On City Sizes and Economic Playthings

In the latest installment of his column, Metronomics, Andrew Thompson wonders whether economists need to open their eyes to the realities of city life.

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Economics has long been known as the dismal science, a field that bears only bad news. But to others it’s known as the useless science that bears no news at all. There’s a tension between economists and other academics who think economics is little more than a delusion that we live in a vacuum, a musing of theoretical worlds where “all else is equal,” and that if its practitioners would just take a minute to hold their ideas next to a snapshot of real life, they’d probably go back to grad school and pick up a different degree.

Before I explain why those critics are sometimes right, I need to give a primer on the concept of correct city sizes – yes, cities come not just large and small, but in good and bad sizes. Although economists don’t technically think of cities as “too small,” a city that has room to grow is one that continues to build its tax base without straining its citizens’ abilities to commute to work as new people immigrate (for those of you who know a little about economics, I’m referring to economies of scale). If a city is too big, the cost of commuting has outweighed people’s reason for moving there in the first place: higher wages and more job opportunities (diseconomies of scale).

In 1974, an economist came up with the Henry George Theorem (named for a 19th-century political economist), which takes the aforementioned assumptions about city size and adds that the best way to determine that size is to find the equilibrium between property taxes and the cost of public goods. In the world the theorem puts forth, everyone is the same, the city sets all land prices, and only one type of public good is produced – a set of assumptions that diverge from reality at every point.

Given how wildly our world has strayed from the theorem’s norm, you would think that economists would have simply forgotten about the idea altogether and come up with a better model to determine how big a city should be. To an extent they have, but that doesn’t mean they’ve stopped spending valuable academic brainpower on studying the idea. In the most recent issue of the Journal of Urban Economics, Kristian Behrens and Yasusada Murata examine the idea under the case of monopolistic competition – that is, if the theorem’s world were a little less homogeneous. Behrens, an economist at the Université du Québec à Montréal, told me he didn’t expect the idea to hold and that his paper shows it doesn’t. I asked him why he was doing it in the first place.

“What we basically did was make a theoretical contribution,” he told me. “It doesn’t have any real use for policy-makers; it’s around mostly for academics.” In other words, he and his colleague wrote a wonkish, irrelevant 20-page paper that even he admits won’t help anyone improve cities.

Economists are often criticized for spending their time on disproven ideas that they nevertheless truly believe – like extreme laissez-faire markets – but here I have another criticism: Economists play with ideas that they themselves acknowledge as useless. Instead of reexamining a model that has repeatedly shown its lack of value in determining correct city sizes, why not engage in case studies of various cities and see how their sizes are helping or hindering them? The problem with the Henry George Theorem is that it doesn’t take into consideration how different cities are, how the quality of transportation makes commuting times longer and shorter depending on which city you live in, or that property taxes are one of many, many different taxes used by government to pay for an array of public goods.

Unfortunately, such rigid reliance on tired, obsolete models is not limited to the Henry George Theorem, perhaps because so much of academic theorizing happens in ivory towers. Of course, I love economics and find it applicable to every level of life. But only when its use is married to actual experience do I think people will stop thinking of it as useless and happily consider it just plain dismal.

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