By Nicholas Khaw
“Start spreading the news
I am leaving today
I want to be a part of it
New York, New York.”
– Frank Sinatra
“In New York, concrete jungle where dreams are made of
There’s nothing you can’t do
Now you’re in New York
These streets will make you feel brand new
Big lights will inspire you,
Let’s hear it for New York, New York, New York.”
– Jay-Z and Alicia Keys
When I was applying for college admissions way back in 2004, I confess, readily, that one of the major factors in deciding to which colleges to apply was if that particular college was located in a city. I’m a city kid, through and through, and I’ll happily state it unabashedly. Like a colleague of mine says, “There‟s a reason why Candace Bushnell did not write Sex and the Village: cities are sexy.”
The thing is, back in 2004, I never really understood the appeal of cities for me. I mean, sure, there were loads of things to do in a city. Way more options than in a rural area, certainly. But I never had a real analytical framework for understanding the sexiness of a city.
Cue: Urban Economics.
Happily, while there are portions of economics that can be seriously dense and unnecessarily complicated, the basic analytical framework for Urban Economics is very straightforward. It’s taken from Edward Glaeser, a Harvard Professor and career city-vangelist, who recently crafted “The Triumph of the City”, where he argues that the “city” is humankind’s “greatest invention” and that cities make us richer, smarter, greener, healthier and happier. There’s a lot of “-ers” for one “invention.”
And so, with respect to cities, Glaeser states,
“Economics judges policies by whether they increase the choices available to people, not on whether they help rebuild a particular locale. Economics does not preclude place-based policies, such as urban redevelopment, if they are the best way to help people, but economists do insist that these policies be judged on whether they improve individuals‟ lives, not on whether they make a place more pleasant.”
So, what is a measure of how much satisfaction a given person can derive from a given city? Well, hey, surprisingly enough(!), Glaesar the economist says, a utility function, of course!
Total Utility (Satisfaction) = Income + Amenities – Housing Costs – Transportation Costs
Granted, this is clearly a simplification but in terms of a basic analytical framework in which to think about cities, this is mighty straightforward. You can cover pretty much every aspect of living decision within this framework. More income is good, so you get higher utility. More amenities, which include stuff like healthcare, education, issues of liveability, are good, so you get higher utility. Higher housing costs are bad, so you get lower utility. Higher transportation costs are bad, so you get lower utility. Take the net effect of all these, and ta-da, you have a solid basic framework of considering the value of the city.
In cities, income is generally higher. The reasons for this have been proven empirically – cities have higher productivity, attract high-skilled individuals, drive most of productivity differences, and attract skill-intensive industries. Naturally, income is higher. For amenities, well, it’s straightforward – a more densely populated region (a city versus, say, suburbia) would require more healthcare specialists, more security, more places of entertainment and culture to serve the large population.
But, of course, on the flipside, since there is high demand for cities, we would expect the price of the city – essentially, the costs of living in a city – to be high as well. However, while these costs are high, empirical studies undertaken by the Economist Intelligence Unit (EIU) show that expensive cities are still competitive. By competitive, the EIU means a city’s “demonstrated ability to attract capital, businesses, talent and visitors.” Indeed, 8 of the 10 priciest cities in the world rank in the top 16 in global city demand, based on the EIU’s Worldwide Cost of Living Survey and the Global City Competitiveness Index.
What does that tell us?
Well, if we assume that people are (largely) rational, they would not live in a place where they derive negative utility. So, we should expect that the benefits from higher incomes and greater amenities outweigh the housing and transportation costs associated with living in a given city. And since, cities tend to cost more (but are still in high demand), it follows that cities provide larger benefits in terms of income and amenities, thereby giving utility of zero or more.
Of course, this is not to say that there is negative utility accruing to living in rural areas. And I am positive that people living in rural areas are just as rational as those living in urban areas. Given that, this must mean that there are people who derive positive utility from living in rural areas as well. However, the world is urbanizing. Fast. In 1900, 13% of the world lived in cities. In 2007, 50% of the world lived in cities. By 2020, something like 60% of the world will be living in cities.
If we assume that people are just as rational as one another, this means that more and more people have been deriving greater utility from living in cities than living in rural areas and this trend looks set to continue. Otherwise, why live in an urban area?
So, thanks to Edward Glaeser and Urban Economics, it is much easier for me to see now why I’m such a city kid. Cities are sexy. From New York to Paris to Tokyo to Kuala Lumpur to Gondor to Metropolis, the city is, in Sinatra’s words, “King of the hill/Top of the list/Head of the heap.”
Nicholas Khaw is currently a practising economist at a local investment house.