Triumph of the city: Economics, Agglomeration, and Efficiency

What is “agglomeration economics,” and why do some industries cluster in certain cities?

“Agglomeration economics refers to the productivity and innovation benefits that arise when firms and workers locate near one another. Industries cluster in certain cities because proximity facilitates knowledge spillovers, access to specialised labour, shared suppliers, and lower transaction costs. For example, tech firms in Silicon Valley benefit from a dense network of talent, venture capital, and complementary businesses, while finance concentrates in London for similar reasons. Clustering amplifies efficiency and creativity, making some cities natural hubs for particular industries.”

Do agglomeration benefits outweigh congestion, pollution, and overcrowding costs?

“Agglomeration benefits — higher productivity, innovation, and knowledge spillovers — are often what make cities engines of growth, but they come at the cost of congestion, pollution, high housing prices, and overcrowding. Whether benefits outweigh costs depends on governance: well-planned cities can harness density while mitigating negative externalities through public transport, green infrastructure, and effective zoning. Without such management, the very advantages of agglomeration can be undermined, turning dynamism into dysfunction. Ultimately, agglomeration is a powerful force, but its value is contingent on how wisely a city balances growth with livability.”

If technology allows remote work, will cities lose their economic advantage?

“Remote work could reduce some of the traditional advantages of cities, like proximity-driven knowledge spillovers and dense labour markets. However, cities offer more than just physical closeness: they provide networking opportunities, cultural amenities, infrastructure, and serendipitous interactions that are difficult to replicate online. While remote work may decentralise some economic activity, the most dynamic cities are likely to retain their advantage by evolving — for example, by repurposing office space, supporting creative clusters, and maintaining vibrant urban ecosystems. In short, technology may change the form of urban advantage, but it does not make cities obsolete.”

How would you evaluate the claim that “physical proximity is becoming less important in a digital age”?

“The claim that physical proximity is becoming less important has some merit, as digital technologies enable remote work, online collaboration, and access to global markets. Yet cities still offer irreplaceable benefits: informal networking, knowledge spillovers, and the serendipity of face-to-face interactions that fuel innovation. Evidence from tech hubs like Silicon Valley or London suggests that even in a digital age, clustering amplifies productivity and creativity. So while the role of proximity may be evolving, it remains a critical factor in economic and social urban advantage.”