other
Most urban areas have an identifiable central possible disaggregations of the whole economy.
point where population density is at a peak and Indeed, because both urban economics and regional
declines with distance from that point. (A few urban economics study geographic subunits of the na-
areas, such as Minneapolis-St. Paul, have more than tional economy, both make use of some of the
one central point.) Urban economies are based on same models and methods. Urban economics is
frequent contact among people and economic ac- also closely related to real estate, the field that
tivities, and high population density facilitates that studies real estate markets, institutions, investment,
contact. You will be studying economies such as and development. An urban area consists of the
Greater London, the Tokyo/Yokohama metropolitan people who live there and the land, buildings, and
area, the New York metropolitan area, ‘‘Chicago- other facilities that people use. Many urban econ-
land,’’ and the Dallas-Fort Worth ‘‘metroplex.’’ omists concentrate on the study of housing markets
Urban economics is also the study of cities— in urban areas, for example. Other urban economists
both the positive and the negative aspects of cities. study the urban land market, and some examine the
Cities are at the heart of the modern economy and causes and consequences of real estate develop-
society. They are economic centers of trade and ments of various types. Urban economics is also
finance. They are centers of culture, innovation, related to urban planning, urban sociology, urban
and education. Cities are also the home of urban politics, and urban geography. We believe that
problems, including crime, traffic congestion, urban students in all of these fields can benefit from a
sprawl, racial segregation, and discrimination. course in urban economics that provides a solid
Cities are the endlessly fascinating places where understanding of the economics of cities and how
nearly all of us spend our lives. Our proposition in market forces shape cities.
writing this book is that your education should This book uses two different, and complemen-
include a deeper understanding of the economics tary, methods for examining the economy of an
of cities. urban area. The first method is the study of location
3
4 I Chapter 1. Introduction to Urban Economics
patterns within an urban area. The location deci- We shall see that a metropolitan area that grows
sions of households, firms, and industries within the rapidly will see very rapid suburban growth and
urban area are the chief topics. For example, the may have some growth in the central city, whereas a
study of the spatial pattern of population density in metropolitan area that grows slowly will likely
an urban area is a favorite topic in urban economics. experience decline in its central areas along with
Location decisions are influenced by many factors, substantial growth in the suburbs. This combination
including public policies regarding the provision of has motivated the concern about urban ‘‘sprawl.’’
transportation facilities and other public goods and But first we offer a brief introduction to urban
services, local taxation, and zoning and other forms economics as a field of study.
of land use control. The second method is the
examination of the urban economy in the aggregate.
Spatial patterns within the urban area are largely I B. DEVELOPMENT OF THE FIELD OF
ignored. Instead the focus is on the growth or
URBAN ECONOMICS
decline of economy of the urban area. An urban
economy is quite ‘‘open’’ in the sense that imports Urban economics as something of a separate field of
and exports are large fractions of its total economic study within economics began in the late 1930s
activity. Most urban areas specialize in the produc- when economists started using the tools of macro-
tion of a certain group of goods and services for economics to examine urban economies and their
export outside the urban area. Most urban areas thus real estate markets. Basic concepts such as gross
have identifiable economic functions within the national product, exports and imports, the multi-
larger economy. Changes in the larger economy plier, and the unemployment rate were adapted to
can have sizable impacts on an urban economy, the study of urban economies. Perhaps a date for the
and at times may require that the urban area undergo founding of the field is 1956, the year in which the
a significant change in its basic economic function. New York Metropolitan Region Study was initiated.
These two methods for looking at an urban The book that summarizes this huge study was
economy are not independent. Clearly a major written by two economists, Edgar M. Hoover and
change in the economic functions performed by Raymond Vernon, and is entitled Anatomy of a
an urban area can have implications for the location Metropolis. This book, which was published in
patterns within the urban area. Chicago is no longer 1959, carries the subtitle ‘‘The changing distribu-
the ‘‘hog butcher of the world,’’ but is in fact now tion of people and jobs within the New York
the center of its nation’s air transportation system. metropolitan region.’’ This study of New York
Location patterns within the Chicago metropolitan succeeded in gathering an enormous volume of
area have adjusted accordingly as O’Hare Airport data that were presented in a well-organized fash-
and its surrounding area became a major center of ion. The trends observable in the data were then
employment. Further, does a significant change in discussed using a variety of forces that were hy-
the rate at which an urban area grows imply a pothesized to influence the location choices of firms
change in location patterns? At the same time, it and households within a metropolitan area. Anat-
is possible that the location patterns within an urban omy of a Metropolis is a classic study, and we
area can influence its ability to grow. Is the supply of recommend that you read it.
industrial sites sufficient for further industrial Some urban economists would place the found-
growth? Do those industrial sites possess good ing of the field in 1964, the date of the publication of
access to transportation facilities, suppliers, and William Alonso’s book Location and Land Use.
needed workers? Is the urban area (especially its Alonso laid out a basic theoretical model that can be
downtown and other major employment centers), an used to study the economics of location patterns
attractive place that will draw to it workers who within urban areas that is still used today. Alonso’s
possess skills that are used in the new knowledge- method makes use of the idea that households and
based economy? In the next chapter we take a brief firms are willing to make bids for land at various
look at Tokyo, London, Paris, Toronto, Mumbai, locations. Location decisions and patterns of land
New York, Los Angeles, and Chicago to begin to use can be explained by comparing the bids made
see how urban growth and location patterns interact. by different types of households and firms. The law
Development of the Field of Urban Economics J 5
firm outbids others for downtown locations, the refines or makes use of the generally accepted
electronics plant makes the highest bid for a site model (stages 4 and 5), while other researchers
near the interstate highway, the family with children are in the process of questioning the generally
bids more than others for a lot in the suburbs, and so accepted model (stages 1, 2, and 3). Sometimes
on. These ideas will be explored in detail in this those who are questioning the generally accepted
book. Richard Muth gets credit for developing a model will demonstrate that the older model needs
similar theoretical model at the same time Alonso to be abandoned in favor of their newer, better
was working on his book in the late 1950s. See approach. In other cases the older and the newer
McDonald (2007) for a detailed discussion of their models will coexist, and the matter of which model
contributions to the founding of urban economics. is better will be unresolved.
Since the 1960s a great deal of progress has Given these five stages in the accumulation of
been made in urban economics as a field of research. positive economic knowledge, can we determine a
It is also true that urban economics is still a rela- date for the founding of the field of urban econom-
tively new field of study. But what does it mean to ics? Perhaps the field begins with the accumulation
say that progress has been made in a field of of facts—the first stage listed above. If that is the
research? Research in economics can be classified case, then no date can be given because we do not
as one of two fundamental types: normative and (and perhaps can never) know when someone who
positive. Normative economics is the exploration of resembled an economist began to collect data about
questions such as, ‘‘How should the economy be cities. On the other hand, maybe a field of study is
organized to be efficient and/or equitable?’’ Some founded when someone begins to sort through the
ethical objective is specified, and what ‘‘ought’’ to facts and to find patterns and trends that seem to call
be done is deduced—given the facts of life. This for an economic model. The New York Metropoli-
type of research usually makes use of formal eco- tan Region Study is an excellent example of this
nomic theory to derive propositions such as, ‘‘The kind of work. Indeed, maybe it is the finding of such
economy should have perfectly competitive mar- patterns and trends that initiates a field in economic
kets,’’ or ‘‘A tax should be placed on polluters.’’ The science.
task of positive economics is to determine the facts Others will claim that economic science does
of economic life. not exist until the first economic model pertaining to
The development of positive economic knowl- those patterns and trends is actually formulated.
edge in fields such as urban economics typically This is why 1964, the year of the publication of
proceeds through five stages, which can be charac- Alonso’s Location and Land Use, is often proposed
terized as follows: as the date for the founding of the field. There is no
definitive answer to this question, but a stimulating
1 Accumulation of data pertinent to the field of
class discussion might be held to sort out the issues.
study.
How would you compare urban economics to other
2 Systematic examination of these data in order to fields within economics, to other social sciences,
determine the important facts that require for- and to other fields of science?
mal ‘‘explanation’’ through the development of Urban economics provides several examples of
economic models. competing models. For example, consider the anal-
3 Formulation of economic models that are capa- ysis of urban economic growth. One model places
ble of accounting for the important facts. emphasis on the demand for the exports of the urban
4 Empirical estimation and testing of such eco- area, and uses macroeconomic methods (including
nomic models. Keynesian multipliers) to explain trends in the
urban economy. Another model puts its emphasis
5 Use of the models for forecasting, policy anal-
on the supply side. The growth of an urban economy
ysis, and normative analysis.
is seen as being determined largely by its supplies of
Although research may be underway simulta- labor, capital, and infrastructure. Modern growth
neously in all five stages, often researchers at a theory emphasizes the role of technical change. Yet
single time focus on only one or two stages. Also, another model emphasizes the life cycle patterns of
some researchers may be engaged in work that the industries that are located in the urban area. Are
6 I Chapter 1. Introduction to Urban Economics
the industries in the urban area ‘‘mature,’’ or are location decisions of firms and how those decisions
they new and vigorous? Which of these models create cities, and Chapter 5 is an examination of the
is best at explaining the facts that need to be economic functions of cities.
explained? Can these models be combined into a Part II contains three chapters on the location
more comprehensive model that provides better patterns of economic activity within urban areas.
explanations? These matters are discussed in detail Basic theories (based on Alonso’s model) and facts
in Part VI of this book. For now you have learned are introduced in Chapter 6. In Chapter 6 urban
that a field of research can contain alternative areas are organized around a single central point.
models, and that the question of which model is Chapter 7 presents some modest extensions of the
‘‘best’’ can be an unresolved issue. basic model of the city introduced in Chapter 6, and
Our purpose in writing this book is to teach you, Chapter 8 is a discussion of the multi-centered
to the best of our abilities, the nature of the progress urban areas of today.
that has been made in the field of urban economics. Part III contains two chapters that cover theory,
Both normative and positive economics are cov- problems, and policies that pertain to urban housing
ered, but it is fair to say that this book emphasizes and three chapters that constitute an introduction to
the positive side. This reflects caution on our part; urban real estate—basic institutions, market analy-
we are not sure that sufficient knowledge exists to sis, and real estate development. Part IV contains
make detailed normative statements about some three chapters on urban government that cover
urban issues. We do have some answers, but we public finance urban infrastructure, and urban trans-
also have many unresolved questions. portation. Part V covers additional urban social
problems such as poverty (and its spatial concen-
tration), crime, and education.
I C. PREVIEW OF COMING The economic growth of urban areas is treated
ATTRACTIONS in Part VI of the book. The focus of this part of the
book is on the urban area as an economic unit. As
This book is organized into six parts: stated above, spatial patterns within the urban area
– economics and urban areas, are largely ignored. A wide variety of theories of
urban economic growth are covered. These theories
– location patterns in urban areas,
generally are of two types: one type emphasizes
– real estate and urban housing, the demand side as a determinant of growth, and
– government in urban areas, the other type concentrates on the supply side. The
– urban social problems, and relationship of urban growth to forces of agglom-
eration in urban areas and to technical change is
– urban growth.
discussed in depth. The last chapter in the book is
The remaining four chapters of Part I continue devoted to urban economic growth policy. The
the introduction to the field of urban economics. chapter discusses the process of setting general
Chapter 2 is a survey of urbanization around the economic goals, devising strategies and supporting
world. Chapter 3 is a discussion of schools of policies, and conducting evaluations of the results
thought within the field of urban economics. of policy.
Urban and real estate economists come in (roughly
speaking) four varieties: mainstream, behavioral,
conservative, and Marxist. An economist’s identifi-
I D. CONCLUSION
cation with a particular school of thought can This first chapter has served to introduce you to the
influence the research questions he or she asks, subject matter of urban economics and to the con-
the methods used to investigate those questions, tents of this book. Urban economics is largely an
and the nature of the conclusions that are drawn applied field of economic inquiry in which data are
from research. These matters are examined in some collected, patterns in the data are observed, eco-
depth in Chapter 3. In chapters 4 and 5 we turn from nomic models are formulated and tested, and then
methodological matters to the economic origins and the knowledge that is gained is used for forecasting
functions of cities. The focus of Chapter 4 is the or policy-making purposes.
References J 7
Urban economics is about the economics of true that quite a few professional economists who
urban areas. Urban areas are linked to the larger specialize in urban economics began their studies
economy, and one critical task is to understand with similar concerns, and this book reflects the
those linkages. The other major part of the agenda topics that urban economists have decided to study.
of urban economics is to understand the spatial However, economists (and other social scien-
patterns of economic activity within an urban tists, of course) know that concern about economic
area—and how those patterns have changed. You and social problems is not enough. Study and
will learn that the absence of population growth at professional training are needed to turn concern
the metropolitan level usually translates into popu- into deeper understanding and useful contributions
lation decline in the core of the urban area because to debates over urban economic and social policy.
there is an underlying trend toward suburbanization That is why the emphasis in this book is on the
even in urban areas that are not growing. You will fundamental methods that are used by urban econ-
also learn that very rapid population growth in the omists. As you will see, there are many places
metropolitan area leads to an increase in population where the more formal study of urban economics
densities and to a remarkable spreading out of the comes very close to being the study of an urban
urban area. economic or social problem. However, there will
One final introductory word needs to be said. also be many times when your study of this book
Probably many students sign up for urban econom- seems to be pretty remote from more immediate
ics because they are interested in and concerned urban problems. Be patient. Urban economists are
about a variety of economic and social problems probably more concerned about urban problems
that exist in urban areas in the U.S. and around the than are most people, but they also know that
world. Students are rightly concerned about pov- understanding urban problems is difficult work.
erty, homelessness, central city schools, racial dis- A course in urban economics is, in our view, an
crimination, the welfare system, high taxes, and essential part (but only a part) of the education that
many other troubling aspects of urban life. Such one needs to understand and address urban eco-
students have come to the right place. It probably is nomic and social problems.
I REFERENCES
Alonso, William, 1964, Location and Land Use, Cambridge: Harvard University Press.
Hoover, Edgar and Raymond Vernon, 1959, Anatomy of a Metropolis, Cambridge:
Harvard University Press.
McDonald, John, 2007, ‘‘William Alonso, Richard Muth, Resources for the Future,
and the Founding of Urban Economics,’’ Journal of the History of Economic
Thought, Vol. 29, pp. 67–84.
!
C H A P T E R
2
W O R L D U R BA N I Z AT I O N
I A. WHAT IS URBANIZATION? The previous paragraph is a short explanation of
the ‘‘pull’’ factors that generate urbanization—the net
Urbanization is the transformation of a society from movement of the population from rural to urban areas.
rural life to life in towns and cities. Employment is However, in less-developed nations, urbanization is
transformed from agriculture and cottage industry also partly attributable to ‘‘push’’ factors in rural areas.
to mass production and services. Urbanization can Extreme rural poverty is rampant in many countries of
occur once a society begins to be able to feed itself Africa and Asia. According to Pernia and Quibria
with a smaller percentage of the working popula- (1999), the rural poor in these nations are characterized
tion. This reduction in the percentage of workers in by very limited access to land and irrigation facilities,
agriculture can arise from trade with others and/or lack of education (indeed, illiteracy), lack of modern
from increases in productivity in agriculture. Many technology, and location in backward regions. Rural
argue that urbanization is the inevitable outcome population growth will exacerbate the problems of the
of economic development as workers become more rural poor by reducing further their access to land and
specialized in craft and service occupations. As we education. Some of the poor from depressed rural
shall see, urban areas provide economies of agglom- areas will think that life can be better—perhaps only
eration. Economies of agglomeration can simply slightly better—in an urban area and decide to migrate.
consist of economies of scale in the production of They become the urban poor, who tend to reside in
a product. For example, an early source of urban- slums and squatter settlements that lack basic services
ization was the production of textiles in factories, such as water and sanitation. Many of these slums and
which could be accomplished far more cheaply squatter settlements are illegal, and so are not provided
than by handicraft (i.e., spinning wheels and hand with basic services such as schools and health services.
looms). Large-scale production, coupled with de- The migrants are absorbed into the ‘‘informal’’ urban
clining transportation costs in the nineteenth century, economy that consists of self employment and small-
meant that people began to wear ‘‘store-bought’’ scale enterprises. The urbanization data that are re-
clothing. Other agglomeration economies are more viewed in this chapter are the result of the positive
subtle. The concentration of production of a partic- ‘‘pull’’ factors and the ‘‘push’’ factors of rural poverty.
ular product in a city can mean that specialized One might conjecture that much of the urbanization in
labor markets, equipment markets, and public in- China since the economic reforms of 1978 has resulted
frastructure and educational opportunities can from the positive ‘‘pull’’ factors of urban areas, but that
exist so that a city can develop a clear comparative urbanization in Nigeria is largely the result of rural
advantage. In addition, a city can provide basic ‘‘push’’ factors (including civil war). Urbanization in
transportation and other forms of infrastructure India might be characterized as a combination of the
that can serve many types of industries. two forces.1
1
Three popular books can provide the reader with an overview of recent economic development in less-developed nations. Jeffrey
Sachs (2005) presents an optimistic picture, whereas William Easterly (2001) is much more pessimistic. Paul Collier (2007) falls
somewhere between optimism and pessimism in that he is optimistic about the prospects for most of the developing world, but
worries mightily about the ‘‘bottom billion,’’ who are located in 50 failing states, primarily in sub-Saharan Africa and Central Asia.
Many of these states are landlocked and plagued by civil war, bad governance, and bad neighbors.
8
The Urbanizing World J 9
The world is becoming urbanized. The United of urbanization.3 In 2005 all of the regions of the
Nations reports that 29.1% of the world population world were well on the way to becoming urbanized
of 2.54 billion was urban in 1950, and that 48.6% of societies. The chapter also presents data on the
the population of 6.51 billion lived in urban areas in largest urban areas in the world. An arbitrary cutoff
2005.2 This means that 739 million people lived in of 3.0 million population is used. In 1950 there were
urbanized areas in 1950, and that this number had 15 urban areas in the world with population of at
grown to 3.16 billion in 2005—more than four times least 3.0 million, and this number grew to 109 in
the number of people. By the time you are reading 2007! Some of the largest urban areas in the world
this chapter it is virtually certain that a majority began as relatively small cities in 1950. For example,
of the world’s population will be living in urbanized Lagos, Nigeria had a population of about 300,000 in
areas. For a society that begins as a rural economy, 1950. Its population in 2007 was 9.5 million.
the process of urbanization often takes place in three The second major portion of this chapter is a
stages. In the modern era a society that is primarily more detailed look at some of the leading urban
rural may begin with 15% of the population living areas in the world. We indicated in Chapter 1 that
in urbanized areas. Once urbanization begins, the growth of an urban area and changes in its spatial
percentage of the population living in urbanized pattern are related, and we explore this idea for
areas increases at an increasing rate. Eventually that Tokyo, London, Mumbai, Toronto, Paris, New York,
rate of increase starts to decline, until a fairly stable Los Angeles, and Chicago. This portion of the
percentage is reached, which usually is about 75% chapter also provides an introduction to urban data.
to 80%. The percentage of the population that is
‘‘urban’’ may increase somewhat from this level,
I B. THE URBANIZING WORLD
but such an increase will probably be rather slow.
In this chapter we present the data on world Table 2.1 displays the population of the world and
urbanization since 1950, the base year for the com- its major regions along with the percentage of the
prehensive urban population data base that is main- population that lived in urbanized areas. The years
tained by the United Nations. In 1950 two regions of covered by the table are 1950, 1975, 2000, and
the world (Europe and North America) were far 2005. The table also includes projections for the
along in completing the process of urbanization, but year 2030 supplied by the United Nations demo-
most of the rest of the world had much lower levels graphic staff.
World 2.54 29.1 4.08 37.3 6.12 46.6 6.51 48.6 8.32 59.7
Africa 0.22 14.5 0.42 25.7 0.82 35.9 0.92 37.9 1.52 50.0
Europe 0.55 51.2 0.68 65.7 0.73 71.4 0.73 71.9 0.71 77.8
Latin America 0.17 41.4 0.32 61.1 0.52 75.3 0.56 77.5 0.71 84.6
North America 0.17 63.9 0.24 73.8 0.32 79.1 0.33 80.7 0.40 86.7
Asia 1.41 16.8 2.39 24.0 3.70 37.1 3.94 39.7 4.93 54.1
Oceania 0.01 62.0 0.02 71.5 0.03 70.4 0.03 70.5 0.04 72.6
Source: UN World Urbanization Prospects web site.
2
The UN uses the definition of urban that is used by each nation’s census takers. These definitions vary. See World Urbanization
Prospects on the UN web site.
3
The exception is Oceania, which includes Australia. The small region in terms of population was highly urbanized in 1950.
10 I Chapter 2. World Urbanization
North America was the most urbanized region points from 1975 (compared to an increase of 19.7
in 1950 with 63.9% of its population of 0.17 billion percentage points from 1950 to 1975). Each of
living in urban areas. (Mexico is included in Latin these regions essentially had approached the stable
America in this table.) Just over half (51.2%) of the level of urbanization in 2000. As Table 2.1 shows,
population of Europe was urban in 1950, and Latin urbanization increased slightly in each of these
America had an urbanization percentage of 41.4%.4 regions from 2000 to 2005.
The other major regions of the world—Africa and Urbanization in Africa and Asia continued
Asia—had not begun the urbanization process. Just from 1975 to 2000. The increase in the percentage
14.5% of the African population was urban in 1950, of people living in African urban areas was smaller
and the figure for Asia was 16.8%. Note that 55.5% than the increase in Asia. In fact, urbanization in
of the world’s population (1.41 billion) lived in Asia Africa increased by 10.2 percentage points, com-
in 1950, so Asia’s low level of urbanization is a pared to the increase of 11.2 percentage points from
major factor in producing a world urbanization of 1950 to 1975. This outcome is related to the lagging
29.1%. economic development performance of the African
The next 25 years saw an increase in urbani- continent during these years. The data for Africa
zation across the board. The three major regions thus run counter to the rule that, once urbanization
that had relatively high levels of urbanization begins, a period of increasingly rapid urbanization
increased their urban percentages. North America ensues.5 In contrast, urbanization in Asia proceeded
continued to lead with 73.8% urban population (an at a more rapid pace. The urbanized population
increase of 9.9 percentage points). Urbanization in Asia increased by 13.1 percentage points, and
in Europe increased more rapidly to 65.7% (up 14.5 reached 37.1% in 2000. As is shown in the next
percentage points), and urbanization in Latin section, rapid economic development and urbani-
America increased very rapidly to 61.1% (up zation in China are largely responsible for this
19.7 percentage points in 25 years). These regions outcome. Table 2.1 also shows that urbanization
demonstrated the second phase of urbanization continued to increase on both continents between
mentioned in the previous section—the phase in 2000 and 2005.
which the rate of increase in the percentage urban The last columns in Table 2.1 display the UN
slows down as the 75% to 80% level is approached. population and urbanization projections for the year
During this same period Africa and Asia began the 2030. The population of the world is projected to
process of urbanization. The urban population of reach 8.32 billion in 2030—an increase of 1.81
Africa increased to 25.7% (up 10.2 percentage billion from 2005 (an increase of 28%). The UN
points), and the urban population of Asia reached projects the percentage urban to be 59.7% in that
24.0% (up 7.2 percentage points). These regions year, so the urban population is projected to increase
illustrated the first phase of urbanization—the to 4.97 billion (an increase of 1.81 billion from
phase in which urbanization begins and may 3.16 billion in 2005). In essence, the UN is project-
accelerate. ing that the entire increase in the world’s population
The rate of urbanization decelerated in the will take place in urban areas.
three highly urbanized regions from 1975 to Urbanization in North America and Latin
2000. The urban population of North America America are projected to be well over 80% in
increased to 79.1% in 2000 (up 5.3 percentage 2030 (including 86.7% in North America). Such
points from 1975), and Europe’s urban population urbanization levels have not been reached previ-
reached 71.4% in 2000 (an increase of 5.7 per- ously, so one might wonder whether this projection
centage points). Urbanization continued to in- will prove to be accurate. Urbanization of Europe is
crease more rapidly in Latin America to 75.3% also projected to increase, but to remain below 80%.
in 2000, which is an increase of 14.2 percentage Both Africa and Asia are projected to have slight
4
Oceania (primarily Australia, with Melbourne and Sydney) began with a high level of urbanization of 62%, and this level increased
to a figure slightly over 70%. This region will not be included in the subsequent discussion.
5
See Easterly (2001) for a discussion of the reasons for lagging economic development in Africa.
The Major Urban Areas of the World J 11
majorities of their populations living in urban areas I C. THE MAJOR URBAN AREAS OF
in 2030. Given that the population of Asia is THE WORLD
projected to increase from 3.94 billion in 2005 to
4.93 billion in 2030, an urban percentage of 54.1% What is the largest urban area in the world? Table 2.2
means that the urban population of this continent is leaves no doubt. Tokyo had a population of 34.4
projected to increase by 1.1 billion in 25 years, million in 2000 (up to 35.7 million in 2007). If the UN
compared to an increase in the total Asian popula- figures are accurate, Tokyo is almost twice as large as
tion of 1.0 billion. The UN is projecting that a small the next-largest urban area, which was New York at
decline in the rural population of Asia will occur 17.8 million. By the way, New York has already lost
for the first time. One hopes that continued urban- second place to Sao Paulo, Brazil, and Mexico City
ization in Africa will be driven by economic devel- and Mumbai (formerly Bombay) are gaining rapidly
opment rather than by escape from severe rural and will almost surely overtake New York. The UN
poverty and civil war. data for 2007 show that the population of New York
Discussions of various aspects of urbanization had increased to 19.0 million, but that Sao Paulo had
in developing nations are included in later chapters increased from 17.1 million to 19.8 million. The
of this book. Chapter 9 includes a discussion of population of Mexico City also reached 19.0 million
property rights and their importance to the function- in 2007, and Mumbai was a close fourth with 18.9
ing of a market economy—and how the lack of million. By the time you are reading this book, New
property rights affects the opportunities for many York will have dropped to fourth place in the world
urban residents in developing countries. Informal rankings.
housing is examined further in Chapter 10, and Table 2.2 lists the top ten urban areas in the
housing policy is the topic of Chapter 11. Rent world in 1950 and 2000. These rankings are fun to
control in developing countries (and developed examine, but they also illustrate a serious point. The
countries) is featured. Chapter 19 is devoted to urbanization of the more recently developing part
urban poverty in developing countries. This chapter of the world (primarily Latin America, India, and
is brief (but we hope a powerful introduction to China) has changed the list substantially. Four of the
the topic), and we suggest that students who are top ten urban areas from 1950 in Europe and North
deeply interested in the plight of the poor in devel- America are no longer on the list (London, Paris,
oping countries should take additional courses in Moscow, and Chicago). These have been replaced
economic development, politics, pubic health, and by urban areas in Latin America and India (Sao
languages. Paulo, Mexico City, Mumbai, and Delhi). Further-
more, it took a population of almost 12 million just
1950 2000
to make the top ten list in 2000, whereas the largest TABLE 2.3 Population of the Major Urban Areas
urban area in the world (New York) had a popula- (millions)
tion of 12.3 million in 1950. Tokyo, Los Angeles,
and Kolkata moved up in the rankings, while New 1950 1975 2000 2007
York, Shanghai, and Buenos Aires remained in the Europe
top ten but fell in the rankings. However, a strong London, UK 8.4 7.5 7.2 7.6
case can be made that London remains in the top ten Paris, France 6.5 8.6 9.7 9.9
with a population of 13.9 million in 2001 because Berlin, Germany 3.4 3.1 3.4 3.4
the UN data do not cover the entire metropolitan Moscow, Russia 5.4 7.6 10.0 10.5
area. This point is explained later in this chapter. St. Petersburg, Russia 2.9 4.3 4.7 4.6
Table 2.3 is the master list of all of the urban Rome, Italy 1.9 3.3 3.4 3.3
areas in the world with populations of at least 3.0 Milan, Italy 1.9 3.1 3.0 2.9
million. The table begins with Europe. These ten Madrid, Spain 1.7 3.7 5.0 5.6
major urban areas in Europe are all famous places Barcelona, Spain 1.8 3.9 4.6 4.9
with long histories as major cities. In 1950 the Athens, Greece 1.3 2.7 3.2 3.2
largest was London, with a population of 8.4 mil-
lion, and the smallest was Athens with 1.3 million. North America
Population growth in Europe (Table 2.1) was 40% USA
from 1950 to 2005, and this overall population Atlanta 0.5 1.4 3.5 4.5
growth is reflected in the population growth in these Boston 2.6 3.2 4.0 4.5
major urban areas, with the exceptions of London Chicago 5.0 7.2 8.3 9.0
and Berlin in the UN data. (London is discussed in Dallas-Fort Worth 0.9 2.2 4.2 4.8
more depth later, and Berlin was isolated in East Detroit 2.8 4.0 3.9 4.1
Germany and divided into two zones until the Houston 0.7 2.0 3.8 4.5
reunification of Germany in 1990.) Moscow had Los Angeles 4.9 10.7 16.4 17.3
become the largest urban area in Europe by 2000, Miami 0.6 2.6 4.9 5.6
with a population of 10.0 million at that time (up New York 12.3 15.9 17.8 19.0
from 5.4 million in 1950), with Paris a close second. Philadelphia 3.1 4.5 5.2 5.5
Population growth in these major urban areas has San Francisco–San Jose 2.0 3.7 4.8 5.2
been more rapid than in the region as a whole. Total Seattle 0.8 1.7 2.7 3.1
population of the ten urban areas was 35.2 million Washington, DC 1.3 2.6 3.9 4.3
in 1950 and 56.9 million in 2007—an increase of
62%. Population growth has been relatively rapid in Canada
the major urban areas of southern Europe such as Montreal 1.3 2.8 3.5 3.7
Madrid, Barcelona, and Athens, each of which Toronto 1.1 2.8 4.6 5.2
much more than doubled in size.
The case of London requires further examina- Latin America
tion because it has emerged as one of the leading Mexico City 2.9 8.8 16.8 19.0
financial centers in the world (along with New York Monterey, Mexico 0.4 1.6 3.3 3.7
and Tokyo). How could the population have de- Guadalajara, Mexico 0.4 1.8 3.7 4.2
clined in this icon of the modern economy? The Buenos Aires, Argentina 5.1 8.7 11.8 12.8
UN data cover an area known as Greater London, Santiago, Chile 1.3 3.1 5.3 5.7
which is a regional governmental unit that includes Bogota, Colombia 0.6 3.0 6.4 7.8
Inner London and Outer London (also known as Medellin, Colombia 0.4 1.5 2.7 3.3
Ring 1). Greater London is surrounded by a Green Lima, Peru 1.1 3.7 7.1 8.0
Belt, an area in which urban development is resisted Caracas, Venezuela 0.7 2.3 2.9 3.0
by planning authorities. The Green Belt policy for
London has been in place since 1938, but it has not Brazil
stopped urban development in the areas just outside Belo Horizonte 0.4 1.9 4.7 5.6
the Green Belt. A broader definition of the London Brasilia 0.0 0.8 2.7 3.6
The Major Urban Areas of the World J 13
Curtilia 0.2 0.9 2.5 3.1 Ankara, Turkey 0.3 1.7 3.6 3.7
Fortaleza 0.3 1.1 2.9 3.6 Istanbul, Turkey 1.0 3.6 8.7 10.1
Porto Alegre 0.5 1.7 3.5 4.1 Riyadh, Saudi Arabia 0.1 0.7 3.6 4.5
Recife 0.7 1.9 3.2 3.8 Jiddah, Saudi Arabia 0.1 0.6 2.5 3.0
Rio de Janeiro 3.0 7.6 10.8 12.2
Salvador 0.4 1.3 3.0 3.7 India
Sao Paulo 2.3 9.6 17.1 19.6 Ahmadabad 0.9 2.0 4.4 5.4
Bangalore 0.7 2.1 5.6 6.8
Australia Chennai 1.5 3.6 6.4 7.2
Melbourne 1.3 2.6 3.4 3.7 Delhi 1.4 4.4 12.4 15.9
Sydney 1.7 3.0 4.1 4.3 Hyderabad 1.1 2.1 5.4 6.4
Kanpur 0.7 1.4 2.6 3.2
Africa Kolkata 4.5 7.9 13.1 14.8
Cairo, Egypt 2.5 6.4 10.5 11.9 Mumbai 2.9 7.1 16.1 18.9
Alexandria, Egypt 1.0 2.2 3.6 4.2 Poona 0.6 1.3 3.7 4.7
Cape Town, S. Africa 0.6 1.3 2.7 3.2 Surat 0.2 0.6 2.7 3.8
East Rand, S. Africa 0.5 1.0 2.3 3.0
Johannesburg, S. Africa 0.9 1.5 2.7 3.4 China
Khartoum, Sudan 0.2 0.9 3.9 4.8 Beijing 4.3 6.0 9.8 11.1
Algiers, Algeria 0.5 1.5 2.8 3.4 Changchun 0.8 1.6 2.7 3.0
Abidjan, Cote d’Ivoire 0.0 1.0 3.0 3.8 Chengda 0.8 1.9 3.9 4.1
Nairobi, Kenya 0.1 0.6 2.2 3.0 Chongqing 1.7 2.4 6.0 6.5
Kinshasa, Congo 0.2 1.5 5.5 7.8 Dalian 0.7 1.4 2.9 3.2
Addis Ababa, Ethiopia 0.4 0.9 2.5 3.1 Dongguan 0.4 0.9 3.8 4.5
Dar es Salaam, Tanzania 0.1 0.6 2.1 2.9 Guangzhou 1.5 2.7 7.4 8.8
Casablanca, Morocco 0.6 1.8 3.0 3.2 Guiyang 0.7 2.7 7.4 8.8
Lagos, Nigeria 0.3 1.9 7.2 9.5 Harbin 1.0 2.3 3.4 3.6
Hong Kong 1.7 3.9 6.7 7.2
Asia Nanjing 1.0 1.9 3.5 3.7
Tokyo, Japan 13.1 27.0 33.4 34.7 Shanghai 6.1 7.3 13.2 15.0
Osaka–Kobe, Japan 4.1 9.8 11.2 11.3 Shenyang 2.1 3.7 4.6 4.8
Nagoya, Japan 1.0 2.3 3.1 3.2 Shenzhen 0.2 0.3 6.1 7.6
Seoul, S. Korea 1.0 6.8 9.9 9.8 Tianjin 2.4 4.9 6.7 7.2
Busan, S. Korea 0.9 2.4 3.7 3.5 Wuhan 1.3 2.7 6.7 7.2
Pyongyang, N. Korea 0.5 1.3 3.1 3.3 Xi’an 0.7 1.7 3.7 4.0
Manila, Philippines 0.5 5.0 10.0 11.1 Zibo 1.4 2.0 2.8 3.1
Hanoi, Vietnam 0.3 1.9 3.8 4.4
Source: UN World Urbanization Prospects web site.
Ho Chi Minh City 1.2 2.8 4.6 5.3
Singapore 1.0 2.3 4.0 4.4
metropolitan area is often used by including these
Bangkok, Thailand 1.4 3.8 6.3 6.7
counties that are adjacent to the Green Belt (known
Jakarta, Indonesia 1.5 4.8 8.4 9.1
as Ring 2). We use this definition later in a more
Dhaka, Bangladesh 0.3 2.2 10.3 13.5
detailed examination of London. The London Met-
Chittagong, Bangladesh 0.3 1.0 3.3 4.5
ropolitan Area so defined had a population of 12.1
Karachi, Pakistan 1.1 4.0 10.0 12.1
million in 1951, 13.3 million in 1971, and 13.9
Lahore, Pakistan 0.8 2.4 5.4 6.6
million in 2001. An even broader definition of the
Tehran, Iran 1.2 4.3 7.1 7.9
London metropolitan area is known as Southeast
Baghdad, Iraq 0.6 2.6 5.2 5.1
England, and this area had a population of 14.8
Tel Aviv, Israel 0.4 1.2 2.8 3.1
million in 1951, 17.0 million in 1971, and 18.4
14 I Chapter 2. World Urbanization
million in 2001. What is the best definition of the 2000, which accounts for 38% of the total population
London metropolitan area? There seems to be no growth of that region. The California urban areas
agreement on this question, but the sum of Inner also grew rapidly. The Los Angeles urban area more
London, Ring 1, and Ring 2 may be a reasonable than doubled in population between 1950 and 1975,
answer. If that definition is used, then the population from 4.9 million to 10.7 million, and added more
of London grew by 1.8 million between 1951 and than 5 million more people in the next 25 years. San
2001, and London remained in the top 10 list of the Francisco (including San Jose–Silicon Valley) more
world’s urban areas. The data reported by the UN than doubled from 2.0 million in 1950 to 4.8 million
that show population decline for Greater London in 2000. These two urban areas account for 34% of
simply reflect a general movement of population to the population growth in the western region.
the suburbs just beyond the Green Belt. Such are the The major urban areas of the Northeast fall into
difficulties in interpreting data on urban areas. three groups; those that grew rapidly (Washington,
Population growth in the major urban areas of DC, Toronto, and Montreal), those that grew less
North America provide an even more striking pat- rapidly (New York, Chicago, Philadelphia, and
tern that stems from the regional population growth Boston), and Detroit—a place that experienced
patterns in the U.S. The population of the U.S. population growth from 1950 to 1975, but has since
increased from 151 million in 1950 to 280 million not grown at all. Washington, D.C. is a special case
in 2000, an increase of 85%. However, over these because it is the home of the national government (a
same decades population growth in the northeastern growth industry), and Detroit is a special case
U.S. was 43% (from 87. 4 million to 124.6 million), because of its heavy reliance on the major American
and the southern region grew by 114% (from 43.7 auto companies, which have been in decline since
million to 93.6 million). The western region grew by the 1970s. Together the six major urban areas of the
213% from a much smaller base population of 19.6 northeastern U.S. grew somewhat more rapidly than
million in 1950 to 61.4 million in 2000.6 their region—by 59% from 1950 to 2000, compared
In 1950 there were no urban areas outside of the to population growth in the region of 43%. Popula-
northeastern part of the continent with at least 1.0 tion growth in Toronto and Montreal reflects both
million people—with the exceptions of Los Angeles overall population growth in Canada and the urban-
and San Francisco, the two giant urban areas in ization trend in that country. Population growth in
California. Fifteen urban areas in North America Canada was 124% from 1950 to 2000 (from 13.7
reached a population of at least 3.0 million by 2007 million to 30.7 million). In 1950 18% of the Cana-
(including Toronto and Montreal in Canada). These dian population lived in Toronto and Montreal, and
include six urban areas in the northeastern U.S. this percentage increased to 26% in 2000.
(New York, Chicago, Philadelphia, Detroit, Boston, As noted above, the story in Latin America is
and Washington, D.C.) plus the two in Canada. The one of substantial population growth and rapid
other seven consist of Los Angeles and San Fran- urbanization. The urbanization story is driven pri-
cisco and five others in the ‘‘Sunbelt’’ that had marily (but not entirely) by Brazil. As Table 2.3
populations less than one million in 1950. These shows, Brazil had just two major urban areas in
five newer major urban areas are Miami, Atlanta, 1950—Rio de Janeiro (3.0 million) and Sao Paulo
Dallas-Fort Worth, Houston, and Seattle. (Given all (2.3 million). In 2007 Brazil had nine urban areas
of the rain in Seattle, its inclusion in the ‘‘Sunbelt’’ is with populations of at least 3 million. The seven
dubious.) The growth and urbanization of the south- newer major urban areas had populations of 0.7
ern U.S. is a major story of the second half of the million or less in 1950. In 1950 14% of the popula-
twentieth century in the U.S. The four major urban tion of Brazil lived in these nine urban areas. By
areas of the southern U.S. all grew from less than 2000 the percentage of the population living in these
1 million in 1950 to at least 4.5 million in 2007 (with nine urban areas had increased to 32% (30% in
Miami increasing from 0.6 million to 5.6 million). 2007). In 2007 Sao Paulo was the second-largest
Population growth in the four major urban areas of urban area in the world. Its population had increased
the South was a combined 16.7 million from 1950 to from 2.3 million in 1950 to 19.6 million in 2007, an
6
See John McDonald (2008) for a detailed discussion of regional and urban population growth trends in the U.S. after 1950.
The Major Urban Areas of the World J 15
increase of 8.5 times. Urbanization in Brazil is a 14 urban areas in Africa with at least 3 million
combination of moving to genuine opportunity and people. Cairo was still the largest urban area on the
moving to an urban slum to escape rural poverty. continent with 11.9 million people, but it was
Brazil is famous for its ‘‘favelas,’’ makeshift slums closely followed by Lagos, Nigeria with 9.5 million.
that have a reputation for crime and violence. South Africa has three urban areas in the ‘‘3 million
Easterly (2001, p. 215) provided a vignette of life club,’’ Egypt has two (Cairo and Alexandria), and
in a favela in which a young woman moved to no other nation in Africa has more than one. The
Salvador (population 3.7 million) to escape rural urban areas of the continent that rank second (La-
poverty, and eventually found herself living in a hut gos), third (Kinshasa), and fourth (Khartoum) came
with her baby and a friend. She supports herself and from virtually nothing in 1950. The greatest popu-
the baby by taking in laundry and washing it in a lation explosion in each of these three came after
canal to earn about 20 dollars a month. 1975, and continues. The population of Lagos
The largest urban area in Latin America in 1950 increased from 1.9 million in 1975 to 7.2 million
was Buenos Aires (population 5.1 million), and in 2000 and 9.5 million in 2007. The implications of
Mexico City was third with a population of 2.9 such rapid urbanization coupled with severe poverty
million. Population growth was very rapid in Mexico are difficult to grasp. Easterly (2001) paints a dis-
City, and in 2007 it was tied with New York for third tressing picture. Although Nigeria has substantial
in the world with a population of 19.0 million. Buenos revenues from its oil exports, the government has
Aires more than doubled in size to 12.8 million in failed to provide basic services, even in the oil-
2007. However, population growth in Buenos Aires producing area of the nation. Easterly (2001,
just roughly matched population growth in Argentina, pp. 232–3) adds that
in that 30% of the nation’s population lived in the
capital in 1950 and 32% did so in 2007. Most of the The slums of Lagos are no better off: shacks on stilts
other sizable urban areas are national capitals (Santi- set on black lagoons that also serve as odiferous
ago in Chile, Bogota in Colombia, Lima in Peru, and sewers, amid scraps of land piled high with mounds of
Caracas in Venezuela). Population growth was rapid garbage. Doctors and nurses have long since aban-
doned the health clinics in the slums due to lack of
in all of these capitals, and each had reached popula-
funds and medicines. The men of Lagos lagoons eke
tion levels of at least 3 million in 2007. In addition, out a living from snagging rafts of logs floated down
Medellin in Colombia and Monterey and Guadalajara the Niger River into the lagoons.
in Mexico were added to the list of urban areas with at
least 3 million people. In all Latin America had just The most remarkable urbanization story, the
two urban areas with at least 3 million people in 1950, Asian story, is saved for last. In 1950 the continent
and the number had grown to 17 in 2007. Eight of had a population of 1.41 billion and just five urban
those 15 urban areas that joined the ‘‘3 million club’’ areas with at least 3 million people—Tokyo, Osaka–
are located in Brazil. Kobe, Kolkata, Beijing, and Shanghai. Recall that,
Africa is the next continent in Table 2.3. In at this time, both Europe and North America (with
1950 Cairo was, by far, the largest urban area in much smaller populations) had four urban areas
Africa with a population of 2.5 million. Alexandria with at least 3 million people. The population of
was in second place with a population of 1.0 Asia grew to 3.94 billion in 2005, but in 2007 50
million, and no other urban area on the continent Asian urban areas were members of the ‘‘3 million
had 1 million people. Johannesburg was next with club.’’ We shall relate the story by geographic part
0.9 million. Other urban areas that subsequently of the continent.
developed into major metropolitan areas were very Consider East Asia first, starting with the na-
small in 1950—Lagos in Nigeria had 0.3 million tions other than China. Japan is (at the time of this
people, Kinshasa in Congo had 0.2 million, Khar- writing) the second-largest economy in the world
toum in Sudan had 0.2 million, Abidjan in Cote and a highly urbanized nation. Its two largest urban
d’Ivoire had fewer than 0.1, and so on. In 1975 there areas, Tokyo and Osaka–Kobe, grew rapidly in
was only one urban area in Africa with at least 3 population and reached 35.7 million and 11.3 mil-
million people—Cairo with 6.4 million, but this lion, respectively, in 2007. In addition, Nagoya (the
number grew to seven in 2000. In 2007 there were home of Toyota and other manufacturing firms)
16 I Chapter 2. World Urbanization
joined the ‘‘3 million club’’ in 2000. In 2007 39% of 2007 there were 18. Indeed, there were eight urban
the Japanese population lived in these three urban areas with populations of at least 6.5 million in
areas. Other nations in the region started on the path 2007. Beijing and Shanghai continue to be included
to economic development after 1950. The most in the ranks of the world’s largest urban areas
successful ‘‘Asian Tigers’’ include South Korea (although Beijing fell from the top ten list in
and Singapore. South Korea has two major urban Table 2.2). Shanghai increased in population by
areas—Seoul with a population of 9.8 million and 7.7 million from 1975 to 2007 as the Chinese
Busan with 3.5 million in 2007. Singapore is a city- government moved to open its economy to the
state that reached a population of 4.4 million in world with the economic reforms that began in
2007. Other nations included in Table 2.3 began 1978 after the death of Mao. It is said that a very
developing but have yet to achieve the success of large percentage of the world’s construction cranes
South Korea. This group consists of the Philippines, operate in Shanghai. We would wager that some of
Vietnam, Thailand, and Indonesia. Each of these our western readers have not heard of some of the
nations now includes a major urban area (two in the following six urban areas: Chongqing (6.5 million),
case of Vietnam). The largest urban area in this Guangzhou (8.8 million), Guiyang (8.8 million),
group is Manila in the Philippines (11.1 million in Shenzhen (7.6 million), Tianjin (7.2 million), and
2007), followed by Jakarta in Indonesia (9.1 million Wuhan (7.2 million). For example, Shenzhen is the
in 2007). North Korea is the last nation included in large urban area on the southern coast of China near
this group of East Asian countries. North Korea is a Hong Kong that is a major center of export indus-
desperately poor nation, but it too has one major tries. It had a population of just 0.3 million in 1975,
urban area. Its capital Pyongyang had a population and was created after 1980 as an industrial center.
of 3.3 million in 2007—up from 0.5 million in 1950. Each of these six urban areas is considerably larger
Now we come to China. Its economic transfor- than Berlin, Rome, Madrid, Miami, Philadelphia,
mation perhaps is the biggest economic news of our San Francisco-San Jose, and many other famous
time, and that transformation is shown in the data on urban areas in the West. However, China is not
its urban areas. The economic transformation began highly urbanized. In 2007 7.2% of the Chinese
even before the economic reforms in 1978. Earlier population lived in these 18 largest urban areas
reforms included a vast improvement in health (compared to 39% of the Japanese population
services to the rural Chinese population, provision that lived in its three largest urban areas). So this
of rural infrastructure (roads, bridges, electricity, means that China’s major urban areas can be
and sanitation and potable water) and a ‘‘green’’ expected to continue to grow rapidly as its economy
revolution that raised crop yields substantially. The continues to develop, and that many smaller urban
economic reforms started in 1978 included ending areas will join the ‘‘3 million club.’’ Au and Hen-
the commune agriculture system and moving to a derson (2006a, 2006b) ask ‘‘Are Chinese cities too
market system. A big part of China’s success stems small?’’ And they point out ‘‘how migration restric-
from the free trade zones (special economic zones) tions limit agglomeration and productivity in
that were set up to attract foreign investment and China.’’ We would add that one can feel the field
produce manufactured products for export. of urban economics shifting to the East.
In 1950 China had two urban areas with at least Now we shift attention to South Asia, including
3 million people—the capital of Beijing (4.3 mil- Bangladesh, Pakistan, and India. Bangladesh is a
lion) and its port of entry Shanghai (6.1 million). very poor nation with two major urban areas that
(At that time Hong Kong, with a population of 1.7 have come from nothing in 1950. Dhaka had only
million, was a colony of Great Britain and not part 0.3 million people in 1950 and grew to 2.2 million
of the Chinese nation. Hong Kong was added to in 1975. Then it exploded to 10.5 million in 2000
China in 2005.) In 1975, prior to the beginning of and 13.5 million in 2007. It has joined the ranks of
the economic transformation, the number of urban the largest urban areas in the world. In addition,
areas with population of over 3 million had in- Chittagong also began with only 0.3 million people
creased to four with the addition of the port cities and has grown to 4.5 million in 2007. The percent-
of Shenyang and Tianjin. By 2000 there were 15 age of the nation’s population that lived in these two
urban areas with 3 million or more people and in urban areas increased from only 1.5% in 1950 to
Some Leading World Metropolitan Areas J 17
11.4% in 2007. Bangladesh has begun the long, hard population levels in excess of 3 million, and Delhi
road to development, but much of its urbanization (12.4 million), Kolkata (13.1 million), and Mumbai
can be classified as escape from severe rural pov- (16.1 million) had joined the exclusive club of
erty. Sachs (2005, p. 11) tells a story of observing metropolitan areas with more than 10 million peo-
thousands of workers in Dhaka walking as much as ple. Sachs (p. 186) states that the large coastal port
two hours to work twelve-hour shifts in the garment cities of Mumbai, Kolkata, and Chennai ‘‘have been
sweat shops. In spite of all this, the workers—who the stars of Indian economic growth.’’ Population
are mostly women—report that their employment growth in the ten major urban areas continued after
has changed their lives for the better by enabling 2000, and in 2007 7.5% of the Indian population
them to save some money and to have choices about lived in these urban areas. This relatively small
their lives, including whom to marry. The urbaniza- percentage suggests that these urban areas can be
tion story for Pakistan is actually quite similar to the expected to continue to grow rapidly as the Indian
one for Bangladesh. Pakistan has two major urban economy continues to modernize. In addition, the
areas—Karachi and Lahore—and both started with ranks of the major urban areas can be expected to
relatively small base populations in 1950. The popu- expand.
lation of Karachi reached 12.1 million in 2007, and Lastly, we come to the Middle East (or south-
the population of Lahore was 6.6 million at that west Asia), which runs from Iran on the East to
time. In 2007 11.4% of the Pakistani population Israel and Turkey on the West. Tehran, Iran was the
lived in these two urban areas. largest urban area in this region in 1950 with 1.2
India comes next. India has joined the ranks of million people. This portion of Asia had seven
the developing nations. As Sachs (2005, p. 181) urban areas with at least 3 million people in
discusses, economic development began in India 2007. This group includes Baghdad, Iraq (5.1 mil-
with the green revolution of the 1970s. This was lion in 2007), Tel Aviv, Israel (3.1 million), and two
followed by market liberalization reforms in the urban areas each in Turkey and Saudi Arabia. The
following decade. Sachs (2005, p. 184) demon- two urban areas in Turkey are the capital Ankara
strates that growth in income per capita in India’s and the ancient capital of Istanbul. Istanbul had a
states during the 1980s was strongly related to the population of 1.0 million in 1950, and growth has
level of urbanization in the state in 1981. Urbaniza- been very rapid throughout the subsequent 57 years.
tion at the state level varied from 12% to 36% at that The population of Istanbul reached 10.1 million in
time. Growth of income per capita varied from 2% 2007. The two urban areas in Saudi Arabia are
per year in the states with the lowest level of interesting cases. The capital Riyadh and Jiddah
urbanization to 4% in those states with the highest both had population levels of just 0.1 million in
levels of urbanization. Although it follows a very 1950, and they both increased to the 0.6–0.7 million
different political philosophy compared to China range in 1975. Then, in the wake of the dramatic
(i.e., democracy versus Communist Party rule), the increases in the price of oil that were initiated in the
pattern of Indian urbanization in broad outline is 1970s by the Organization of Petroleum Exporting
comparable to the pattern in China. India had two Countries (OPEC), of which Saudi Arabia is the
major urban areas in 1950—Kolkata (4.5 million) leading member, population in these two leading
and Mumbai (2.9 million). Three other urban areas urban areas grew rapidly and reached 4.5 million in
had population levels of at least 1 million at that Riyadh and 3.0 million in Jiddah in 2007.
time. In 2007 there were ten Indian urban areas with
at least 3 million people. In 1950 4.0% of the I D. SOME LEADING WORLD
population lived in these ten urban areas, and this
percentage increased to 5.2% in 1975, a year in
METROPOLITAN AREAS
which there were four urban areas in the ‘‘3 million In this section we take a brief look at the growth
club.’’ The newcomers to the club were Chennai and spatial patterns of five of the world’s major
(3.6 million) and Delhi (4.4 million). Population urban areas—Tokyo, London, Mumbai, Toronto, and
growth in Kolkata and Mumbai had taken off. Paris. Tokyo is the largest metropolitan area in the
Each had population levels in excess of 7 million world and the economic and political capital of the
in 1975. By 2000 four more urban areas had world’s second-largest economy. It has experienced
18 I Chapter 2. World Urbanization
enormous growth since the end of World War II as of Tokyo city fell to 5.38 million and the rest of the
the Japanese economy boomed, but we will also urban area experienced population growth from
see that the growth of Tokyo slowed down during 5.96 million to 7.67 million. This change reflects
Japan’s ‘‘lost decade’’ of the 1990s. London is the the fact that much of Tokyo was destroyed during
financial capital of Europe and, along with World War II, and that the urban area was rebuilt
Tokyo and New York, one of the financial capitals with lower densities in the central area. Such was
of the world. Mumbai (formerly Bombay) is the the situation at the beginning of the period of rapid
leading urban area in India, a nation that is under- economic growth in Japan.
going rapid economic development. Its growth The population growth for the metropolitan
perhaps can be called explosive. Toronto is the area by decade is as follows:
leading urban area in Canada, and it grew rapidly
in the second half of the twentieth century. And,
1950–60 36.9% 4.81 million
to quote Rick Blaine (Humphrey Bogart), ‘‘We’ll 1960–70 35.0% 6.25 million
always have Paris.’’ 1970–80 19.0% 4.58 million
1980–90 10.8% 3.10 million
Tokyo 1990–2000 5.1% 1.62 million
period. All of the population growth since 1960 was entire metropolitan area. Ring 2 consists of counties
channeled to the areas outside Tokyo city. that are outside of and adjacent to the Green Belt
We see that in 2000 24% of the metropolitan that surrounds Greater London.
population was living in Tokyo city. However, Table 2.5 shows that the population of the
employment is much more centrally located than metropolitan area grew from 6.17 million in 1891
is population. The metropolitan area had an employ- to 10.92 million in 1931, an increase of 77% in
ment level of 16.69 million in 2000, and 43% of 40 years. During these years the population of Inner
those jobs (7.12 million) were located in Tokyo city. London held steady at roughly 4.2 to 4.4 million.
Tokyo city had almost as many jobs as residents. Population grew rapidly in the other parts of the
The three central wards (one of which contains the metropolitan area; the rest of Greater London (Ring
Imperial Palace), an area about 5 miles by 3.5 miles, 1) increased by 2.37 million and Ring 2 increased
were home to 2.43 million jobs. The areas outside by 2.21 million. Growth was interrupted by depres-
Tokyo city had a population of 25.28 million and sion and war in the 1930s and 1940s, but the
9.57 million jobs. It is well known that commuting metropolitan area reached a population of 12.09
by public transit is a way of life in Tokyo. million in 1951, an increase of 10.7% over 1931.
Population declined in Inner London to 3.71 million
and increased in Ring 1 and Ring 2.
London
Population growth in metropolitan London was
London is similar to Tokyo in that it is a ‘‘global just 15% in the 50 years from 1951 to 2001. Inner
city’’ that is the economic engine for its nation. But London fell to a population of under 3 million in
London has a much smaller population of 13.94 1971, and dropped to 2.43 million in 1981. Since
million in 2001, and its overall population growth then it has rebounded slightly to 2.77 million in
has been slow since 1951. The population data 2001. The population of Ring 1 fell from 4.52
for the London metropolitan area are shown in million in 1951 to 4.18 million in 1981, and then
Table 2.5. Some explanation of the data is needed. increased in the 1990s to 4.41 million in 2001. The
The London metropolitan area as presented here population distribution has shifted to Ring 2 during
consists of Greater London and Ring 2. The total these years, growing from 3.89 million in 1951 to
population of the metropolitan area is the sum of 6.77 million in 2001. The growth of population in
these two. Inner London and Ring 1 are contained Ring 2 is 155% of the population growth of the
inside Greater London. Greater London is a gov- metropolitan area over this 50-year period. London
ernmental unit, and one often sees London equated is a clear example of slow population growth at
with Greater London. However, for our purposes the metropolitan level that is translated into decline
Ring 2 should be included because we are interested in the inner locations and growth in the outer
in the spatial distribution of the population over the locations.
been expanded significantly over the years. The TABLE 2.8 Population of Paris Metropolitan Area
population of the traditional central city was (Ile de France) (1000s)
631,000 in that year, and it has remained between Year Total Paris Inner Ring Outer Ring
599,000 and 713,000. The metropolitan area
entered the second half of the twentieth century 1962 8,470 2,790 3,440 2,239
with a population of 1.26 million, of whom 676,000 1968 9,249 2,591 3,833 2,825
(54%) lived in the traditional central city. Total 1975 9,879 2,300 3,977 3,602
growth of 56% from 1931 to 1951 translated into 1982 10,073 2,176 3,905 3,992
just 7% growth in the traditional central city. The 1990 10,661 2,152 3,988 4,520
metropolitan area doubled (108%) between 1951 1999 10,952 2,125 4,039 4,788
and 1971, and the traditional central city increased Source: Demographia web site.
only 5.5% to 713,000. By this time the traditional
central city contained only 27% of the population of
the metropolitan area. As noted above, the decade of population of London increased by 15% from
the 1970s produced relatively slow growth for 1951 to 2001.
Toronto of 12%, and we see in Table 2.7 that the Population growth in the metropolitan area has
population of the traditional central city declined by been accompanied by a substantial decline in the
16% to 599,000. Growth in the metropolitan area city of Paris itself—from 2.79 million in 1962 to
picked up in the 1980s and 1990s (56% over these 2.12 million in 1999 (a drop of 24%). As we can see
20 years), and the population of the traditional in Table 2.8, most of that decline occurred during
central city came back to its earlier level of 1962 to 1982. Since then the population of the city
676,000 (up 13%). As noted above, the boundaries has held relatively steady. Population in the inner
of the Toronto municipality have expanded greatly suburbs increased from 3.44 million to 4.04 million,
over the years; its population was 631,000 in 1931, with most of that increase coming in the 1960s.
2.48 million in 2001, and 2.50 million in 2006. After 1968 population growth has shifted entirely to
The basic message in Table 2.7 is that, while the the outer suburbs, which more than doubled in
metropolitan area outside the traditional central city population between 1962 and 1999 from 2.24 mil-
grew from 586,000 in 1951 to 4.44 million in 2006, lion to 4.79 million. Paris is an example of a
the population of the traditional central city re- metropolitan area with sizable, but not rapid, popu-
mained constant (676,000 in 1951 and 671,000 in lation growth that has seen population decline in the
2006). However, the population of the traditional inner city and steady drift to the outer suburbs.
central city did fluctuate somewhat over time as the The spatial pattern of employment in the Paris
rate of total population growth varied. But the metropolitan area has been changing as well.
bottom line is that the population of Toronto over- Table 2.9 shows employment data by area (by place
whelmingly grew out, not up. of work) for 1990 and 1999. Total employment
changed very little during these years (a decline
of 0.7%), although population grew by 2.7%. But
Paris
during the decade of the 1990s employment in the
Table 2.8 displays population data for the Paris core area of the city of Paris fell from 1.09 million to
Metropolitan Area from 1962 to 1999. The geo- 891,000—a decline of 18%. Employment in the
graphic area included is the governmental unit
known as Ile de France. Paris is the capital of TABLE 2.9 Employment of Paris Metropolitan Area
France and one of the world’s great cities and tourist (Ile de France) (1000s)
attractions, of course. However, population growth
Paris
in France has not been particularly rapid (26% from
1962 to 1999), and that rate of growth is reflected in Year Total Core Outer Inner Ring Outer Ring
the population growth in the Paris metropolitan
1990 5,076 1,087 729 1,753 1,508
area. The population of the metropolitan area in-
1999 5,043 891 765 1,741 1,645
creased from 8.47 million in 1962 to 10.95 million
in 1999, an increase of 29%. Recall that the Source: Demographia web site.
22 I Chapter 2. World Urbanization
outer portion of the central city increased modestly The difficulty of this question is compounded by the
from 729,000 to 765,000 and declined slightly in the fact that, since 1970, some satellite cities that were
inner ring suburbs from 1.75 million to 1.74 million. really economic units separate from the major city
The outer suburbs made up the difference; employ- at that time have been engulfed by the spreading out
ment increased from 1.51 million to 1.65 million. of the major urban area.
The jobs are decentralizing along with the people. The U.S. Bureau of the Census has the task
Do jobs follow people, or do people follow jobs? of defining the metropolitan areas. As a practical
The answer is ‘‘yes.’’ More discussion of this matter the Census Bureau defines metropolitan
question is to come. areas as groups of counties that contain a central
city with a population of at least 50,000. A county is
included in a metropolitan area if there is a signifi-
I E. TALES OF THREE AMERICAN cant amount of commuting to jobs in the county that
CITIES: NEW YORK, LOS ANGELES, contains the central city. Counties are used as the
building blocks of metropolitan areas because their
AND CHICAGO
boundaries do not change and because a great deal
The New York, Los Angeles, and Chicago metro- of data is gathered at the county level. This proce-
politan areas are, by far, the three largest in the U.S. dure means that the Census Bureau changes the
The book by Janet Abu-Lughod (1999) provides definition of a metropolitan area as residential and
a detailed history of these three urban areas— commuting patterns change. This procedure also
America’s global cities. This section provides a means that there can be more than one ‘‘metropoli-
systematic presentation of some of the basic facts tan division,’’ as defined by the Census Bureau,
of metropolitan population growth and spatial pat- within a metropolitan area. For example, Newark is
terns for the three largest urban areas in the U.S. its own metropolitan division because it is a central
since 1970. As in the previous section on interna- city of over 50,000 population and workers in
tional cities, the fundamental point is that there is a surrounding counties commute to Newark. Conse-
close relationship between the growth of an urban quently, the Census Bureau also defines what it calls
area and change in the spatial patterns of population a Combined Statistical Area (CSA). A CSA has a
and employment. Economic models to explain these population of at least 2.5 million and at least two
facts are covered in later chapters. metropolitan divisions that are economically inte-
The definition of the metropolitan area is the grated. The Census Bureau has also defined ‘‘micro-
first question that must be answered in an empirical politan areas’’ as consisting of a city of 10,000 to
study. We wish to focus on a particular urban area 50,000 people and the county in which the city is
viewed as an economic unit, distinct from rural located (plus any adjacent counties that are eco-
areas and other urban areas. Clearly studying nomically integrated with it). Metropolitan areas
only the ‘‘central city’’ (i.e., New York City, the and micropolitan areas together make up the list of
city of Los Angeles, the city of Chicago) will not do. Core Based Statistical Areas, of which there were
The residential suburbs must be included because 935 in the U.S. and Puerto Rico in 2003.
they are part of the economic unit. A more difficult New York, Los Angeles, and Chicago all fall
question concerns the inclusion of nearby cities that into the CSA category. For purposes of this section,
are satellite cities, but not really residential suburbs these three major urban areas are defined for 1970 to
of the main city. For example, New York has 2000 as given groups of counties as itemized in the
Newark, New Jersey just across the Hudson River. subsequent paragraphs. This definition means that
Chicago has a ring of old satellite cities—Wauke- some counties are included for 1970 that cannot be
gan, Elgin, Aurora, and Joliet (in Illinois), and Gary, considered to be part of the main urban area at that
Indiana. Except for Gary, these cities were founded time. However, there is a benefit from studying the
in the nineteenth century after a railroad line was same geographic area over time. We make a small
built around Chicago, intersecting the major trunk error by including some farms and an occasional
rail lines that converge on Chicago. Los Angeles has satellite city in 1970, but we make sure that we
a series of cities that line the coast of the Pacific encompass the entire larger urban area for the entire
Ocean, and a line of cities that stretches to the East. 1970–2000 period. We recognize what we are
Tales of Three American Cities: New York, Los Angeles, and Chicago J 23
doing, and keep that small error in mind. The 924,000 in the core area exceeds the population
method that is followed is to define a ‘‘core’’ of the State of Montana (and six other states), and
area (e.g., the central city), an inner ring of suburban suggests the image of large expanses of abandoned
counties, and an outer ring of counties. territory in the Bronx. The next decade tells a
different story for the core area; the population
increased by 3.10%, and this was followed by an
New York
even larger increase in the 1990s of 8.98%. The
The New York Metropolitan Area consists of 22 population of the core area in 2000 had bounced
counties in New York, New Jersey, and Connecticut. back to its 1970 level of about 8.2 million.
New York City consists of its five boroughs— Next consider the inner ring of eight counties
Manhattan, Brooklyn, Queens, the Bronx, and that are adjacent to the core area. Population de-
Staten Island. Each is a separate county. clined in this area during the 1970s and 1980s, and
Population data for 1970, 1980, 1990, and 2000 then regained most of this loss by 2000. The failure
are shown in Table 2.10. The definitions of the core of population to grow at the metropolitan level
area, the inner ring and the outer ring follow Hoover meant decline for the inner ring in the 1970–90
and Vernon (1959), and are noted in the footnotes of period, but the growth in the 1990s at the metropol-
Table 2.10. The population of the metropolitan area itan level translated into growth in the inner ring.
grew by 29.6% from 1950 to 1970, and reached 17.8 The outer ring experienced population growth dur-
million in 1970. The next 20 years actually saw ing the entire 1970–2000 period, and its rate of
negative population growth; population dropped to growth was actually greatest in the decade of the
17.1 million in 1980, and the 1990 population was 1970s while the rest of the metropolitan area was
17.6 million. But New York revived in the 1990s. experiencing large population losses.
Population growth from 1990 to 2000 was 1.46 The New York metropolitan area gives us a
million, which amounts to 8.29% growth for the reasonably clear example of what happens to the
decade. Table 2.10 also shows that the core of the spatial distribution of population in modern urban
metropolitan area—defined as New York City, areas under conditions of zero growth. When there
excluding Staten Island and adding Hudson County is no population growth in the metropolitan area (as
(Newark), NJ—had a population loss of 11.3% from in 1970–90), the core area declines rather sharply,
1970 to 1980. All parts of the core area lost popu- the inner ring also declines, and the outer ring
lation during the 1970s. The population loss of experiences growth equal to the declines in the
other two areas. One might hypothesize that the
data for 1970 and 1990 provide us with a pretty
TABLE 2.10 The New York Metropolitan Area
clear picture of the underlying trend toward the
Population (1000s) ‘‘suburbanization’’ of the population. Even if there
is no population growth, the outer suburbs still grow
1970 1980 1990 2000
for a variety of reasons such as the demand for new
Core Area 8,207 7,283 7,509 8,183 houses, desire to escape central city problems, local
Manhattan 1,533 1,428 1,487 1,539 taxes, and the shift of jobs to the suburbs. The core
New York City 7,897 7,077 7,336 8,018 area must cope with population decline, while the
Inner Ring 5,455 5,188 5,114 5,401 outer ring must handle rather sizable growth. The
Outer Ring 4,095 4,650 4,961 5,457 remarkable turnaround that New York experienced
Total 17,757 17,121 17,584 19,041 in the 1990s is not typical, as you will see. The rate
of population growth in the core area of 8.98%
Notes: Core area is defined as Manhattan, Brooklyn, Queens, the
actually exceeded the growth rate for the entire
Bronx, and Hudson County, NJ. New York City includes Staten
Island and excludes Hudson County. Inner ring counties include 3
metropolitan area of 8.29%. New York City bene-
counties in New York and 4 counties in New Jersey. Outer ring
fited from the economic boom of the late 1990s as
counties include 5 counties in New York, 4 in New Jersey, and 1 in sizable areas were rebuilt and employment in its
Connecticut. financial sector boomed. New York’s role as a world
Source: Bureau of Economic Analysis, U.S. Department of financial capital makes its experience in the 1990s
Commerce. unusual, if not unique.
24 I Chapter 2. World Urbanization
information that you must bear in mind as you read 2.13 also shows that employment growth varied
this book. by industry; manufacturing jobs increased only
The basic data for Los Angeles are shown in by 6.4%, while jobs in the service sector grew
Table 2.13. Total employment in the metropolitan 224.3%. The main components of the service
area increased from 4.49 million in 1970 to 9.22 sector are health care, business services, private
million in 2000, an increase of 105.3%. Population educational services, and various professional ser-
growth over this same period was from 9.98 vices (law, accounting, etc.). See the footnotes to
million to 16.37 million, which is an increase Table 2.13 for more details. Other sectors as a
of 64%. Employment grew more rapidly than whole, including retail trade, grew by about 95%.
population because the baby boom generation As we know from the national data, this compari-
entered the work force, and because a larger son of industry employment growth is typical—
proportion of women decided to work. Table manufacturing jobs grew comparatively slowly
and service sector jobs grew comparatively
rapidly.
TABLE 2.13 Employment in the Los Angeles Table 2.13 also shows employment for Los
Metropolitan Area by Place of Worka Angeles County (the central county) and for the
Share other four suburban counties. Employment in the
Geographic Area Los Angeles metropolitan area grew very rapidly,
Employment (1000s) 1970 2000 1970 2000 and a good deal of that growth took place in the
LA Metro Area central county. Employment in Los Angeles County
Total 4,491 9,223 100% 100% increased from 3.39 million to 5.51 million, a
Manufacturing 1,018 1,083 22.7% 11.7% growth of 62.6%. This compares to population
Retail Trade 714 1,398 15.9% 15.2% growth in the county of 35.2% (Table 2.11). But
Servicesb 981 3,279 21.8% 35.6% the employment growth rate in the four suburban
Otherc 1,778 3,463 39.6% 37.5% counties was more than double the rate in the central
LA County county. Employment in the suburban counties of
Total 3,391 5,514 100% 100% 1.10 million in 1970 turned into 3.71 million in
Manufacturing 825 663 24.3% 12.0% 2000; a growth of 237.3%. Population growth in
Retail Trade 522 788 15.4% 14.3% these suburban counties was 133.3% over the same
Services 766 2,099 22.6% 38.1% period (Table 2.11). Recall that employment growth
Other 1,278 1,964 37.7% 35.6% exceeded population growth in the metropolitan
Suburban Counties area by 41.3%, so jobs were ‘‘suburbanizing’’
Total 1,100 3,709 100% 100% more rapidly than were residents. Employment
Manufacturing 193 420 17.5% 11.3% growth by industry shows the same pattern in
Retail Trade 192 610 17.5% 16.4% both locations—manufacturing jobs grew relatively
Services 215 1,180 19.5% 31.8% slowly and service sector employment grew rela-
Other 500 1,499 45.5% 40.4% tively rapidly. Another interesting fact is that the
a composition of employment in the suburban coun-
Employment includes all full-time and part-time wage and salary
employees and proprietors.
ties resembled the overall composition of employ-
b
Services include hotels, personal services, business services (ad-
ment in the metropolitan area fairly closely both in
vertising, data processing, etc.), repair services, health services,
1970 and 2000.
private educational and social services, legal services, membership Employment growth in Los Angeles was cer-
organizations, and professional services (engineering, accounting, tainly spectacular. No wonder so many people de-
management consulting, etc.). cided to locate in Los Angeles. At the same time, one
c
Other employment includes construction, TCU (transportation, could say that population growth in Los Angeles was
communication and utilities), wholesale trade, FIRE (finance, in- spectacular. No wonder they created so many jobs.
surance, and real estate), government (federal, state, and local), and Which is it? As noted in the previous section, it is
all other. both, of course. People follow jobs, and jobs follow
Source: Regional Economic Information System, Bureau of Eco- people. One important goal of this book is to explain
nomic Analysis, U.S. Dept. of Commerce. both mechanisms.
Appendix: Making Local Population Projections J 27
twelve years (in 2012). What will happen to 5 Another method that is used by local demogra-
New York? phers in the U.S. is to base their projections on
3 Assume that the metropolitan area grows so as projections of population at the state level. The
to be the same percentage of the nation’s popu- U.S. Bureau of the Census provides long-run
lation as it was in 2000. The U.S. Bureau of the population projections at the state level that are
Census makes projections of the U.S. popula- based on standard demographic methods that
tion that are updated on a regular basis. The use historical data on births, deaths, and net
most recent projections (made before the 2000 migration trends. They also provide state popu-
census) are as follows: lation projections that are based on a large scale
econometric model of the nation, the regions,
and the states. Sometimes these two types of
1990 (actual) 249,439,000 projections differ widely. As discussed in detail
2000 270,299,000 (281,422 actual) by McDonald and South (1985), the two sets of
2010 299,862,000 regional population projections were issued in
2020 324,927,000 the early 1980s for the year 2000 based on the
2030 351,070,000 same national population projection. These pro-
2040 377,350,000 jected population growth percentages, along
2050 403,687,000 with the actual population growth, are:
1960–80 1980–2000
Note that the projection for 2000 turned out to Actual Demographic Econometric Actual
be 2.22% below the actual population count, so Projection Projection
one might update the projections for 2010 and Northeast 9.7% 5.6% 10.2% 9.07%
later years by adjusting them upwards by Midwest 13.8% 1.5% 6.1% 9.41%
2.22%. If this method is used, Los Angeles South 36.6% 31.2% 26.5% 33.03%
will never catch up to New York, of course. West 52.6% 44.8% 31.5% 46.41%
4 However, the fraction of the population of the U.S. 25.8% 18.1% 18.2% 24.25%
nation that is located in the Los Angeles
metropolitan area has been rising. You could
First, we see that the national population pro-
assume that this fraction will continue to rise
jections were low by 6.2%. The econometric
as it did over the 1970–2000 period. This
projections were much more accurate for the
appears to make sense, and is a more sophisti-
Northeast and the Midwest, but the demo-
cated used of the past data. The U.S. popula-
graphic projections for the South and West
tion was 205,052,000 in 1970 and 281,422,000
were actually quite accurate. The demographic
in 2000, so the fraction of the population
projections included a drop in the population of
located in metropolitan Los Angeles was
the state of New York from 17.56 million to
4.87% in 1970 and 5.82% in 2000. This is
14.99 million, while the econometric model
an increase of 0.95% in 30 years, or an increase
produced a projection of 19.2 million. Actual
of 0.32% per decade. We might therefore
population in 2000 was 18.98 million. On the
project that the population of metropolitan
other hand, the two methods were in agreement
Los Angeles will be 6.14% of the U.S. popu-
that the population of California would increase
lation in the year 2010, which (after adjusting
from 23.67 million to almost 31 million (actu-
the U.S. projection upwards by 2.22%) pro-
ally 30.61 and 30.89 million, respectively).
duces a projected population of 18.82 million.
Actual population was 33.87 million.
A fascinating fact is that the fraction of the
U.S. population located in Los Angeles did not There is no ‘‘right answer’’ for how to make
change in the 1990s; it was 5.81% in 1990. The local population projections. It may surprise you to
New York population has been declining as a learn that all of the methods discussed here have
fraction of the nation; it was 8.66% in 1970 and been used by local demographers and others who
fell to 6.77% in 2000. need a local population projection.
References J 29
I EXERCISES
1. Select a major urban area that has not been discussed in this chapter, and conduct an
empirical analysis that is similar to the ones contained in Tables 2.1–2.10.
2. Use the four methods discussed in Section F above to make population projections
for the New York and Los Angeles metropolitan areas for 2010 and 2020. Does LA LA
land overtake the Big Apple? If so, when does that happen?
I REFERENCES
Abu-Lughod, Janet, 1999, New York, Chicago, Los Angeles: America’s Global Cities,
Minneapolis: University of Minnesota Press.
Au, C, and J.V. Henderson, 2006a, ‘‘Are Chinese Cities Too Small?’’ Review of
Economic Studies, Vol. 73, pp. 549–576.
Au, C., and J.V. Henderson, 2006b, ‘‘How Migration Restrictions Limit Agglomera-
tion and Productivity in China,’’ Journal of Development Economics, Vol. 80,
pp. 350–388.
Collier, Paul, 2007, The Bottom Billion: Why the Poorest Countries are Failing and
What Can Be Done About It, New York: Oxford University Press.
Easterly, William, 2001, The Elusive Quest for Growth, Cambridge, Mass.: MIT Press.
McDonald, John, 2008, Urban America: Growth, Crisis, and Rebirth, Armonk, NY:
ME Sharpe.
McDonald, J., and D. South, 1985, ‘‘A Comparison of Two Methods to Project
Regional and State Populations in the U.S.’’ Annals of Regional Science,
Vol. 19, pp. 40–53.
Pernia, Ernesto, and M. Quibria, 1999, ‘‘Poverty in developing countries,’’ in
P. Cheshire and E. Mills,eds. Handbook of Urban and Regional Economics,
Vol. 3, New York: North-Holland.
Sachs, Jeffrey, 2005, The End of Poverty: Economic Possibilities for Our Time,
New York: Penguin Press.
!
C H A P T E R
3
SCHOOLS OF THOUGHT IN
U R BA N E C O N O M I C S
30
Mainstream Economics J 31
society, where utility depends upon the goods a promote growth in the long run. Government polic-
person consumes and how a person spends his/her ies can be mistaken or badly timed, but on balance
time. People are assumed to act rationally in pursuit the policies of a democratic government can be
of their own interests. The society is constrained by made to improve welfare.
the availability of resources, including land, capital, The research agenda of mainstream urban
and (above all) the time of its members. Framing the economists is, to a degree, influenced by member-
economic question in this way as maximization ship in this school of thought. A fair amount of their
subject to constraints leads to the familiar normative research focuses on the costs and benefits of various
proposition that the marginal benefit of a particular policy actions or proposals. Consider housing for
good or activity (and hence price) should equal low-income households, for example. Facts are
marginal cost. This is so because the failure to gathered concerning the operation of the urban
satisfy this condition makes someone needlessly housing market in general and the status of low-
worse off. For example, suppose a monopolist income households in the housing market in partic-
controls all of the taxicabs in a particular city ular. Economic models of the urban housing market
and charges a fare that is higher than marginal are formulated and estimated. Then those models
cost. This means that there are some consumers are used to discover the most efficient method for
out there who are willing to pay more than marginal improving the housing of low-income households.
cost (but less than the monopoly price) for a taxi Mainstream urban economists think that the facts
ride, but they are unable to satisfy their demands. show that the construction of public housing is a
The benefit of the unsupplied taxi ride exceeds the very expensive method for improving the housing
benefit of the next-best use of resources at the of low-income households. The use of housing
margin (i.e., the marginal opportunity cost), so vouchers—certificates that increase the ability of
the consumer is made needlessly worse off. A dif- low-income households to rent decent housing in
ferent allocation of existing resources (more taxi the private market—is far more efficient. The same
rides, less of something else) could make consumers improvement in housing quality can be achieved
better off. with a lower government expenditure on housing
Mainstream economists believe that the alloca- vouchers, as well as a lower expenditure of real
tion of resources to their various uses is, for the most resources, than on public housing.
part, best handled by the market. However, there are Now the fact is that housing policy in the U.S.,
some very important exceptions to this rule that call until fairly recently, included only a small program
for intervention into the economy by government. that resembles housing vouchers. Many other coun-
Mainstream economists argue that monopoly (and tries supply large amounts of public housing. What
oligopoly), externalities (pollution and congestion), explanation did the mainstream urban economist
information problems (such as murky accounting by have for this seeming anomaly? First, nearly all of
firms), and public goods all call for public action to the public housing was constructed before we knew
improve the allocation of resources. They also that housing vouchers are better policy. We were
acknowledge that the market economy produces a locked into a policy that had to use the existing
distribution of income that is unequal, and they public housing units until they were obsolete. Re-
generally favor public policies to reduce income cently a program was started in which some of those
inequality. They recognize that there may be some public housing units are being demolished and
loss of efficiency caused by income redistribution replaced with a variety of public programs, includ-
policy, but they suggest that society might be will- ing housing vouchers. Second, the suppliers of
ing to tolerate some inefficiency in order to achieve public housing (and housing that is supplied by
a more equitable income distribution. They believe private suppliers under public subsidy) formed po-
that government intervention in these situations will litical interest groups that block attempts to turn the
improve matters. Indeed, mainstream economists public money for housing over directly to the low-
also generally advocate activist macroeconomic income households. A political battle was fought,
policies as well. They believe that the government and that battle was waged partly with the results of
is capable of using monetary and fiscal policy to studies that show the efficiency of housing vouchers
stabilize the economy in the short run and to and the waste of public housing. Also, the final
32 I Chapter 3. Schools of Thought in Urban Economics
outcome involved some modification of the voucher – People tend sometimes to sacrifice their
idea to give housing suppliers some control over own interests for the sake of someone else.
how the program is administered.
Camerer (2005) offers the following perspective.
The appendix to this book provides a brief
review of some of the major normative propositions
In one sense, behavioral economics is the inevitable
in mainstream microeconomics, and introduces the result of relaxing the assumption of perfect rational-
mathematical techniques that are used in this book. ity. Like perfect competition and perfect information,
You should study the first two sections of this the assumption of perfect agent rationality is a useful
appendix before you read Chapter 3. limiting case in economic theory. Generalizing these
The other three schools—behavioral econom- assumptions to account for imperfect competition
ics, conservative economics, and Marxist econom- and costly information was challenging, slow, and
ics—are all critical of mainstream economics, for proved to be powerful; weakening the assumption of
different reasons. In a nutshell, mainstream eco- perfect rationality will be too.
nomics makes unrealistic assumptions about human
behavior (behavioral economics), does not pay Behavioral economics has proved to be impor-
sufficient attention to human freedom as an ultimate tant in urban economics and real estate because of
goal (conservative economics), and ignores class evidence that asset markets in general and real
struggles (Marxist economics). It is all far more estate markets in particular are not fully efficient.
complicated than that, as we briefly suggest in this This means that market prices do not completely
chapter. reflect all available information. In particular, asset
markets in general and real estate markets in par-
I C. BEHAVIORAL ECONOMICS ticular are subject to ‘‘bubbles,’’ episodes in which
prices increase simply because prices are increas-
Behavioral economics can be considered an out- ing. Robert Shiller is the leader in the application of
growth of mainstream economics, and has achieved behavioral economics to real estate. He thinks that
prominence in recent years. Mullainathan and Tha- asset market bubbles are the result of what he calls a
ler (2001) define behavioral economics as follows: social contagion. Shiller (2008, pp. 41–42) states
that
Behavioral economics is the combination of psychol-
ogy and economics that investigates what happens in the most important single element to be reckoned
markets in which some of the agents display human with in understanding this or any other speculative
limitations and complications. boom is the social contagion of boom thinking,
mediated by the common observation of rapidly
This means that models are constructed in rising prices. This social contagion lends increas-
which people are not assumed to possess perfect ing credibility to stories—I call them ‘‘new era’’
information and are not able to be fully rational. stories—that appear to justify the belief that the
Five important ways in which people display human boom will continue. The operation of such a social
limitations are these: contagion of ideas is hard to see because we do not
observe the contagion directly, and it is easy to
– People have limited powers of problem neglect its underlying causes.
solving, so they follow rules of thumb to Some observers seem to be ideologically opposed to
simplify decision making. the idea that contagion of thought patterns plays any
– People are influenced by what John K. role in our collective thinking. Indeed, people think
Galbraith called ‘‘conventional wisdom,’’ that the world is led by independent minds who
invariably act with great intelligence.
even if that wisdom is not so wise after all.
– People are influenced by how problems are In the case of real estate bubbles we have
‘‘framed.’’ people making major investment decisions using
– People have limited willpower, so they do rules of thumb that are based on conventional
not always act in their long-run best wisdom that is a social contagion, as in ‘‘Let’s
interests. buy a house at a high price with very little down
Conservative Economics J 33
payment because ‘everyone’ says that housing and markets should be created to permit households
prices will continue to go up.’’ to protect themselves from financial ruin. He also
An economic model based on the idea of social supports the idea of a government financial product
contagion gets interesting because the real economy safety commission, similar to the Consumer Prod-
will, for a time, produce positive feedback that tends uct Safety Commission.
to validate the idea that prices will continue to rise.
Akerlof and Shiller, in a book titled Animal Spirits I D. CONSERVATIVE ECONOMICS
(2009), identify three mechanisms of this sort:
Conservative economics will be discussed at some
– Rising asset prices make households feel length here because this school of thought has been
richer, so they spend more money on real quite influential since the 1970s, and because most
goods—the house as ATM (automatic teller students may not really know how conservative
machine) as owners sign up for larger mort- economics differs from mainstream economics.
gage loans. Most students know that Milton Friedman, the
– Rising asset prices stimulate real invest- late professor emeritus from the University of Chi-
ment, which increases income and wealth. cago and a winner of the Nobel Prize in economics,
(Housing suppliers responded to the price was the most prominent conservative economist.
increases up through 2006—by increasing But it was Friedrich A. Hayek (another Nobel Prize
supply and ultimately bringing the market winner) who wrote what conservative economists
crashing down.) consider to be the classic statement of their values.
– Rising prices induce investors to use more Hayek’s book The Road to Serfdom was published
financial leverage (borrow a larger propor- in 1944, and it still exerts considerable influence in
tion of the price of the asset), which tends to conservative quarters. In its Summer 1994 issue the
increase asset prices even more. conservative magazine Policy Review included a
symposium entitled ‘‘Serfdom USA—Fifty Years
The financial crisis that has been caused by the Down Hayek’s Road.’’ The symposium coincides
housing price bubble and subsequent crash is discussed with the reissue of the book on its 50th anniversary.
in some detail in Chapter 9. We are just beginning to Hayek’s chief concern was with the progressive
understand the impacts of the crash in housing replacement of competition with planning, or the
markets on urban areas. For example, foreclosures central direction of the nation’s resources toward
are concentrated in some neighborhoods. What will some objective. At the time he wrote he was worried
be the effects? A major research agenda looms. about the progressive advance of socialism in west-
Behavioral economists make policy recom- ern nations, especially England. His concern was
mendations that take human behavioral tendencies with the method of centralized planning, even if the
into account. They generally believe that the econ- goals espoused by its advocates were admirable.
omy is best run by markets, but that government He saw that the ultimate effect of socialism and
policy should be designed to protect people from the other forms of central planning would be a return
extreme risks that can arise in a market system. A to serfdom, the condition of most ordinary people
popular book by behavioral economist Richard prior to their progressive liberation that began
Thaler and law school professor Cass Sunstein roughly with the Renaissance. For Hayek (1944,
(2008) argues that government policies and pro- p. 14), the hallmark of Western Civilization is
grams should include provisions that ‘‘nudge’’ peo-
ple to make good decisions, partly by framing the respect for the individual man qua man, that is, the
decisions in ways that produce good choices. For recognition of his own views and tastes as supreme in
example, place the healthy foods in the school his own sphere, however narrowly that may be circum-
cafeteria where children are more likely to choose scribed, and the belief that it is desirable that men
them. Shiller (2008) recommends that information should develop their own individual gifts and bents.
technology should be used to provide better infor-
mation that can help people make better financial Conservatives think that the emergence of this
decisions, and that additional financial institutions respect for the individual was closely associated
34 I Chapter 3. Schools of Thought in Urban Economics
with the development of the laissez-faire market Capitalism and Freedom sets down the conserva-
economy. tive’s economic creed clearly and concisely. Like
For Hayek the danger was people who advocated Hayek, Friedman’s basic proposition is that human
goals for the society other than freedom and liberty. freedom is the ultimate end, and that competitive
This includes mainstream economists who advocate capitalism is a system of economic freedom that is a
the maximization of utility of society’s members. necessary condition for political freedom. The sec-
Hayek’s central point is that the pursuit of social goals ondary proposition is that the scope of government
(except for those that can achieve virtually unanimous must be limited to functions that Friedman outlines
agreement), even those chosen through democratic and that governmental power must be dispersed
means, must inevitably sharply restrict the freedom of rather than concentrated at the federal level. His
individuals. The democratic decision to engage in basic statement (1962, p. 2) is that
central planning of a particular sector of the economy
will lead to a delegation of substantial power to Freedom is a rare and delicate plant. Our minds tell
planning agencies. Hayek (1944, p. 66) stated that us, and history confirms, that the great threat to
freedom is the concentration of power. Government
The objectionable feature is that delegation is so is necessary to preserve our freedom, it is an instru-
often resorted to because the matter in hand cannot ment through which we can exercise our freedom; yet
be regulated by general rules but only by the exercise by concentrating power in political hands, it is also a
of discretion in the decision of particular cases. In threat to freedom.
these instances delegation means that some authority
is given power to make with the force of law what to Friedman asked (1962, p. 2), ‘‘How can we
all intents and purposes are arbitrary decisions (usu- benefit from the promise of government while
ally described as ‘‘judging the case on its merits’’). avoiding the threat to freedom?’’ His answer is
that government largely should be limited to cer-
The attempt to plan a substantial portion of an tain functions that support the competitive market
economy will eventually cry out for an economic economy—provision of pure public goods such as
dictator, someone who can get things done—make the common defense, maintenance of law and order,
the trains run on time, etc. Free societies are gov- enforcement of contracts voluntarily made, defini-
erned by the rule of law, not by administrative tion and enforcement of property rights, and provi-
discretion. Or, as Milton Friedman suggests, the sion of a monetary system. He found little reason for
Federal Reserve should increase the money supply government action to regulate or operate monopo-
by a fixed percentage per year (a rule) rather than lies, or for public policy to attempt to correct for
attempt to engage in discretionary monetary policy. externalities (neighborhood effects) or informa-
Hayek wrote a new forward for his book in the tional problems.
late 1950s, and there he recognized that socialism Friedman’s view of monopoly is instructive.
based upon the state as chief owner of the means of Monopoly means a lack of alternatives, and there-
production was essentially a dead issue in the U.S. fore an inhibition of freedom. Friedman stated (in
and Western Europe. His updated forecast was for agreement with Hayek) that monopoly most often
continued ‘‘hodge-podge’’ development of the wel- arises from government policy of some sort or
fare state that would produce restrictions on human through collusive agreements, so most monopoly
freedom that would strongly resemble full state can be avoided by eliminating the offending public
socialism. Increasing reliance on administrative support or by enforcement of the antitrust laws. The
discretion rather than the rule of law was, in his few instances in which monopoly arises from tech-
view, going to be in the cards. The desire to have a nological factors call for one of three courses of
welfare state would slowly produce a psychological action: private monopoly, government regulation, or
predilection to limiting freedom. He predicted that government operation. Friedman suggested (1962,
we would get there, just at a slower pace than if we p. 28) that permitting the private monopoly to
had embraced outright socialism. operate as it will ‘‘may be the least of the evils.’’
Whether you believe Hayek’s prediction, In matters of externalities, or neighborhood
Milton Friedman certainly did. His 1962 book effects, Friedman follows the argument that was
Conservative Economics J 35
made by Ronald Coase, his colleague at the Uni- problem? First of all, the economy is full of con-
versity of Chicago and yet another Nobel Prize straints on free choice. Equal educational opportu-
winner, in a classic article (Coase, 1960). Coase nity is not available to all, minimum wage laws
argued that, if property rights are fully defined and exist, and occupational licensure limits entry to
enforced, and that the costs of making ‘‘transac- various remunerative jobs. Friedman advocates do-
tions’’ (i.e., costs of arriving at private contracts) are ing away with all of these limitations on freedom,
trivial, then externalities will not cause in- but in the meantime we have people in poverty.
efficiencies. Private negotiation can be used to Furthermore, Friedman believes that the alleviation
arrive at an efficient allocation of resources. For of poverty is a public good. As he put it (1962,
example, suppose that a factory owns the right to p. 191):
make noise. In this case the neighbors can pay the
factory owner to reduce the noise (by, perhaps, I am distressed by the sight of poverty; I am benefited
installing insulation), or they can suffer—which- by its alleviation; but I am benefited equally whether I
ever is cheaper. Or suppose that the neighbors own or someone else pays for its alleviation; the benefits
the right to peace and quiet. The factory owner can of other people’s charity therefore partly accrue to
install insulation, or he can bribe the neighbors into me.
accepting some noise (whichever is cheaper). Fur-
thermore, all parties always have the option of Given this ‘‘free-rider’’ problem, the alleviation
moving away. Provided that a private agreement of poverty must become a public program. Private
can be reached with minimal difficulties, there is no charity will be insufficient to improve the welfare of
role for government to play in the regulation of those who are not in poverty. In this case, as in the
factory noise. Besides, the attempt by government case of other public goods, a public program enhan-
to regulate noise may make matters worse. Prob- ces the personal freedom of both the poor and those
lems related to information are best handled by who are not poor.
individuals because they have an incentive to There can be no question that membership in
make decisions based on good information. the Conservative Economics school of thought in-
Friedman recognized that one of society’s fluences one’s research. These economists look for
needs is the alleviation of poverty. Here he is unexpected places in which the private market is
famous for his advocacy of the negative income working well, and they take particular delight in
tax for all poor people regardless of occupation, finding those instances in which government policy
employment status, sex, location, etc. According to turns out to have had effects that seemingly were the
Friedman, the negative income tax has three funda- opposite of those intended. In fact, George Stigler,
mental advantages: it provides purchasing power another of Friedman’s colleagues at the University
for the poor directly, it permits markets to function of Chicago, received the Nobel Prize for founding
in unregulated fashion, and it can be set up to the Chicago School of Political Economy. Members
provide an incentive for the poor to work. Friedman of this school concentrate some of their research
advocated the negative income tax as a more effec- efforts on the economic analysis of political deci-
tive replacement for the myriad of programs that sions—equilibrium in the political marketplace for
attempt to assist the poor. Note that Friedman’s policies that help or harm certain groups. Why do
proposals follow Hayek’s philosophy that we public policies seem to ‘‘fail’’ so often? Perhaps it is
should follow simple rules of law rather than rely because we fail to perceive the real purposes of
on the bureaucratic judgments of people such as those policies. For example, it is argued that zoning
officials of the Environmental Protection Agency to regulate the use of urban land is needed to protect
and social workers. the health and welfare of the public. The legal
At this point you may wonder why Friedman justification for zoning in fact falls under the police
advocates any antipoverty policy at all. In a market power of local government. No doubt some aspects
economy people are paid according to their own of zoning ordinances do protect the health and
decisions to work, obtain training for jobs, under- welfare of the public, but other aspects of zoning
take risks, and so on. The income distribution is probably do just the opposite. Consider the require-
the result of choices freely made, so what’s the ment that some suburban zoning ordinances require
36 I Chapter 3. Schools of Thought in Urban Economics
that residential lots are quite large. This ‘‘large-lot’’ ultimate outcome of capitalism is huge industrial
zoning has the effect of excluding households of firms owned by the capitalist class that exploit and
more modest means from living in that suburb, and oppress the industrial workers, the proletariat. Cap-
has little to do with the health and welfare of the italism ultimately fails to be of benefit to the mass of
public. Has zoning therefore ‘‘failed’’? No, because workers, who rise up and defeat the capitalist class
the exclusion of lower-income households was the in the final battle of the war between these two
intention of the local government in the first place. dominant social classes. The overriding theme in
Two of Friedman’s favorite examples of urban Marx is the class struggle between the two classes
policy are public housing and urban renewal. One that are associated with the two primary factors of
argument made for public housing is that slums production, capital and labor.
create negative neighborhood effects. Therefore, Marxian economics survives in universities
the argument goes, the government should tear around the world (and a few other places), so it
down the slums and replace them with public behooves one to understand Marxian arguments,
housing so that the negative neighborhood effects and to be able to recognize a Marxist. Marxism has
are eliminated. Friedman replies that those negative been revised and adapted to the modern urban
neighborhood effects may well exist, and that Coa- scene, but the theme of class struggle remains intact.
sian negotiation cannot handle the problem. The According to Marxists, conventional economics,
proper policy therefore is to levy a tax on slum including both the mainstream and conservative
housing (just as we should levy a tax on polluters), varieties, omits class conflict as an important factor
and to provide the poor with more income through a to consider.
negative income tax. By the way, other conservative What does this sort of Marxist analysis have to
economists doubt that there are pervasive negative do with urban areas? Plenty, according to a growing
neighborhood effects associated with the housing group of Marxist urbanists. For them, class conflict
consumed by low-income households that would and the role of the state in advanced capitalism play
call for any public action at all. Friedman then out in urban areas. In the early 1970s Marxists
suggests that the real justification for the public began to write about how, in their view, urban
housing program was paternalism—policy makers problems that provoke local conflicts have their
thought that the poor needed better housing more roots in national, and even global, economic forces.
than they needed other things. Why has industrial investment shifted to the U.S.
Whatever the justification for the public housing Sunbelt and to less-developed countries? Why is the
program may have been, its results seem to have American economy (and other advanced econo-
been disastrous. The program of the 1950s bulldozed mies) shifting from an industrial to a service
more housing units than were constructed, and many base? How do these forces influence class conflicts
of the units constructed under the urban renewal in urban areas, and what are the outcomes of those
program were for middle-class households. The conflicts? A book by Matthew Edel (1992) surveyed
public housing units that were constructed tended the developments in Marxist urbanism up to that
to segregate the poor into public housing develop- time.
ments, and to concentrate and perhaps to exacerbate Marxists see class conflicts in controversies
social problems. The actual implementation of the over the use of land in cities and in the funding
public housing and urban renewal programs, as of urban public services. Industrial workers in the
opposed to the high-minded goals that were the U.S. (and in other advanced capitalist countries)
original motivation for these programs, was the failed to create national revolutionary politics based
result of decisions made by local officials and real on grievances at the work place, so Marxists have
estate developers who had their own agendas. turned their attention to urban political economy
because that is where the class conflict action is. For
them capitalism will inevitably lead to class con-
I E. MARXIAN ECONOMICS
flicts that will lead to a socialist revolution, so the
Karl Marx provided the world with a sweeping questions are, ‘‘Where are the conflicts happen-
interpretation of economic history that included a ing?’’ and, following Lenin, ‘‘What can Marxist
prophecy for capitalism. Marx taught that the intellectuals do to move the revolutionary process
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