Why do Cities Exist?

By The Change Lab

Cities exist because people can’t do everything on their own. Humans become settled in a particular place as a result of the Neolithic revolution i.e. the discovery of agriculture tied people to the land. Initially a group of humans would settle in a piece of land and work together to produce enough food for the clan. Then surplus appeared due to a really fertile land and good harvest, so it was not necessary for everyone to toil the land. 

Consequently, some people will specialize in farming, but others can focus on different occupations like becoming a builder, craftsmen, soldier etc. Then these specialists will produce goods and services they don’t need for themselves and trade with other specialists i.e. everyone is better off than in autarky. 

Another interesting feature about production technology is that often specialists can produce better just by being close to one another and when they are close to people interested in their trades i.e. close to the market. Those are the forces fuelling the process of agglomeration. Cities are an economic consequence of specialisation and trade. 

Newcomers are brought into cities both by the economic opportunity and the fascination of the plethora of opportunities the city provides i.e. arcades, plazas, culture, sophisticated food and theatre. 

However, cities cannot be taken for granted. For instance, they came next to disappearing in Western Europe at the time of the Barbarian invasions. Cities were directly attacked and sacked by invaders and nothing could keep slaves working in the fields. Agricultural surplus disappeared, war and bandits cut trade routes. People thus had no option but to go back to the fields. There was no law and order to sustain cities, so without cities, art and culture soon stagnated in Western Europe but flourished in the east where law and order still prevailed. Technology has a big role in increasing the productivity of agriculture and therefore causing migrations to cities. 

A trading city: 

The Workers in the North are more productive. They can make 2 loaves of bread per hour and 6 shirts per hour. Meanwhile, workers in the South are less productive and can only make 1 loaf per hour and 1 shirt per hour. The North, although it's better at everything, is much better at shirts so it has a comparative advantage in shirts. The South has a comparative advantage in bread. If each region specialises then they can trade. 

For cities to form, we need economies of scale in trading. If economies of scale exist: specialised trading firms emerge; firms use big trucks, ships, warehouses, specialised workers; they handle trade more cheaply than individuals. 

These trading firms want to locate where they can easily operate i.e. near ports, crossroads, internal hubs etc. Because many firms and workers cluster there: land prices rise, people use smaller lot, and the population becomes dense. 

So trading cities grow when two things happen together: Comparative advantage; Scale economies in transport and exchange(big traders can move goods more efficiently). 

Before the Industrial Revolution, most people in trading cities did not make goods themselves but collected,stored, transported and distributed goods made elsewhere. Trading was risky, so trains and cities developed systems of banking, legal services and insurance to support exchange. 

Trading city example: Athens(500BC) grew by trading crafts and olive products for food and raw materials. Athens started with trade but later forced other cities to pay tribute which led to war and decline.