Order Without Design: How Markets Shape Cities

The allocation of urban land following design norms without taking land prices into account is of course an urban planner's dream. Planners and engineers like to reason in terms of "needs," while urban economists think in terms of scarce resource allocation. Asked to provide an opinion on the optimum density of a residential area, a planner will usually provide an estimate would be based on norms---for instance, the density required if the walking distance to a primary school of optimum size should be less than 15 minutes. Asked the same question, an urban economist would answer "it all depends." Urban land is a scarce resource, and its price indicates how scarce it is in a specific location. Therefore, depending on its price, land should be used parsimoniously where the price is high, resulting in high density, and more lavishly where it is cheap, result ing in lower densities. From an economist's point of view, there is no optimum population density, as density, which is a land consumption indicator, depends on several variwhose values change over time even for the same location.
In a command economy, there are no price signals, so an obsolete land use is likely to remain in effect for a very long time. Let us take the example of a factory built long ago near a city's central business district, on what would now be a very desirable piece of land for a department store or an office building because of its accessibility. The state firm owning the land use rights cannot move its factory to a different part of town that would be more convenient for operating a factory, because the land occupied by the factory has no market value. The firm can only request the government to provide a new parcel of land in a new location, while probably also requesting funds to cover the cost of relocating the factory. As one can imagine, this is not likely to happen often. In a command economy, a land use change always appears as a cost without any direct apparent benefit either to the owner of the land use right or to the government department that will have to authorize the change and pay for it. Even the loss of productivity due to a poor location will not appear in obvious ways to the managers of an enterprise, as prices for production are established by the central government independently of the cost of inputs. This has consequences for the structure of cities in command economies. The newest buildings are always found in areas newly developed in the suburbs. In Russia, for instance, factories built in the nineteenth century or in the first half of the twentieth century found themselves located in what is now the downtown area. High-rise residential buildings are found on the periphery of cities, while low-rise buildings are found closer to the center. High population densities are found in the suburbs, where land values would be the lowest if located in a market economy, and low densities are found close to the city center, where land values would be the highest
Under Deng Xiaoping, China chose a different path. It gradually reformed its system until it made a progressive, orderly transition from a command to a market economy. However, the shift of the system in China was not due to an ideological conversion. As Ronald Coase and Ning Wang explained in their book on China's reform, "China became capitalist while it was trying to modernize socialism." The Chinese now advocate adopting market mechanism to allocate land because:

it sends strong signals through prices when land is underused or the use is unsuitable for its location;
it provides a strong incentive to users to use as little land as possible in areas where there is strong demand, in particular in areas well served by transport net works;
and it stimulates innovation in construction: without land prices, there would have been no skyscrapers, no steel frame structures, and no elevators.

Cities are primarily labor markets. This claim may seem terribly reductionist to the many among us who love cities. During the French "cultural revolution" of May 1968, students were deriding a life reduced to only three activities: "Metro, boulot, dodo," which can be roughly translated by "commuting, working, sleeping." Better land use and transport improve the way that labor markets function, allowing for the core indispensable values of urban life beyond "Metro, boulot, dodo":

a commute short enough that one has time for leisure activities,
an open job market that allows one to change jobs and-through trial and error-find a job that best suits, and
a residence from which access to social life or nature is quick and easy. So even though I am not implying that a city's only purpose is as a labor marketplace, I am arguing that without a functioning labor market, there is no city.

Usually between 35 and 50 percent of any urban population does not participate directly in the labor market.
People migrating from other cities once they have reached retirement age may be the cause of the growth of a few cities whose growth is more driven by con- sumer markets than by labor markets. These types of cities might become more common in the twenty-first century with the projected aging of the world popula tion. The retiree population of these cities is expected to consume a lot of services in health care facilities, restaurants, and entertainment venues. The growth of these "retiree" cities would then be caused by the dual effect of both the retirees' migra tion and that of additional workers to staff the services required by the retirees. These retiree cities would not require spatial concentration and are unlikely to create much economic dynamism.
In 1050, Cordoba, in the south of Spain, was the largest city in Europe with: 450,000 inhabitants, followed by Palermo, Sicily, with a population of 350,000. By the middle of the fourteenth century, the population of both cities had shrunk to 60,000 and 50,000, respectively, because their respective locations had become less important to eastbound trade routes. In the eleventh century, Kaifeng in China was probably the largest city in the world, with 700,000 people, while Shenzhen was not even on the map. Today, Shenzhen has 10 million people, and over the past 10 centuries, Kaifeng's population has barely increased to 800,000 people stasis determined by the economic center and political capital having moved to other cities in later dynasties.
Productivity increases with city size only if the transportation network is able to connect workers with firms and providers of goods and services with consumers. This connectivity is difficult to achieve in large cities as it requires consistency among a number of factors: land use and investments for transport networks; pricing decisions for road use, parking, and transit fares; and collection of local taxes and user fees. Failure to manage urban transportation in a manner that maintains mobility results in congestion. Congestion decreases labor mobility and productivity and is in fact avoidable in large cities. Its presence represents a failure on the part of city managers. Congestion has a dual negative effect: It acts as a tax on productivity by tying down people and goods, and it degrades the environment and increases greenhouse gas emissions. It is conceivable that in the future, some mismanaged large cities may reach a level of congestion and pollution whose combined negative effects could offset the economic advantage of spatial concentration. These cities would then stop growing, and the economic advantage of spatial concentra tion would be taxed away by congestion and an unsafe environment.
Maintaining mobility while a city's built-up area and its population are growing is not easy. For centuries of urban development, walking was an adequate means of urban transportation. At the beginning of the industrial era, one could walk from the periphery to the center of each of the largest European and Ameri can cities in less than an hour. In the 1830s, the area occupied by each of the three largest cities in the Western world-Moscow, London, and Paris-was less than 60 square kilometers. By contrast, the built-up areas of today's largest cities cover several thousand square kilometers each. In large modern cities, mobility can be maintained only with an elaborate system of transport, usually combining private and public modes of travel.
Marx's observation in his Communist Manifesto that markets produced everlasting uncertainty and agitation" and that as a result "all that is solid melts into air" is still true today and could refer to the changes taking place in the most dynamic cities of emerging economies. Economist and Harvard professor Joseph Shumpeter, giving a more optimistic version of Marx's original insight, called this "creative destruction."
By the early 1960s, Hong Kong's textile manufacturing industry was the most successful in Asia. In 1980, the percentage of Hong Kong workers still employed in the manufacturing industry represented 46 percent of total employment, and the manufacturing sector represented 24 percent of Hong Kong's nominal gross domestic product (GDP). By 2010, manufacturing had fallen to 1.8 percent of GDP, and employment in manufacturing had been reduced to 3.4 percent of total employment.
Relationship between population, land, and floor space consumption:
Productivity per worker is closely correlated to the average number of jobs per worker that are reachable in less than 60 minutes. Productivity increases as accessibility does due to the following: when individuals are able to optimize individual labor decisions, firms have the most productive people in jobs, and aggregate output increases. Beyond 20 minutes of travel time, worker productivity still increases, but its rate decays and practically disappears beyond 60 minutes.
Floor area ratio (FAR) is the ratio of a building's total floor area (gross floor area) to the size of the piece of land upon which it is built.
The area of land required for building the total floor area depends on the FARs for residential and commercial areas, as discussed at the beginning of this chapter. The FAR depends on the price of land relative to the price of construction. If a unit of land is more expensive than a unit of construction, then it will be necessary to substitute capital for land (i.e., build taller buildings with higher FARS). The FAR is therefore a parameter best set by markets. However, planners often restrict FARs because of the possible negative externalities generated by tall buildings.
Among eight of the ten US cities with the largest number of work-at-home individuals, the share of people working at home is larger than the share of workers using public transport. In all nine cities, the increase of work-at-home individuals have been larger than the increase in public transport users. However, with the exception of San Francisco, the cities have rather low densities by world standards.
Profile of densities in 12 metropolises
While congestion is usually measured for car traffic only, congestion can occur at bus and Bus Rapid Transit (BRT) stops and in metro stations. While attempting to use the BRT in Mexico City in 2014, I saw three buses pass the station where I was waiting without being able to board, the buses being able to take only a few passengers among the more than 100 individuals waiting on the platform. This is also congestion, which planners should measure. Trying to shift commuters from one congested transport mode to another congested mode doesn't decrease con gestion problems. Consequently, measuring and monitoring mobility for all modes of transport at the metropolitan level is an indispensable step for improving urban transport. A quantitative index measuring mobility improvements or setbacks is necessary to provide substance to urban transport policy. Advocating "mobility" without a way of measuring it will just add a new faddish slogan similar to "sustainability" and “livability." Both slogans are unmeasurable and are too often used by urban planners to justify whatever policies they favor.
In many cities, most modes of transport coexist. Some modes are heavily dominant, like the motorcycle in Hanoi, which represents 80 percent of commuting trips, or the car in US metropolitan areas (86 percent of all trips). However, in most cities, several transport modes coexist, and their relative share of total commuting trips varies with time. These variations reflect consumers' choices, which respond to changing conditions in household income, urban structure, or transport mode performance. The shift in dominant modes of transport reflects an increase in population and household income. The share of passengers by transport mode reflects commuters' preferences but also government action. This supply and demand tends to change rapidly in cities whose economies are growing fast; less so in cities where population and income are more stable.
Of course, the trickle-down effect would also become a trickle up. Imagine that government constraints the housing supply of higher-income groups and favors exclusively the building of lower-cost housing units. In the absence of new supply, higher-income groups will outbid the lower-income group to occupy the only new units on the markets. The trickle down will then become a trickle up. Trickle up means that housing units previously affordable to lower-income households are being bought by upper-income groups (gentrification). This happens quite often in government subsidized housing when the overall housing market is heavily constrained by land use regulations or the lack of infrastructure expansion, which constrains land supply. Higher-income groups then "invade" the housing stock of the lower Income groups. The effect is particularly severe when higher-income groups acquire existing dwellings only to reassemble them into larger ones, thus decreasing the number of housing units in the entire stock.