Cities Are Better When They Act Like Companies

Commentaries on economics and technology.
March 25 2012 7:22 AM

Competition Can Make Cities Better

Important urban areas endure in a way that even nations do not, but we can still improve them. Here’s how.

An aerial view of Rome and the Vatican City.
An aerial view of Rome and the Vatican City on May 11, 2011. Thousands of alarmed Italians are fleeing the capital amid rumours that a seismologist predicted that a devastating earthquake will strike the Eternal City.

Photo by AFP/Getty Images.

Cities matter, as they always have, but now more of the world is starting to take notice of their problems and possibilities. At their worst, cities are slums, places where the social constraints of the village are loosened, people can misbehave in anonymity, and poor and unemployed people live in squalor. At their best, they are places where the best and the brightest congregate, new wealth is created, and scholars and artists sharpen their wits and hone their creativity.

Most cities have grown through evolution, from unpremeditated beginnings. Moreover, they rarely die. Cities (and their imperfections) persist in a way that large political entities, even those of which they are a part, do not. Compare, say, Athens, Jerusalem, Vienna, Beijing, Moscow, or Istanbul, to the Roman Empire, Austria-Hungary, the Ottoman Empire, Imperial Russia, the Third Reich, or the Soviet Union.

And, as we are seeing worldwide nowadays, national governments are difficult to overturn and also difficult to (re)build. Democracy does not always lead to liberty or good outcomes.

So, perhaps cities are the right place and have the right scale for massive social change. This does not mean that national governments are irrelevant, or that they no longer hold life-and-death power over people’s lives; but cities make more of a difference in people's daily lives. Especially in a world where many of the big things—trade, technology, legal regimes—are globalized, most of the small things are actually happening in cities. By 2050, seven out of 10 human beings will live in cities, up from about 50 percent now and barely 14 percent in 1900.

Cities run schools, collect garbage, maintain police forces (and local power of life and death), issue building permits, build sewers, regulate power companies, and generally determine the overall quality of life. They can also raise revenue, whether through income taxes, property taxes, or myriad fees.  But cities still often operate in a pre-market way. They mostly build their infrastructures themselves, and innovations do not spread easily, owing to a lack of incentives and, for that matter, much of a market … other than when one city hires managers from another.

On the other hand, cities are increasingly behaving like companies, becoming intimately involved in their citizens’ quality of life, and, in an increasingly mobile world, competing for “customers.” Despite registration systems such as those in Russia and China that restrict movement, people can come and go from cities much more freely than they can cross national borders. Meanwhile, cities can be both more flexible and more arbitrary, and compete on terms not available to legislatively restricted national governments. 

Paul Romer, a former Stanford University economist best known for his Charter City initiative, has a scheme for building new cities from scratch—and using competition to spread the benefits to old cities over time. As he points out, if you want a new business model, you don’t fix an old company; you start a new one. In the same way, if you want a new kind of city, it is easier to build a new one than to change an old one.

Most cities evolved blindly, and have ended up semi-workable, whereas a city that is started from scratch can, in theory, benefit from intelligent design. But, even with long-term investors, to build a viable city at scale nowadays represents a daunting challenge, requiring not just architecture, but also modern infrastructure, schools, and hospitals. Moreover, in addition to people, investors, land, and other tangible assets, an independent yet accountable government must create and enforce rules, and a charter must specify how the rules can be changed.

While Romer’s formula is complex, his charter cities will be subject to the ultimate form of accountability: They will succeed only if they can attract investors and citizens who want to live and work there. But, skeptics ask, will they attract a favorable selection of people?

Romer’s and Hursh’s answer is that migrants are not slum dwellers by nature; put them in a good city and they will reach their innate potential. The key is not just to allow, but to lure, people inside the system. According to Romer: “A new city can attract the working poor and still succeed as a large-scale real-estate development project. And a good thing too, because charity will never finance urban living space for 3-4 billion additional people. If new places enter the ‘city business,’ the working poor will find [affordable] urban housing and transport for the same reason that they now find food: because someone profits by offering it to them.”

That calls for a system that will return their investment and more over time, which means that investors will design a city that helps its citizen/taxpayers to prosper. In the background, the board of governors that Romer proposes makes sure that everyone takes the long view.

The goal is not perfection in a single city, but more effective innovation and competition, so that the best cities prosper and other cities emulate them. There are enough mobile people that one city’s success won’t harm others; on the contrary, it is more likely to encourage existing cities to change, just as new market entrants force incumbents to improve. Sometimes, in order for evolution to do its best work, the individual components need some intelligent design.

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