Economic Thinking is Job Number One

In the midst of this financial crisis, it is doubly important to understand the economic perspective on urban planning and real estate development, argues USC Professor Peter Gordon.
October 13, 2008, 5am PDT | Peter Gordon
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Is it the best of times or is it the worst of times? What do we know?

We know that life expectancies are longer then ever and keep on improving. And we know that humans have been on the planet for about 50,000 years with most living at subsistence levels (about $200 a year in today's dollars) up until only 200-250 years ago. That's for 99.5 percent of our existence. The last 0.5 percent has been amazing.

Look at the more recent past. When it comes to appreciating what we routinely consume today versus what was available to us not so long ago, page through an old Sears-Roebuck catalogue (you can get them for as far as 100 years back) or look at a 5-year old electronics catalogue. Who wants to trade places with our ancestors or recent predecessors? One cannot be anything but optimistic when looking at the long sweep of history.

At the same time, we read daily about serious financial and economic crises here and abroad. We are trying to figure out how we got into these -- and how to get out. Let's come back to that and return to the good news story for a moment.

The Virtuous Cycle

We are just beginning to understand economic success. Scholars now agree that institutions matter. The institutions most favorable to economic development and prosperity create the greatest stability and growth. This means clear and credible property rights. Some describe these as economic freedoms. Not surprisingly, people do their best work when they are confident that they are protected from force and fraud. Recent history in the west can be seen as the unfolding of a virtuous cycle: people living with clear and credible economic freedoms work hard and become prosperous, but prosperous people demand (and often get) economic freedoms. This is the simplified version, but it summarizes an insight that has taken researchers many years to develop.

To be sure, we are not living in paradise; there are problems. Here are two. First, we are trying to understand why and how the virtuous cycle does better in some places than in others. Paul Collier's The Bottom Billion: Why the Poorest Countries are Failing and What Can be Done About It is a good place to start when thinking about this. Second, to bring us up to date at home, how do we manage the modern market economy? There is no agreement on this and we are learning as we go.

With the collapse of Communism, we know that top-down central planning does not work. But planning is a universal activity, by all people, businesses and agencies everywhere. The tricky part involves the coordination of bottom-up plans. Markets do some of this. Regulatory agencies also help by acting as referees. And markets themselves create various vetting and accrediting groups. Evolution among all of these is a wonderful thing and it is faster than ever. But we now see that credit markets and credit instruments have evolved much faster than either the rating agencies or the regulators could grasp. Can they catch up?

The Role of Cities

What role do cities play in all of this? Cities are the engines of growth. They are the places where, for a variety of reasons, people do their best work. Ever since Joseph Schumpeter, economists have recognized the key role of entrepreneurs. Entrepreneurs are specialists in discovery, discovering new products and services and how to bring them to market in new and better ways. It follows that successful cities are congenial hosts to entrepreneurial activity.

In an era when labor and capital are more mobile than ever, cities compete for labor and capital more than ever. Which ones will be most congenial to creative and entrepreneurial spirits? Which ones will be the future engines of growth?

The broad themes described here impact most professionals working in the fields of planning and development in one way or another. Thinking about them coherently is job number one. Economic thinking is the place to start.

Photo: Peter Gordon

Peter Gordon is a Professor in the University of Southern California's School of Policy, Planning and Development. He is also the instructor of the Planetizen online course ECON-201: Economic Thinking for Planners and Developers, which provides students with the necessary tools to understand land use issues from an economic perspective.

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