Will Hutton, the British journalist and economist, has an article in The Observer today which says that cities are the future and the growth of intangibles is a key factor in their development.
“Economists observe that bringing people together in cities boosts creativity and accelerates economic growth,” Hutton wrote. “In the second decade of the 21st century, the city effect is more marked than ever.
Investment in so-called intangible assets – everything from computer codes to copyrights and patents – is a full 50% higher than investment in tangible assets such as factories and machines and the gap is widening year by year. The crossover point was around 2000 and, on current trends, intangible investment will be running at twice the rate of tangible investment by 2025. It is an economic inflection point to rank alongside the Industrial Revolution and the first machine age.”
The facts are indisputable. About two years ago for the first time in history more than half the world’s population was reported to be living in towns and cities. That’s about 3.6 billion people compared with under 200 million people living in towns and cities in 1914. At the time, that was about 10 per cent of the world’s population.
The trends are clear. According to the UN, the world’s population will hit about 9 billion in 2050. That’s another 1.8 billion people. But the growth of the population of towns and cities will be startling. The UN forecasts it will double to about 7.2 billion.
That means that all the towns and cities created and still inhabited in human history will have to be built again in the next 35 years to meet their population growth.
This is the single biggest challenge humanity faces. And if we fail to address it, the consequences will be disastrous. There are already many examples of failing cities where housing, infrastructure, services, personal safety and the environment are lamentable.
Unless there is a radical improvement in the way cities are planned, built and managed, the number that fail will grow and existing cities will be sucked into a downward spiral.
Global warming due to human action is the subject of an international programme of action that may or may not work. But at least people are trying.
But what are we doing about the extraordinary growth of towns and cities in mainly low-income countries that are already failing to cope?
Take Cairo. During the day, its population grows to 26 million. The city is failing to meet the demand for water, power, sewage services and all the other things towns need.
On present trends, Cairo’s population could hit 50 million in 2050.
This story is repeated across the world. It’s a threat to the coherence of human civilisation at least as big as global warming.
Economics 2030 thinks it’s bigger.
And it’s not just developing countries that will have problems. In February next year, London’s population will reach an all-time high of 8.4 million and is forecast to rise to 10 million in 2030. It’s already the UK’s biggest city by far and twice the size of Berlin, Europe’s second largest conurbation.
Will there be enough homes, hospitals and schools for Britain’s capital when that moment comes? And even if there will be, what kind of life will the majority enjoy in the most expensive city in the UK?
The big question is: why are big cities getting bigger? The answer is that it’s at least partly becaue of the concentration of large employers, most of them service firms, in the main metropolitan centres.
This is mainly due to the rise of intangible capital. When manufacturing was dominant, companies had to be based close to energy, raw materials and transport systems. That’s why Liverpool, Glasgow, New York and Detroit flourished.
But today, most companies produce services and all companies, including manufacturing firms, have balance sheets dominated by intangible assets: financial instruments, goodwill, brands, copyright and patents.
Intangible capital can be located anywhere. And those that manage modern firms prefer to locate them in or near places that suit their lifestyles: either because they offer quality of life advantages or tax benefits.
London benefits from both, particularly to the advantage of those rich enough to own a family home anywhere near its centre.
A by-product of this trend is that the metropolitan centres are irresistibly attractive to the talented and young. One in three of Britain’s fresh graduates get their first job in London. This is despite the fact that rents are at least twice the level in other British towns and cities.
On present trends, London’s growth will not only result in the city becoming more over-crowded, expensive and socially-divided. And as infrastructure investment grows with the population, less will be spent on towns and cities elsewhere in the UK. It’s a vicious cycle that seems unstoppable.
It also will lead to a drain of talent from rural communities and small towns. This can affect whole countries. Scotland, which in September said no to independence, has the highest proportion of pensioners in the UK. It’s a result of the exit of the young and ambitious to big cities and many to London.
Hutton celebrates the joys of cities. But for many city-dwellers they offer a miserable existence. Unable to find work in farms and villages in rural areas, people across the world are moving in despair to towns and cities. This is not a celebration of the glory of urban living.
Economics2030 argues that the growth of cities is largely a non-market phenomenon that provides overwhelming evidence that price fails to work in societies where services are dominant, as they are in cities. Despite the cost of living in London, its population is growing faster than practically any other city or town in the UK.
The second is that their growth is largely due to the capacity of business corporation to generate almost unlimited amounts of intangible capital. This gives large businesses unmerited advantages over the self-employed and those owning or working in small businesses, particularly outside metropolitan centres.
So the starting point for those seeking to address the greatest challenge of our times to recognise that the market doesn’t work in optimising the geographical distribution of populations in economies where services dominate. Another approach is needed
And it also requires a proper understanding of the implications of the inexorable rise of intangible capital, the foundations upon which capitalism is now built.