The London paradox

How reliable is personal experience? This a question raised by Janan Ganesh in the FT. He writes:

Modern London is liberalism...in excelsis. It has taken the free movement of people, goods, services, capital and ideas to anarchic extremes that might have no precedent.
Anyone can talk a good game about freedom and diversity; living here is a practical test of one’s commitment to these things

I lived in London for over 20 years, and this struck me as nonsense. For one thing, I saw little diversity. I lived in Belsize Park and worked in the FT building, both of which seemed no more ethnically diverse than a Ukip party conference*; some of London's supporters seem to forget that ethnic diversity exists in other cities.

Nor did I experience any "free movement". Perhaps my biggest reason for leaving London was that I wasted hours travelling; one of the biggest adjustments I had to make when I moved to Rutland was realizing that it is quicker and more pleasant to travel the 25 miles into Leicester for an evening than it was to get from the office to the West End.

Like millions of others, I was just a mindless drone moving from silo to silo. The notion of the city as a serendipity engine in which innovation and creativity is sparked by chance meetings always struck me as romantic drivel.

My experience, however, runs into a problem. The fact is that London is far more productive than the rest of the country - 29.2 per cent more so, according to ONS data**. How can this be?

The obvious possibility is that my experience is wrong and cities do indeed benefit (pdf) from agglomeration effects: people learn from living and working alongside each other. As Ed Glaeser has said:

We are a social species that gets smarter by being around other smart people, and that’s why cities thrive. That’s why Wall Street traders still have trading floors where incredibly wealthy people are all willing to sit right on top of each other.

But there's a problem here. If this were the case, we'd expect that cities generally would have higher productivity than less densely populated areas. But in the UK, this is not so. Researchers at the University of Cambridge point out (pdf) that our other major cities such as Birmingham and Manchester have below-average productivity.

This is consistent with another theory - that London's wealth is due not to benevolent agglomeration effects but to parasitism. It might be that big legal (pdf) and financial industries actually depress economic activity elsewhere, in part by sucking talent away from other uses. Professor Glaeser might be right to say that wealthy traders want to sit on top of each other - but this could be because doing allows them to benefit from insider dealing, front-running and rigging markets rather than because of genuine productivity improvements.

I offer this as just a hypothesis. To reject it one must answer the question: why is it that London is one of our few cities to benefit from agglomeration effects?

* You might reply that this is because I lived and worked in affluent areas - to which I reply that the richer parts of  Leicester, for example, have a large Asian population.

** This raises another paradox. Higher productivity doesn't translate into higher subjective well-being: Londoners are actually slightly less happy than the national average.

Comments

[Chris Purnell]

Perhaps London's higher productivity is because it attracts large numbers of young migrants from elsewhere in the UK, the EU and the wider-world.

[Matt Moore]

Yeah... the UK is probably big enough to support only one truly global-scale agglomerated city. We only have to look at how rare they are (I count four) to see that it's amazing the UK even has one.

Yes, this is in part at the expense of other areas (talent drain), but the net effect is positive.

No, I would never live there.

[Alex]

Why is it that London is one of our few cities to benefit from agglomeration effects?

There are city-specific reasons, but a big reason is that other cities haven't reached the scale that allows them to benefit from such effects. Especially so in the UK, where London is a global city yet Birmingham and Manchester only have similar scale (skills, infrastructure, people) in small, central areas.

In 2008/09, Glaeser himself was part of a project that looked at why Manchester's productivity lags London and what agglomeration has to do with it.

I now live in London and don't agree with Ganesh, but for other reasons. The paper on Manchester agglomeration may be worth a read. http://manchester-review.co.uk/?page_id=162

[Miguel Madeira]

Almost by definition, it is expectable that the economic sectors who benefits more from aglomeration effects will congregate in only one or a few towns.

[THD Young]

Regional disparities. Are they real? Or is London quite as inefficient as the provinces? Is London's "success" just consolidation? One metaphor for this is the Grand Bank fisheries which produced colossal catches just before complete collapse because the remaining fish congregated in a last (terminal) super-shoal. Is London the terminal super-shoal? I think the political class is happy to go on trawling it.

Consolidation of employment in the Central Business District in London is a fact. Dispersal of employment is reducing. The Just Space planning group seeks to highlight this phenomenon as it campaigns for more attention to be paid to employment and enterprise located in industrial parks, high streets and other scattered so called "non-strategic" sites in Victorian and outer suburban areas.

Planning or town-planning is what we're talking about here. The schism between market believers and Statist interventionists familiar from economics is paralleled in Planning. The issue in both cases is appropriate liberty. Current Planning and London consolidation impact ordinary liberty very poorly despite Ganesh's claim that the capital is some paragon of liberalism.

Edmund Phelps is interested in the quality of liberty that's available or understood culturally. His recent article in the NYRB refers to it. And it's liberty, he has in mind, available across the society.

Our Planning tendencies are to de-risk space - mostly for the sake of main asset values (homes) and big developers (long term investment in so-called new "business quarters"). By doing so we have radically reduced the ordinary availability of space to entrepreneurialism and experimentation. By now, with so much at stake in the form of property value, this pattern is socially embraced. Certainly it is politically.

The extraordinary aerial photography of Britain in the 20s, 30s, 40s and early 50s available at the Britain From Above website shows the vast diffusion of employment activity across the country then. It's possible to compare now and then because contemporary aerial photography is freely available on mapping sites like Bing. I recommend it.

The assumption behind your piece is presumably there should be State action to promote productivity via Planning. I'd suggest Planning needs to focus less on "solutions" and more on the condition of genuine liberty.

[John Springford]

It's worth thinking about this historically - agglomeration effects were strong in the 19th century in Britain's industrial cities as the costs of trade fell and globalisation peaked. With deindustrialisation from the mid-20th century, productivity in these cities fell as people moved from manufacturing into low-skilled services work. And, likewise, London's productivity growth is linked to the growth of international trade in financial and business services since the fall of Bretton Woods.

[Steven Clarke]

Maybe the question we should be asking is not why London is performing so well (there are probably many unique, path-dependent factors for its success), but why our second tier cities are performing less well.

I don't have the answers. One might be the extreme fiscal and political centralisation we have in the UK has denied other cities the tools to promote their success.

[Dinero]

".... depress economic activity elsewhere, in part by sucking talent away from other uses."

- another example of a case alluding to an economic argument of HS2 suppressing economic activity in the periphery.

[Tim Robbins]

1. Surely the main difference from the national average is simply that the better jobs are in London and well educated people move there to get them?

2. Perhaps relevantly, I work for an organisation with a big office in London and smaller office in Glasgow. The London staff tend to be more ambitious and work harder. At the same time, they move jobs much more often and are more competitive in unproductive ways. My (admittedly biased) opinion, is that the Glasgow staff are more productive per hour worked.

3. Maybe comparing city productivity to non-city productivity isn't the way to think about things. Perhaps we should look at how cities affect national productivity. If everyone was in the cities productivity woould be rubbish as we'd starve and I don't suppose no cities at all would work either. What's the right balance?

[DBonar]

A side comment.

I'm pretty sure the reason the traders all sit in crowded rooms in expensive property just to talk on the phone is the same reason people pack into the pub to drink. It's more fun.

It's more exciting with many people around. You can share your small triumphs and especially your small frustrations with the people around you. You see and interact with a large number of other (successful) people. Its a little nudge of pride to be going into an expensive building in The City each morning rather than a suburban office park.

My point is that being in the high-priced, crowded office is a positive not a negative. IBs can afford to offer than as an extra inducement to their employees (and they can pay their employees enough to afford to live relatively near the office). Of course, for some people it is a negative, but that just means they likely won't work at an IB.

[Dinero]

To compare productivity measured in local prices it it would be necessary to normalize prices first. Things consumed in the city are generally more expensive there.

Also

The pdf does not say how GVA was calculated. If vegetables are grown in the country and then sold at retail prices in the city, then that is not really agglomeration effect, rather a centralization effect, as would the higher salaries of managerial staff of national firms with head offices in London. Or if the last stage of finishing and distributing goods takes place in the city, before being distributed back out again. London as well as being an administrative and commercial center is not only a city like the others it is also geographically central, and the Capital city.

[Matt]

Obviously immigration. I might rail against it in general, but all the asian PHDs in science, engineering and comp science give something. However, on the other hand a lot of this productivity might be an accounting phenomenon owing to financial engineering and creative accounting in finance. Hard to know.

London has a momentum effect going for it now, the question is whether we abloish the green belt and let more immigrants in, or whether we build higher, limit immigration to Phds/skilled labour and spread the gains from productivity to people that never had a chance like the disabled, mentally ill and so forth.

[GF]

It's not agglomeration effects, its network effects. For the same reason that everyone is on facebook and not on myspace, highly productive people want to be near highly productive people.

Agglomeration effects explain why a firm might want to locate in a city, network effects explain why a firm wants to locate in London. Less productive firms are just priced out of the market. So when it comes to city productivity, it's winner takes all.

[Bill Fraser]

The problem is in how you define productivity. London is more "productive" because the City earns so much from gambling and dubious financial dealings. It removes wealth from pepole who add to the physical and mental capital of the world and divides the spoils. It is in the unique position of creating wealth by simply printing more money than it has as deposits then charging interest on the money it never had in the first place. It therefore is in the position of controlling the growth rate of the rest of the economy by extracting a significant proportion of its earnings in interest.
I have my doubts as to whether on that basis London can trully br called productive.

[KP]

You lived in a London Borough where "White British" is a minority ethnic group (44%) and this "seemed no more ethnically diverse than a Ukip party conference"

To get to the West End from the FT Office at Southwark Bridge, you have to suffer nothing more than a pleasant half-hour stroll along the South Bank.

I see from your Investors Chronicle picture that your eyesight isn't the best, and you could do with some exercise.

[theOnlySanePersonOnPlanetEarth]

"Yes, this is in part at the expense of other areas (talent drain), but the net effect is positive."

The mighty one has spoken, behold his latest truth. kneel before thy master.

Matt Moore is such a turd, a turd with penchant for delivering proclamations.

He wouldn't know the truth if it inserted itself up his back passage.

[Richard Gadsden]

Ohter cities, like Manchester and Birmingham, have considerably stronger economies per-capita than their surrounding areas. Manchester is much wealthier than Blackburn or Burnley (or, for that matter, everywhere else in GM). There are a handful of very rich suburbs, but I think few would argue that the wealth of Richmond-on-Thames disproves that aggolomeration in the City has driven wealth.

That Manchester is poorer than London commuter towns in the South East proves precisely nothing about agglomeration.

[Metatone]

Dinero points to the usual problem with most studies in this area. It would be really useful to know how profits are broken down across companies with HQ in London, but other offices elsewhere.

There are real problems in the UK with investment in regional cities. Manchester still only has a marginally functional public transportation system - certainly not on a level with the Tube.

[Blissex]

«Professor Glaeser might be right to say that wealthy traders want to sit on top of each other - but this could be because doing allows them to benefit from insider dealing, front-running and rigging markets rather than because of genuine productivity improvements.»

There is an amazing graph that shows that in the USA financial sector "productivity" has not increased in many decades, that is that financial sector income has been a fairly constant proportion of assets managed even if assets managed have grown enormously, especially since 1980, as USA government (treasury, central bank) policy has pushed up leverage and asset prices a lot, and financialized whatever could be.

I would expect for London's financial companies to have the same rapacious ability to continue to extract a constant share of assets under management even if they have grown a lot.

[Blissex]

«There are real problems in the UK with investment in regional cities.»

The real problem in the UK is that the political class is still managing decline.

First they have given up on the part of the country outside the South East, despite a few urban centre renovation projects.

People tend to forget that large parts of the UK outside the South East are still in a really bad shape like the rustbelt in the USA; it is no longer news.

Second the political class have kept the economy of the South East outside London moving along almost only thanks to continuous feeding with massive debt increases to fuel property speculation and a bit the construction industry, but they are preparing to give up on the South East too, as eventually the debt boom will end, and most of the South East will become like the Midlands or even the North East.

The more outspoken parts of the political class have clearly indicated that they think that after that happens the only part of the UK economy that will will remain in a good shape sustainably is going to be London, and only as a global money laundering centre, like Hong Kong, Dubai, Singapore, Switzerland.

The magazine "The Economist" as usual is the weathervane of the political class leanings, and once wrote of the City of London:

www.economist.com/node/21542417
«one of the world's most successful business clusters, and the best hope the next generation has of earning a decent living.»

[George Carty]

Isn't much of America's rust belt (except for single-industry cities like Detroit or Gary, Indiana) recovering now though, due to cheap property prices there which don't really exist even in the run-down bits of the UK?

[AllanW]

You point to ONS data then miss a few simple truths that underpin its collection. When looking at companies and central government organisations, London and the south east region include in its numbers the largest organisations because of their registration or head quarters. Simples. Much of the value or benefit that those organisations generate comes from regional branches not the head office; its just reported there.

http://www.ons.gov.uk/ons/data/dataset-finder/-/q/datasetView/Economic/UKBH?p_auth=oMKgq1an&p_p_auth=Mm5758ks&p_p_lifecycle=1&_FOFlow1_WAR_FOFlow1portlet_geoTypeId=2013WARDH&_FOFlow1_WAR_FOFlow1portlet_UUID=0

When you consider capital as well as revenue-side spending from central and local government you see that London and the south east has become a parasite on its host body. One example; spending per capita on capital schemes in the last few years in London has been double that of the next highest region (the north west) of which half is allocated for Sellafield decommissioning. Real expenditures in the rest of the country have been raped to feed the London monster.

http://www.theguardian.com/news/datablog/2014/aug/07/london-gets-24-times-as-much-infrastructure-north-east-england

At a presentation in policy week at Manchester University late in 2014, the London representative blithely asserted that the region needed a further £35b per year INCREASE in expenditure to maintain its 'status'; in any other circumstances the accumulated failings this represents in transport, infrastructure and lifestyle (happiness) would be cause for drastic intervention not unlimited accommodation by their neighbours.

[Paul Swinney]

Other cities in the UK do benefit from agglomeration, it's just that they still haven't got over their industrial hangover for agglomeration's impact to been seen in aggregate:

http://www.centreforcities.org/blog/century-of-cities-the-return-of-the-big-city/