The Rise of Winner-Take-All Urbanism

Earlier this year, Richard Florida published Why America’s Richest Cities Keep Getting Richer in The Atlantic.  Florida is a leading urban studies author and researcher, professor at the University of Toronto and Director of Cities at its Martin Prosperity Institute.

“The most important and innovative industries and the most talented, most ambitious, and wealthiest people are converging as never before in a relative handful of leading superstar cities that are knowledge and tech hubs,” wrote Florida.  “This small group of elite places forge ever forward, while most others struggle, stagnate, or fall behind.  This process is one I like to call winner-take-all urbanism.”

Winner-take-all urbanism is another manifestation of the winner-take-all economics of the past few decades, in which a relatively small number of players reap a very large share of the rewards, upending whole industries with their outsized returns.

The digital economy has given rise to the global superstar company.  Whenever a product, service or process is captured in software and digitized, it becomes digital capital and the economics of abundance take over.  They can now be perfectly replicated and transmitted almost instantaneously anywhere in the world at marginal costs.

Superstar companies are primarily driven by economies of scale, generally achieved through platforms and network effects.  The more products or services a platform offers, the more users it will attract, helping it then attract more offerings from ecosystem partners, which in turn brings in more users, - which then makes the platform even more valuable.  Moreover, the larger the network, the more data is available to customize offerings to user preferences and better match supply and demand, further increasing the platform’s value.

The result is that a small number of companies become category kings dominating the rest of their competitors in their particular market, - the Facebooks, Googles, Twitters, Ubers and AirBnbs.  Category kings generally take over 70 percent of the total market value in their category, leaving everyone else to split the remaining 30 percent.  Winners are winning at almost triple the speed since 2000, while losers are losing faster than ever.

Something similar has been happening with skills and  talent.  For the past few decades, the demands for high-skill jobs have significantly expanded, with the earnings of the college educated workers needed to fill such jobs rising steadily.  With capital now abundant and generic, talent has become the linchpin asset of the knowledge economy, making capital highly dependent on talented experts to navigate our increasingly global and highly complex business environment.

This is driving the high levels of senior executive compensation, - especially CEOs, - as well as the compensation of high skilled professionals in industries like finance, entertainment, software and consulting.  Low- and mid-skill labor has been losing out in this battle between capital and talent.

It’s all quite ironic.  In the heady days of the dot-com bubble 20 years or so ago, management experts noted that large firms would no longer be necessary and were in fact be at a disadvantage in the emerging Internet era when competing against agile, innovative smaller companies.

In addition, many thought that the Internet would lead to the decline of cities, because it enabled people to work and shop from home, be in touch with their friends over e-mail and text messaging, and get access to news and entertainment online.  Why would anyone choose to live in a crowded, expensive urban area when they could lead a more relaxing, pastoral, affordable life in a small town?

As it turned out, instead of declining, we’ve seen the rise of superstar cities.  “Cities have been caught up in this winner-take-all phenomenon, too,” noted Florida.  “Just as the economy confers disproportionate rewards to superstar talent, superstar cities… similarly tower above the rest.  They generate the greatest levels of innovation, control and attract the largest shares of global capital and investment, have huge concentrations of leading-edge finance, media, entertainment, and tech industries, and are home to a disproportionate share of the world’s talent. They are not just the places where the most ambitious and most talented people want to be - they are where such people feel they need to be.”

Network dynamics apply to cities just as they do for companies and talent.  “Superstar cities’ expanding economies spur demand for more and better restaurants, theaters, nightclubs, galleries, and other amenities.  Successful businesspeople and entrepreneurs endow their museums, concert halls, private schools, and universities.  Their growing tax revenues are plowed into new and better schools, more transit, better libraries, more and better parks, and so on, which further reinforces and perpetuates their advantages.  They have unique kinds of economies that are based around the most innovative and highest value-added industries, particularly finance, media, entertainment and tech; businesses in superstar cities are formed and scaled up more quickly.  All of this attracts still more industries and more talent.  It’s a powerful, ongoing feedback loop that compounds the advantages of these cities over time.”

“Moreover, the advantages that accrue to superstar cities are substantially more enduring than those that accrue to superstar talent.  No matter how big the name, talent rises and falls. Professional athletes have relatively short careers and can be sidelined by injuries, and even the biggest draws at the movie-theater box office grow older and fade with time.  Big cities can and do decline, of course - Detroit was a big, prosperous city at one time - but the biggest and most dominant ones tend to redouble their strengths.  Over less than two decades, New York City was hit by a massive terrorist attack, the collapse of its tech economy in the dot-com bust, a globe-shaking financial crisis in 2008, and Hurricane Sandy, and yet it remains the most economically powerful city in the world.”

But, such a concentration of talent, wealth and economic activity in fewer and fewer places has led to what a recent Economist issue called the changing economies of geography, - the rising inequalities between a relatively small number of superstar cities and the many towns and regions that have been left behind by technology and globalization.  This is an economic challenge every bit as serious as the growing weath inequality between the 1% and everyone else.

In its introductory article, The Economist explained that according to economic theory, regional inequalities should diminish as poorer and cheaper places attract investment and jobs and grow faster than richer ones.  This was the case through much of the 20th century in the US, when many factories producing textiles, shoes and precision machines moved from Northeast states like Massachusetts to the South and Midwest were labor costs were cheaper.

“From 1880 to 1980, income gaps across American states closed at an average annual rate of 1.8%: real personal income per person in Florida rose from 33% of that in Connecticut to 82%,” noted The Economist.  “Similar convergence occurred across Japanese prefectures and European regions.  “At the same time, as geographical differences dwindled within and between industrialised economies, the gap between those economies and the rest of the world widened.”

But, these trends changed radically toward the end of the 20th century.  Emerging economies around the world began catching up with more advanced ones as a result of the well known forces of globalization.  But, at the same time, regional inequalities within rich countries began to increase with the outsourcing of jobs to emerging economies with lower labor costs and growing skills.

“Between 1990 and 2010 the rate of economic convergence across American states slowed to less than half what it had been between 1880 and 1980.  It has since fallen close to zero.  Rich cities started pulling away from less well-off counterparts…  A recent report by the OECD found that, in its mostly-rich members, the average productivity gap between the most productive 10% of regions and the bottom 75% widened by nearly 60% over the past 20 years.”

What can be done to address this rising geographical inequality and help regions that’ve been marginalized by globalization and automation?  The Economist discussed a number of ideas.

Mobility in America has been on the decline, so one answer might be to help people move to thriving urban areas where they’re more likely to find a reasonable job.  “The percentage of Americans who move across state lines each year has fallen by half since the 1990s.”  Part of the reason is the soaring housing costs in prosperous cities, often due to stringent planning rules that limit the development of affordable housing.  Relaxing some of those rules would help accommodate newcomers.

Changing demographics is another reason for the decline in mobility, including the need to help care for aging family members and the rise of two-earner households.  In addition, the urgency to leave declining places has weakened.  Government and health benefits enable people to stay put as their incomes go further in places where living costs are lower.  It’s thus important to bolster such places with a variety of public and private policies to help create industrial clusters and jobs, including private investment funds and tax incentives targeted at specific struggling regions.

Finally, we can learn from the past.  Land-grant universities were established in the second half of the 19th century to help provide a solid technical education, including teaching best practices to farmers and factory engineers in rural areas and small towns.  Our state and local colleges could play that role again with new technologies and business practices.  “This would aid the diffusion of new ideas and create an incentive for struggling places to help themselves.”

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