Must-Read: Paul Krugman: The Gambler’s Ruin of Small Cities

Must-Read: Once upon a time in the past the size and location of cities was underpinned by fundamentals in the sense first of agricultural resources and transport, and then of agricultural plus manufacturing resources and transport, on top of which was built, agglomeration economy, increasing returns, and congestion layer of determination. In the future it looks as though it will be not production but consumption suitability: the fundamentals underpinning cities will be where people find it pleasant to live, on top of which there will be a congestion layer, plus a three-fold path dependence increasing returns layer of determination: the consumption culture, the production culture, and the infrastructure left from the past. Will we all live in one million population mile-long thousand foot-wide thousand-foot high arcologies in Greater San Diego? Not all. But a lot of us may: Paul Krugman: The Gambler’s Ruin of Small Cities: “Once… towns and small cities… served as central places serving a mainly rural population engaged in agriculture and other natural resource-based activities…

…Over time… agriculture has become ever less important…. Nonetheless, many small cities survived and grew by becoming industrial centers, generally specialized in some cluster of industries held together by the Marshallian trinity of information exchange, specialized suppliers, and a pool of labor with specialized skills. What determined which industries a small city developed?… Location… nearby resources… random chance… then a sequence in which one industry created conditions that favored another…. Rochester, New York… started as a flour milling center, benefitting from the Erie Canal, then as a center for nurseries and seeds…. Then, in 1853, John Jacob Bausch… optics… creating the preconditions for the rise of Eastman Kodak, and much later Xerox…. Typical…. Even if what a city was doing in, say, 1970 seemed very different from what it was doing in 1880, there was usually a sort of chain of external economies creating the conditions that allowed the city to take advantage of particular new technological and market opportunities when they arose… a chancy process…. When a city starts out fairly small and specialized, over a long period there will be a substantial chance that it will lose enough coin flips that it effectively loses any reason to exist.

I’m not saying that there weren’t patterns… miserable winters… college towns… destinations for immigrants. Still… a random process… in which small cities face a relatively high likelihood of experiencing gambler’s ruin. Again, it was not always thus: once upon a time dispersed agriculture ensured that small cities serving rural hinterlands would survive. But for generations we have lived in an economy in which smaller cities have nothing going for them except historical luck, which eventually tends to run out…. Are there policy implications from this diagnosis? Maybe. There are arguably social costs involved in letting small cities implode…. But it’s going to be an uphill struggle. In the modern economy… any particular small city exists only because of historical contingency that sooner or later loses its relevance…


Brad DeLong
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