Why Commerce Is Concentrated In Cities

In 1900, all the 20 largest cities in the United States were situated on the waterways. This is because it was more efficient and cost-effective to transport goods through waterways in the past. So, geography did play a major role in commercial enterprises clustering together in an area. As Harvard economist Edward Glaeser points out, globalisation meant waterborne commerce in those times. Waterborne commerce led to trading networks, and allowed traders and farmers to commute more easily from one part of the world to other.

But even today, commerce is concentrated in large cities. Why? One reason is that contrary to popular belief, it is much cheaper to run many commercial enterprises in cities. It may be true that rents are high in cities, but many establishments would not have taken off in areas that are more frequented by customers. For example, a retail outlet in Connaught Place can more easily recover its costs than a similar outlet in a village in Himachal Pradesh. To begin with, there is probably not such a huge demand for such goods and services in a village in Himachal Pradesh.

When more people visit a market, it is also easier to spread costs. For example, people are likely to visit a restaurant in Connaught Place at any hour of the day. This may not be true of a restaurant in a remote area. But even when people are not visiting, the restaurant owner is expected to pay the rent. Cities allow merchants and traders to get the most in return for the rent they pay. Economist Paul Samuelson once visited a barber shop and noticed that most chairs were empty. So, he felt that the market is very inefficient in allocating resources, and that the government may do a much better job. As some other economists pointed out, Paul Samuelson was a professor, and he may not have visited the barber shop in peak hours. In peak hours, he may have seen people waiting for chairs to get empty. One of the reasons why commercial enterprises are situated in cities is that this is a good way to avoid real estate from remaining idle.

As pointed out earlier, globalisation in the past meant waterborne commerce. So, commercial enterprises had to find a way to minimise friction that resulted from people of different parts of the world dealing with each other. Today, people from different parts of the world can interact with each other through email or phone. This was not possible in the past. But even today, face-to-face contact allows people to interpret social cues more benevolently. It is very difficult to read the behaviour of people from another part of the world, especially when you do not see them in real. So, even when modern tools make geographic clustering seemingly unnecessary, there is something in human nature which forces people to work together in greater proximity.

For example, long ago, people believed that the printing press would make cities irrelevant. But this did not happen. The printing press actually made cities more vibrant, because reading exposed people to more liberal social norms. When the printing press became more popular, laws became more liberal, and it became more easy to trade with each other. So, people started working even more closely and trading with each other. Today, this is true of the internet, too. The internet has made the society less hierarchical. The internet has led to greater trust among strangers, and now there are many ways to track the activities of strangers. This was not true long ago. This is partly why dense urban areas in many parts of the world saw a revival in the past few decades.