Creating Wealth

This chapter returns to the question at the heart of economics as a social science since Adam Smith and his seminal work on the origins of wealth. Why are some nations rich and others poor? The focus here is on the role of cities, on “agglomeration” in the jargon of economics. We find little evidence in support of Jane Jacobs’s thesis that agglomeration is sufficient to independently trigger economic growth. After explaining the concept of “agglomeration economies,” the gains from spatial concentration, various obstacles to their realization are examined: deficient urban transport; insecurity; arbitrary governance; informality; and so on. Their full realization requires solid institutions, which all too often are lacking. Starting with the origins of the Industrial Revolution, we conclude that the impact of urbanization (greater agglomeration) is essentially allocational, shifting labor to more productive endeavors. The roots of technological innovation, which is at the heart of economic progress, run much deeper, taking us back to national cultures and institutions.