Agglomeration, working from home, and the character of places

Why do certain industries cluster together in one location? Social scientists have answers:

Photo by Chris F on Pexels.com

Economists believe agglomeration — like the clustering of tech in the Bay Area — has historically been the result of two main forces. The first is what they call “human capital spillovers” — a fancy way of saying that people get smarter and more creative when they’re around other smart and creative people. Think informal conversations, or “serendipitous interactions,” over coffee in the break room or beers at the bar. These interactions, the theory says, are crucial to generating great ideas, and they encourage the incubation and development of brainiac clusters. The other force is the power of “matching” opportunities. When lots of tech firms, workers and investors clustered in Silicon Valley, there were lots more opportunities for productive marriages between them. As a result, companies that wanted to recruit, grow or get acquired often gravitated to places like the Bay Area.

However, remote work could actually improve certain matching possibilities. Companies can hire smart people anywhere in the world when they drop the requirement that they physically be in a central office. Not only that, they can pay them less. Moreover, killing the office can significantly lower costs for companies, which no longer have to pay for expensive real estate.

So, in this theory, the future of work and the economic geography of America really hinges on whether companies can create those “human capital spillovers” through computer screens or in offices in cheaper locations.

This is a phenomenon with a pretty broad reach as cities could be viewed as clusters of firms and organizations. What has been interesting to me in this field in recent years is how places like this come to develop and what it means for the character of the place.

Take Silicon Valley as an example. This is the home of the tech industry and, as the article notes, the big firms have committed to physically being there with large headquarters (including Google, Apple, and Facebook). These headquarters and office parks are themselves interesting and often a post-World War Two phenomena as highways and suburbanization brought many companies out of downtowns to more sprawling campuses. At the same time, the impact of all of this on the communities nearby is also important. What happens when the interests of the big tech company and the community collide (see a recent example of a Facebook mixed-use proposal)? What did these communities used to be like and what are they?

This is bigger than just the idea of employees working from home. This potential shift away from clustering would affect places themselves and how they are experienced. If thousands of workers are no longer in Silicon Valley, what does this do to those communities and the communities in which more workers are now at home? Silicon Valley became something unique with this tech activity but it could be a very different kind of place in several decades if there is new activity and new residents.

The same could be said for many other communities. What is New York City if Wall Street and the finance industry clusters elsewhere or disperses across the globe? What happens to Los Angeles if Hollywood disperses? And so on. The character of places depends in part on these clusters, their size, and their history. If the agglomerations shift, so will the character of communities.

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