Why the New Flows of Capital Matter for Cities
Prior to the rise of the car and the trucking industry, cities were the best places for investment. They provided access to markets through ports, rivers, and railroads. They had large pools of unskilled labor living near factories, and they were relatively dense making business easier for firms. Significantly, capital, the cultural sociologist Zygmunt Bauman claims, was heavy and enmeshed in place:
Routinized time tied labor to the ground, while the massiveness of the factory buildings, the heaviness of the machinery and, last but not least, the permanently tied labor bonded the capital. Neither capital nor labor was eager, or able, to move.
Urban centers were hubs of industry, fostering, in the words of political scientist Douglas Rae, a civic fauna. The rich and the poor lived close together and intermingled by participating in common civic projects. Although hardly utopiascities struggled with public health problems, pollution, and ethnic and racial antagonismthe flow of capital through cities created jobs and a rich cultural infrastructure. But as transportation and communication technology advanced, urban investment slowed, moving away from the expensive real estate and high taxes of the city toward greener pastures in the county. As a result, many cities over the last century experienced massive unemployment and high crime as populations followed the flow of capital to middle-class enclaves in the suburbs.
Yet, today, our cities again are seeing fresh investment due to new emerging economic sectors in knowledge and technology. Instead of building factories, investments in the burgeoning knowledge economy focus on human capital, innovation, and lighter technologies. These new sectors have resulted in job growth in software and pharmaceutical development, biotech, digital entertainment, and financial innovation, among other fields.
Urban centers are prime locations for these knowledge-based industries. The reason according to Professor Dana Silver is that [Cities] spur innovation by facilitating face-to-face interaction, they attract talent and sharpen it through competition, they encourage entrepreneurship, and they allow for social and economic mobility. As these sectors continue to grow, capital is again flowing back into cities. Yet, cities must recognize the form of capital has changed, and with that transformation there comes not only opportunities but also new challenges.
As labor shifted from working with machines and metal to generating new ideas and innovations, capital became highly mobile and disruptivewhere once capital was heavy, it is now light. “The disembodied labor of the software era,” says Bauman, “no longer ties down capital: it allows capital to be extraterritorial, volatile, and fickle. Disembodiment of labor augurs weightlessness of capital.” The rapid movement of money allows a city to react quickly, investing in nascent tech industries. New, successful businesses can spring up overnight in seemingly any place.
However, even in an era of highly mobile capital, capital is not moving just anywhere, but to very specific destinations. Though the death of distance has long been heralded, place matters more than ever in the knowledge economy. Cities such as San Jose, San Francisco, New York, Washington D.C., Raleigh-Durham, Seattle, and Austin are places of intense knowledge-based economic growth. Each of these cities contains a cluster of similar high-tech industries that serve to reinforce the vitality of the region.
Although cities are again becoming important economic engines, their revival may not be evenly felt across the country. Innovation hubs take time to develop and certain areas have historical or geographic advantages. Silicon Valley, for example, owed much of its early growth to being the site of Cold War research and more than thirty years would pass before it became a world technology center.
As they attempt to harness this growth, smaller and less-established cities will discover some growing pains. They may experience something closer to what I found working at a successful education tech company. A decade after it was founded in a small city, the company was purchased by a private equity company. The investors moved the company to a larger, more innovative metropolitan area, laying off more than one hundred employeesa considerable blow to the local job market.
Innovation sectors require a highly educated and technological sophisticated population. Such a population takes vast resources to develop and will have potentially tremendous social consequences. As Tyler Cowen argues:
Th[e] imbalance in technological growth will have some surprising implications. For instance, workers more and more will come to be classified into two categories. The key questions will be: Are you good at working with intelligent machines or not? If you and your skills are a complement to the computer, your wage labor and market prospects are likely to be cheery. Ever more people are starting to fall on one side of the divide or the other. Thats why average is over.
The new flows of capital are not only changing cities economically, but also socially. In a Slate article, economist Robert Frank argues top salaries have been growing sharply in virtually every labor market because of two factorstechnological forces that greatly amplify small increments in performance and increased competition for the services of top performers. This economic environment can deepen existing economic divides and exacerbate social tensions within a city. High-growth superstar cities such as San Francisco are struggling with exactly this problem.
In a rush to grow, cities may overlook those who are not part of the new economy. Worries over gentrification include more than simply displacing low-income familiesthese same people may be shut out of access to greater economic opportunity. The knowledge economy can disproportionately award skilled individuals and the sectors that employ them, while creating a sharp economic divide felt locally and nationally.
Unsurprisingly, many cities would rather have the problems of booming San Francisco than struggling Rust Belt cities like Detroit, Michigan. Cities such as Columbus, Ohio, for example, are developing knowledge indicators that can help target new tech industries. Richard Floridas conception of the Creative Class (where cities are encouraged to appeal to artists for economic growth) has been extremely receptive across the country. As innovation sectors continue to grow, cities have again become investment targets, a trend that brings economic as well as urban revitalization. But with opportunity comes challenges. For a city to thrive, governments and business leaders will need to grapple with the seismic economic changes underway. Their metrics and laws will need to be updated to capture this shift. But more importantly, they will need to be vigilant to ensure that the new flows of capital benefit not just a select few, but everybody.