One of the great failings of economists is their confident assumption
that their way of looking at the economy is the only way - certainly,
the only useful way - of understanding it.
For one thing, their almost
exclusive focus on money - prices, actually - and their convenient
assumption that people are rational, allows them to analyse an economy
populated by automatons rather than fallible, flighty humans.
Behavioural economics and economic sociology attempt to correct this deficiency.
But
there's another way of studying the economy that most economists take
little interest in, to the detriment of their understanding of how the
economy ticks: its spatial dimension. This failure is getting more
costly as we move to a knowledge economy.
Why isn't economic
activity spread pretty much evenly across our vast continent? Why is
almost all of it concentrated around our coastline?
For most of
our states, up to three-quarters of their economic activity is
concentrated in their capital city, which is also the state's first site
of white settlement. This is partly an accident of history. Newcomers
tend to settle where other people are already settled.
But
economic geographers have long known there's also a lot of economic
logic to where people settle. Farmers tend to settle where the most
arable land is. Mines have to be built where the minerals are.
Manufacturers have to decide whether to build their factories close to
where their raw materials are or close to where their customers are.
They usually decide to set up in cities, often on the outskirts of
cities where land is cheaper.
What's more, many of the firms in a
particular industry will gravitate to the same city, usually a big one.
Why? So as to exploit "economies of agglomeration".
You've heard
of economies of scale. Economies arise when similar firms agglomerate
(cluster together). Workers with skills relevant to that industry are
attracted to that city, meaning firms have less trouble getting the
skilled workers they need. Workers who lose their jobs at one firm may
not need to move house to get another job at a similar firm.
Likewise,
the manufacturers and their suppliers of specialist equipment and
materials each benefit by being close to each other. Firms in the same
business can keep an eye on each other, copying anyone who gets on to a
better way of doing things. That way, the whole industry gets more
efficient at a faster rate.
All this has long been understood by
economic geographers. But the advent of the knowledge economy has given
agglomeration economies a major new twist and added to the economic
significance of big cities, as the report, Mapping Australia's Economy:
cities as engines of prosperity, by Jane-Frances Kelly and Paul Donegan,
of the Grattan Institute, has pointed out.
"Today the Australian
economy is no longer driven by what we make - the extraction and
production of physical goods - but rather by what we know and do. Like
other advanced economies around the world, our economy is continuing to
become more knowledge-intensive, more specialised and more globally
connected," the report says.
"Knowledge-intensive businesses -
which are the most productive today - tend to cluster and thrive in the
centres of large cities."
It turns out economic activity in
Australia is concentrated in and around large cities, but is not
distributed evenly within cities. Central business districts and
inner-city areas are especially important: they represent substantial
concentrations of employment, but even more intense concentrations of
economic activity. In other words, CBD workers have a lot higher
productivity than other workers.
The report explains that "the
more highly skilled and specialised a job, the greater the need to find
the best person to fill it. This is especially important when the work
involves knowledge, expertise, judgment and learning".
Being close
to suppliers, customers and rivals helps businesses generate new
business opportunities and ideas for products and services, and better
ways of working. These transfers of expertise, new ideas and process
improvements that occur through interactions between businesses are
called "knowledge spillovers" (a class of "positive externality").
Within
cities, CBDs and inner-city areas offer the most opportunities for
face-to-face contact among workers, essential to benefiting from
knowledge spillovers. Spillovers often involve combining and recombining
knowledge to come up with new products and ways of working.
Workers
build on each other's thoughts, jointly solve problems and break
through impasses. Trust is essential, and these kinds of complex
conversations are best had in person.
"High-speed broadband and
other advances in communication technologies will never replace the
importance of face-to-face contact," we're told.
Grattan's
research finds that residential patterns and transport systems mean CBD
employers have access to only a limited proportion of workers in
metropolitan areas. Turning that around, many workers, particularly in
outer suburbs, have access to only a small proportion of jobs across the
city.
For instance, in some outer suburban growth areas of Melbourne,
just 10 per cent of the city's jobs can be reached within a 45-minute
drive. If work journeys are made by public transport it's worse.
The
report warns that, unless governments lift their game, "Australian
cities are likely to continue to spread outwards, further increasing the
distance between where many people live and the most productive parts
of large cities". This would harm productivity - and workers'
opportunity to get ahead.
The point is, governments need to
understand the economy's spatial dimension and respond by ensuring
transport networks better connect employees with employers, and
businesses with their customers and suppliers. Continue letting
congestion worsen and you cause productivity to be lower than otherwise,
not to mention adding misery to people's lives.
