Growthology

A Reversal of Historic Trends?

Brian over at Schumpeter's Century has an interesting post today on mobility and downturns.

In One Fell Swoop, Two Redwoods Fall

From The New York Times, December 2004:

"Southeast from [Socks City] is Shenzhou, which is the world's necktie capital. To the west is Sweater City and Kid's Clothing City. To the south, in the low-rent district, is Underwear City. . . . The niche cities reflect China's ability to form 'lump' economies, where clusters or networks of businesses feed off each other."

From The Economist, February 2009:

"Over the past decade it has become one of the world's fastest-whirring economic engines--a global hub in the manufacture of clothing, shoes and electronics--serviced by tens of millions of migrant workers. Now the region is undergoing an equally remarkable contraction. In the past year, thousands of factories, perhaps one-third to one-half of the total, have closed."

From The Economist, February 2009:

"In the past ten years, obedient to the findings of urban sociologists, American cities have tripped over themselves vying for young, creative people. They have revitalised downtowns and sponsored gay-pride parades. They might have been better off building retirement homes."

Urban and regional development have been dominated for the past decade by two gigantically seductive ideas: the cluster concept as developed by Michael Porter, and the creative class concept as developed by Richard Florida. Porter told mayors that clusters were the "new" way of approaching economic growth; Florida dazzled city councils with tales of the "creative class" and their uniquely instigative role in restoring vibrancy to downtowns.

Now, just because areas that exemplified these ideas--the manufacturing clusters of China and many American municipalities--have run aground during this recession doesn't mean Porter and Florida's theories are prima facie wrong. But the difficulties facing cluster regions and creative cities should prompt reflection on their merit.

It has never really made sense to me how the notion of clusters is particularly "new" to theories of urban economic growth. As James Vance, among others, has long pointed out, clusters are a hallmark of commercially successful cities going back to at least the medieval urban revolution. And as I have noted before, since the beginning of human civilization, cities have been coterminous with creativity. In short, clustered economic activity and creative occupations are actually reasons why cities exist, not necessarily new theories for how cities can grow. Can it make sense--aside from dubious empirical evidence and, now, economic decline--for us to tell cities to be more city-like in their quests for growth?

Finally, the real problem with the cluster and creative class ideas isn't in their descriptive validity, but their prescriptive methods for cultivating clusters and attracting the creative class. Cities are the paragon of messy capitalism--they appear orderly, to be sure, and urban planning does in fact take some measure of order as its objective. But the economic development of cities does not spring from decreed clusters or appointed "creatives"--it happens because of messiness. That is, the unanticipated interactions among many different factors. Delft, an economic jewel in seventeen-century Netherlands, became a creative cluster of science, art, and various industries not through any sort of industrial planning, but through unforeseen overlaps (synergies, I suppose) and connections. It was "development" in the truest sense (a subject for another day). 

Can a State be Schizophrenic?

Apparently so. Florida, which has basically functioned as a giant pyramid scheme, is as a result ground zero for the housing bust.

Yet, as William Haseltine noted yesterday, Florida has shown incredible gumption in recruiting some of the top research centers in the world to set up camp there. Scripps, Burnham, Max Planck, Torrey Pines--these are far from insignificant institutions. The famed innovative organization, SRI, has set up a satellite operation in Florida, as has the Oregon Health & Science University.

Can a real estate Ponzi scheme turn out to be the most dynamic and innovative region of the country?

Cities and Start-Ups

Amid the darkening economic gloom, perhaps we ought to step back for a moment and examine one of the underlying trends shaping our future: cities.

For a variety of reasons, cities (and, more broadly, regions) have been a hot topic over the last several years. Most obviously, the world is now officially urban, with half of Earth's citizens residing in urban areas. The last half century has also seen the rise of mega-ginormous cities-- the United Nations simply uses the term "urban agglomeration" now to describe urban areas. And, particularly in the United States, East Asia, and Europe, it became increasingly obvious over the past ten or twenty years that certain economic activities were concentrated in specific regions. In fact, one of the major developments in economics since the mid-1970s has been economists' "discovery" of geography (this, along with trade, is Paul Krugman's Nobel-worthy contribution). Robert Lucas, another Nobel laureate, went so far as to say that according to orthodox economic theory, cities shouldn't exist!

So it's by now banal to say that cities are central to humanity's future (although some forecasts are less optimistic-sounding than others), and people have turned their attention to the question of cities and economic growth. How do cities grow? Why do some decline? How can we achieve faster rates of innovation and growth in cities and urban regions?

It seems to be well-established that entrepreneurship is the key to urban economic growth. Indeed, it often seems as if entrepreneurship is coterminous with cities. (This is certainly the case with innovation and creativity: one of my favorite ironies is when economists ask how this or that city can be "made" creative or innovative. For all of civilized history, of course, cities have been synonymous with creativity--economic research today often amounts to telling cities to be more, well, city-like.)

So then the question becomes, how can cities and regions generate greater amounts of entrepreneurship? The stadium strategy is (or should be) discredited as an avenue to growth. Likewise, I've heard evidence that public venture funds have done little to stimulate growth. The idea that research universities are the sine qua non has a little more support, but we can all think of cities that are home to fantastic research universities yet fail to sustain dynamic economies.

For any city hoping to spur entrepreneurship, the obvious example that leaps to mind is Silicon Valley--it seems to be the paragon of a region with positive feedback loops and an amorphous entrepreneurial culture. Paul Graham's February essay even posed the question, "Can You Buy a Silicon Valley? Maybe." It's conceivable, says Paul, that a city could lay out a few hundred million dollars to make start-ups stick around, and it would end up with "a self-sustaining chain reaction like the one that drives the Valley."

Start-ups are a crucial element for any city looking to alter its economic trajectory; it's clear that Silicon Valley has a remarkable ecosystem of start-up churn. It's far from clear, however, that the Valley's success can be achieved simply by copying it's model as it now appears. The roots of Silicon Valley's entrepreneurial churn are not found in generations and generations of start-ups. That's how it is now, of course (with many large companies as well), but it's highly likely that Silicon Valley wouldn't exist as it does today if not for its seemingly un-entrepreneurial beginnings.

At the beginning of the twentieth century (not long after Stanford University had been established), with the economic and military ascendance of Japan, the U.S. Navy and Air Force established strategically important bases in the area. These bases, and World War One, played an important role in pioneering radio electronics, making the region a bastion of incipient electronic expertise. Amateur radio clubs were a local craze for a while. The Pentagon poured money into the region in the 1930s, with electronics at the heart, and talent increasingly migrated there. Frederick Terman, the "father of Silicon Valley," was so important in part because he was a magnet for Pentagon contracts.

Through mid-century, the "innovation ecosystem" consisted of Stanford, the military, and satellite operations of large companies like IBM and Lockheed that populated Stanford Industrial Park. By the 1950s, in fact, this tradition of military funding, big-firm innovation, and university research had generated a critical mass of talent and knowledge. Companies like Litton, Hewlett-Packard, and Varian were also important. The event that really launched the Valley's start-up trajectory was William Shockley's move from Boston to Palo Alto to establish Shockley Labs inside Beckman Instruments. Why Santa Clara County? Two reasons: the growing energy of innovation; and his mother lived there.

Shockley Labs was home to cutting edge research, and in the late 1950s, the watershed entrepreneurship event was the breakaway of eight members of Shockley's research team to found Fairchild Semiconductor, the company that would eventually spawn numerous spinoffs, including Intel. The rest you know.

Start-ups are important--there is no doubting that. But it's not clear that without the research and innovation tradition cultivated by large companies the Valley would have become a hotbed of start-ups. (Cultural shifts also played a role, a subject I won't explore here.) Research universities like Stanford are important, but even in cities without them, large innovative firms play the role of what Heike Mayer calls "surrogate universities," throwing off large numbers of new firms. 

Several of us at the Foundation were chatting earlier today with a professor in Atlanta who told us that Atlanta meets all of the en vogue criteria for entrepreneurial growth: excellent research universities, lots of R&D funding, ample numbers of the "creative class," and new firm starts. Yet the region, this professor has found, utterly fails to hold onto its start-ups and, as a result, will soon face a shortage of innovation. Why?

This post has now run on too long to adequately answer that question, but the Silicon Valley and Atlanta examples, along with the myriad regions that have sought to copy the Valley, illustrate that urban economic growth is much more like a cake recipe than an architectural blueprint.

Ph.D. migration reveals innovation patterns

This may be old news, but a paper by Dr. Paula Stephan in NBER's Innovation Policy and the Economy, Vol 7 (2006) just came to my attention. I count at least two very interesting observations derived from the analysis of Ph.D. migration patterns in the U.S.

1. Confirmation of what I call the Broadway Joe Problem. (i.e. QB Namath was not from New York)

Indeed, seven of the top 20 institutions education PhDs to work in industry are located in the Midwest. ... The state stay rate for PhDs working in industry is now 37 percent. ... Purdue's PhDs now overwhelmingly leave the state [of Indiana] to take employment elsewhere .... It is risky as a nation to continue to rely on the "kindness" of Midwestern states to publicly educate the high-quality S&E workforce that heads out of state upon graduation.  ... [A]lmost one out of ten new PhDs going to work for industry heads to San Jose.

2. R&D focus underemphasizes entrepeneurial innovation.

Only ten of the top 20 R&D firms appear on the top 20 hiring list.

Finally, our data suggest that small firms play a larger role in innovation than R&D data would suggest. For example, while the top 200 R&D firms expend more than 70 percent of all R&D in the U.S., they hire only 39 percent of all new PhDs.

What’s Happening in Vegas?

I doubt my sister would approve, moral angel that she is, but I’ve seen the future and it looks like Vegas. Maybe you can help me convince her this is a good thing.

The nickname for Vegas is “Sin City,” but did you know it wasn’t always thus? During the Wild West of the 19th century, Las Vegas was a sleepy Mormon outpost. In 1930, total population was 2,304, which is pretty much the population of my high school. This is from the Wikipedia entry:

Las Vegas started as a stopover on the pioneer trails to the west and became a popular railroad town in the early 1900s. It was a staging point for all the mines in the surrounding area, especially those around the town of Bullfrog, that shipped their goods out to the rest of the country. With the growth of the railroads, Las Vegas became less important, but the completion of the nearby Hoover Dam resulted in substantial growth in tourism, which, along with the legalization of gambling, led to the advent of the casino-hotels for which Las Vegas is famous.

The rise of entertainment as an industrial sector during the 20th century was probably never imagined. So when you think about the jobs of the future, you cannot help but notice the dramatic developments within our lifetime. Whole cities. Hollywood, Orlando, Las Vegas. Whole oligopolies: the NFL, the NBA, NASCAR, WWF. It’s not enough that television was invented as a new media devoted primarily to entertainment, but massively valuable cable channel brands have been established as subsets: HBO, ESPN, MTV.

For me, the one worth close attention is Vegas. Not until the legalization of gambling on March 19, 1931 did the radical innovation of growing an entire metropolis occur to anyone as goal. The city has essentially doubled in size every decade, reaching a quarter million residents in 1990 and half a million in 2000. It is bigger than Cleveland or Atlanta, and by the time the next Census is taken in 2010, it may be bigger than Boston or Seattle.

Again, Wikipedia:

The primary drivers of the Las Vegas economy have been the confluence of tourism, gaming, and conventions which in turn feed the retail and dining industries. Several companies involved in the manufacture of electronic gaming machines, such as slot machines, are located in the Las Vegas area. In the 2000s retail and dining have become attractions of their own.

So when people tell you that entertainment is an ephemeral economic foundation, that is all based on real money generated in other “real sectors,” just ask why Vegas continues to grow. In a world where food and manufactures are produced through automated processes, what is real?

Jacobs' Three Product Stages

I borrowed a book from Dane Stangler without his permission, and couldn't resist because I have wanted to read this book for such a long time: The Economy of Cities by Jane Jacobs.  Written in 1968, the year of riots that radically altered the shape of Detroit and other great cities, the book is amazingly insightful.  Consider this, which I call the Lesson of Three Product Stages:

Garment making, I think, affords an interesting clue to future manufacturing because it exemplifies manufacturing of three distinctly different kinds.  The oldest is craftwork.... The second is mass production.... The third method of garment manufacturing has arisen chiefly during this [20th] century, has grown much more rapidly than the other two, and has become the dominant form.  For lack of any present generic name, let us call it differentiated production.  This method produces relatively modest amounts of each item as compared with mass production, yet it is not craft manufacturing either.... Thanks to this third kind of garment making, one can look at a crowd of thousands of persons in a large city park on a fine day or gathered to watch a parade, and be hard put to find two women or two children dressed in identical outfits. (Chapter 8)

From what I can tell by googling "differentiated production," this concept is underappreciated and sometimes mischaracterized.  Craft products are made by artisans, mass products are made by one-size-fits-all factories, and “differentiated” products are made by modernized assembly processes.  I think the problem is that the word differentiated describes the output, not the process.  Both stage 1 and 3 yield differentiated output, but stages 2 and 3 use mass production.  I am tempted to call stage 3 something new.  Customized? Personalized?  Micro-mass?

Maybe Jacobs Three-Stage Theory is canonical among city scholars, which is entirely likely.  But here's why it matters to me: I have seen the Three Product Stages occur in products that were not invented when I was born.  Key Example:

Personal Computers
Stage 1. 1973-76           Apple I (in a wooden box!)
Stage 2. 1977-81           Apple II, IBM PC
Stage 3. 1985-present    Dell custom-ordered components

So what products are in Stages 1 and 2 today?  And how soon do we think they will get to Stage 3? I can think of a few things in stage 2 (or 2.5) ... houses, game consoles, iPods, digital book readers.  But the most things that are stuck in stage 1 (or 1.5) are major capital infrastructure things like highways and skyscrapers and jumbo jets.  Does anyone doubt they will get to stage 2-3 this century?

Isn't the most interesting irony of Jacobs describing this 3-stage pattern in a book about cities is that it is not too hard to imagine whole cities moving from stage 1 to stage 3?  I keep thinking of all these City 2.0 retirement communities popping up in Florida, Arizona ...