Diversity and Occasional Anarchy: On Deep Economic and Social Contradictions in Hong Kong

10: Cities, Human Capital, and Economic Development

10 Cities, Human Capital, and Economic Development Understanding economic development is the Holy Grail of all economic studies. No theory has yet explained the rise of real incomes per capita in Britain by a factor of about 16 from the eighteenth century to the present and, in contrast, the remarkable increase in China by a factor of 6 within a span of just 30 years. If China continues at this rate, then it will have achieved in 50 years what took Britain 200 years to accomplish. And if we can understand the mechanisms for this development, then maybe it can be duplicated elsewhere, in countries still on the brink of economic development. Economic Role of the City According to an old story, a servant asked his master to pay him by placing a coin on the first square of a chessboard, then two coins on the second square, followed by four coins on the third square, and so on. Had the servant requested to use the white squares only, his master would have to place 2.15 billion coins on the 32nd or final white square. If the full chessboard were used, then his master would have to place 9.2 quintillion (or billion-billion) coins on the 64th or last square. This is the beauty of compounding operations—they are simply astounding! The choice of whether the payment will be made by placing coins on every square on the chessboard or every other square is the most important element of the agreement between the servant and his master. For an economy, the choices that decide whether incomes will double with every generation, or with every other generation, must dominate all other economic policy concerns. In this chapter, I will emphasize the common elements in the works of Jane Jacobs and Professor Robert Lucas on economic development and, in the process, hopefully help fix ideas about Hong Kong as a city. 104 Conditions Affecting Growth and Innovation As I explained in the previous chapter, Jacobs had a formidable reputation as a defender of the city against planners and architects who promoted urban renewal in the form of sterile housing projects. She contemptuously cast aside contemporary urban planning and promoted the dynamic qualities of city neighborhoods. She then went on to write The Economy of Cities (1969) and Cities and the Wealth of Nations (1984) that dealt primarily with how economies develop. She advanced a thesis on economic development that is remarkably fresh and provocative. For Jacobs, cities rather than nations are the originators of wealth creation. The proper unit of study should be the city, not the nation-state. She says: “It affronts common sense, if nothing else, to think of units as disparate as, say, Singapore and the United States, or Ecuador and the Soviet Union, or the Netherlands and Canada, as economic common denominators. All they really have in common is the political fact of sovereignty.” And she chides economists for analyzing economies as national aggregates. Jacobs sees cities as having primacy over rural economies. Cities are not parasitic urban growths that emerged from a rural economic base and became wealthy enough to support its development. Instead, she argues, cities drive rural economies by providing an urban market for rural products. Developing the urban economy benefits rural economies because rural enterprises produce goods that are demanded by the urban centers. Loans and supplies from the urban centers service most of these heavily dependent rural enterprises. By contrast, no significant long-term effect results from developing the rural economy if the larger urban economy continues to stagnate. It is the rural economy that depends on the city, she contends, not the reverse. For the same reason, Jacobs sees large housing projects that create satellite towns on the outskirts of the urban city as akin to rural economies that can never become self-sustaining. Jacobs’ central theme is that economic development is a process by which a group of cities that are engaged in trade with each other create “new work” to add to the work already underway. Cities grow by diversifying and differentiating their economic activities. The process begins with exports and their suppliers, and later as “import-replacement”—a process of producing locally those goods and services that were previously imported. Cities, Human Capital, and Economic Development 105 Free Lunches in Knowledge City economies are sustained by their position as the source of innovative economic change...