The Far-From-Equilibrium City

Introduction
“Two dangers constantly threaten the world: order and disorder” — Paul Valery

In economics, in which equilibrium is a central tenet, the very title of this paper is provocative. However, the title could as easily have been “The Paradoxical City,” as I will argue that paradox underlies, or is the causal mechanism, of the far-from-equilibrium, or critical, state. Equally, I could have titled it “The Creative City,” as creativity is an outcome of a process being in a far-from-equilibrium state. But, as we will see, it is the far-from-equilibrium state which allows certain kinds of paradox to give rise to creativity. Further, most economic analysis focuses on equilibrium — as noted above, it is arguably a central theorem of economics — meaning it is important to focus precisely on this concept, particularly if it cannot help but mislead one about the true nature of the economy. It is for these reasons I want to focus on the far-from-equilibrium state itself rather than on its causal mechanisms. Finally, I could have titled this “The Heterogeneous City,” as I will argue that heterogeneity is one of the driving forces of paradox and disequilibrium in the city, keeping it critical. Any of these titles would have worked, as paradox, creativity, heterogeneity, and self-organized criticality are all features of all cities. To the extent that these features are maximized, though, cities become healthier and wealthier, and we would be wise to recognize those features.

Since over half of the world’s population is now urban (de Blij, 2009), understanding cities is central to understanding the economy as a whole. Considering that most commerce and manufacturing has taken place in primarily urban areas for centuries, understanding cities has probably always been central to truly understanding the economy. In this I join Krugman in his confusion as to why most mainstream economists, most of whom treat economies as taking place on a needlepoint, have tended to ignore cities as cities (1995,1996).

First, of course, I need to clearly define my terms. The issues of paradox and heterogeneity I will address in their appropriate sections. But first, what does it mean to be in a “far-from-equilibrium” state, and how does it relate, if at all, to economic equilibrium?

Peter Lewin (1999, p. 15) argues that equilibrium can be understood in a variety of ways, as a balance of forces, a state of rest, a steady-state, a constrained maximum, an optimum, as rational action, and/or as a situation of consistent plans. Clearly cities are not in balance, a state of rest, a steady state, at any sort of maximum, optimal, nor the result of the purely rational actions of the people living in them. As for consistent plans, “the passage of time cannot occur without the arrival of new knowledge” (Lewin, 1999, p. 24, citing Lachmann, 1978). Even in extreme cases, such as that of Robinson Crusoe, there are changing conditions, such as weather, wear on things he’s built, availability of foods, the condition of his food stores, etc., which are new (or potentially new) knowledge for him. Information that either confirms or does not disconfirm what you already know is not new knowledge. New knowledge necessarily discoordinates plans. So does changing value rankings over time (I may not value the activity I want to do with you as much now as I did a week ago). Further,

Profit and loss are entirely determined by the success or failure of the entrepreneur to adjust production to the demand of the consumers. There is nothing “normal” in profits and there can never be an “equilibrium” with regard to them. Profits and loss are, on the contrary, always a deviation from “normalcy,” of changes unforeseen by the majority, and of a “disequilibrium.” They have no place in an imaginary world of normalcy and equilibrium. (Mises, 1949, p. 295)

Thus, equilibrium in an economy among actual acting people is impossible to achieve. And, I will argue, this is an even more true statement of the situation one finds in cities.

If equilibrium is not a realistic assumption, we are still left with a variety of models. First, there is disequilibrium. With disequilibrium, we must first assume equilibrium, from which plans and interactions can deviate. The Kirznerian entrepreneur, for example, discovers disequilibrium, then works to establish equilibrium. The Schumpeterian entrepreneur creates disequilibrium by creating new things. Lachmann argues that these constant activities keep the economy in a state of disequilibrium. However, there are different kinds of disequilibria. One kind is utter chaos. Another is deviation from equilibrium, from which one can move back toward equilibrium. Yet another kind is the transition state that takes place as one moves from one state of equilibrium to another. It when one is in this transition state that one is in a far-from-equilibrium state, in which the creativity of the far-from-equilibrium state drives the movement from one equilibrium state to the next. For example, there can be a far-from-equilibrium state in unemployment between 4% and 5% unemployment, in which there may be creative ways of finding employment or employing people emerging. Far-from-equilibrium states are not wild fluctuations (which are, as we will see, more typical of positive feedback); they are unstable transitions between stable equilibria, with non-linear dynamics that allow for the creation of new niches, new potentials, and new possibilities. It is possible for a process to be suspended between two equilibria without ever settling into one or the other. In such cases, the process is at maximum creativity. It is also in such cases where knowing what the equilibrium state(s) look(s) like is irrelevant.

However, there is yet another way of conceiving of the far-from-equilibrium state. Stuart Kauffman characterizes the far-from-equilibrium state as a critical state on the borderland between subcritical and supercritical states. “Subcritical” essentially means the “ordered” or finite realm, while “supercritical” essentially means the “chaotic” or infinite realm, with the “critical” line between the two being the “edge of chaos.” In the subcritical realm, one only engages in recombination of what is known — it is a steady-state equilibrium (Kauffman, 1993, p. 312). Disequilibrating forces push the subcritical state toward criticality, where true creativity takes place, on the border between the known, finite realm, and the unknown, infinite realm. It is in this realm where the economy creates the conditions for people to work at their most creative.

Self-Organized Criticality

Stuart Kauffman argues that the economy is a self-organizing critical process (1993, 2008). Similarly, I want to argue that cities in particular have self-organizing criticality and are, thus, in a far-from-equilibrium state. Like the economy at large (and, I would argue, at a higher intensity), cities are “self-amplifying or autocatalytic” (2008, p. 151), meaning they are “mutually sustatining economic-technological ecosystem[s] of complements that commandeer economic capital resources (2008, p. 160). If a city has self-organized criticality, it should have several features, including the presence of power law distributions (an example would be firm size in a free market, where one has a few very large firms, a medium number of medium-sized firms, and a large number of small firms) and the generation of strange attractors, which have the quality of being simultaneously attractive and repulsive, rather than having the attraction-only feature of simple attractors, like gravity. Further, with any process containing strange attractors, the more it changes, the more it stays the same (Sabelli, 2005, p. 19), meaning there is stability in the process. For example, once they emerge, cities tend to become permanent fixtures.

A city is a network, and networks come in three basic forms: ordered/subcritical, chaotic/supercritical, and “poised at the boundary or edge between order and chaos,” or critical (Kauffman, 2008, p. 151). The history of city planning shows attempts to impose order on seeming chaos, or to create an order from nothing (as was the cases with Holland, MI, Flint, MI, and Brazilia, Brazil). However, cities are not truly chaotic, with no discernible structure. Their structure is, rather, complex — or “critical”. Criticality is one of the features of self-organizing processes, or “self-constructing, open nonequilibrium systems” (2008, p.100). And power law distributions are a feature of critical processes. It is a well-established fact, even prior to Paul Krugman’s (1996) utter fascination at the fact, that cities sizes have a power law distribution — the rank-size rule known as Zipf’s law. This at least suggests that urbanization itself may be a critical process. And if one were to find a power law distribution of agglomerations within a city, of firm size and/or longevity, etc., that would suggest that the city itself is critical. Such a fact is hardly sufficient proof that a given city is critical (Kauffman 2008, p. 174), but it is certainly a necessary condition. The same can be said of economies: if we see a power law distribution in the size of firms, the period of time during which firms exist, creation and extinction of products (and of firms), and length and size of booms and busts, the economy is likely critical. Indeed, Kauffman points out that

for the economy, the lifetime distribution of firms is, in the best evidence I know, a power law. The size distribution of firm-extinction avalanches is also a power law. This is at least a hint that the economy is self-organized critical, and that such criticality has something deep to do with how economies, the biosphere, and other co-evolving, co-constructing, complex systems advance into their adjacent-possible spaces. (2008, p. 174)

Note too that “Critical dynamical systems maximize the correlated behavior of variables in systems of many variables. Also critical dynamical systems appear to maximize the diversity of what they can “do” as they become larger” (2008, p. 100). The “adjacent possible” is that space where the known pushes into the unknown, where new products and new ideas are born. The larger the network, the more area is available, meaning there is more space in the adjacent possible. The larger and more complex such a network is, the more creative it is, meaning more new things are created and more entrepreneurial activities can take place. The fact that cities create the conditions for people to be more creative, generate more ideas and products, and create more entrepreneurial opportunities (and, thus, activities) all suggest cities are critical networks. In other words,

there is an economic web of goods and services, where each good has neighbors that are its complements and substitutes. The structure of the web creates ever new economic niches in its adjacent possible for never before-born, new goods and services, such that economic diversity has expanded. The structure of the economic web partially governs its own growth and transformation. (Kauffman, 2008, p. 127)

Economies, and cites, are part of the creativity of the universe. At least the free market economy is, insofar as it maximizes the adjacent possible.

One of the reasons people move to a city is because it helps them solve a wider variety of coordination problems. Certainly prices are central to this process, but proximity to others with similar goals, or whose goals may be useful to one’s own, helps one to greatly facilitate coordination. Kauffman (2008, p. 115) observes that ordered networks cause the elements of the system — in the case of cites, the people in it — to converge in their goals. The result is that the past is “forgotten,” and the system (Kauffman is talking about cells) cannot tell the difference “between food and poison” (2008, p. 115). At the other end, chaotic networks are so sensitive that no coordination can ever take place, because even the slightest noise (and “there is always slight noise”) causes the system to act unreliably. Between the two, “Critical networks, poised between order and chaos, seem best able to coordinate past discriminations with reliable future actions” (2008, p. 115). In critical networks, past actions matter for future actions (time and memory both matter), and coordination of actions is possible without everyone having to do the same things, as with ordered networks. More than that, it seems it is in critical networks we have “the most complex coordinated behavior that can occur” (2008, p. 116). Further, and this is important for understanding cities, only in critical networks do we find that the “diversity of behaviors, continues to increase as network size increases” (2008, p. 117). Thus any network process in which coordination problems are solved, and are solved more quickly the larger the network, is very likely to be a self-organizing critical, meaning far-from-equilibrium, network. This would include market processes and cities.

Of course, new coordinations cannot emerge without discoordination of former plans. Further, new information is discoordinating, resulting in readjustments and attempts to recoordinate. In other words, business activity of all kinds necessarily both coordinates and discoordinates simultaneously (Lachmann, 1981). This tension between coordination and discoordination is also an element of self-organized criticality. Breaking and creating bonds is what allows for movement, for action to take place. The most complex kinds of movements, decisions, actions, etc. are those that take place in the realm of criticality, in the far-from-equilibrium state. Out of this comes order. Indeed, “order in a system does not demand or imply equilibrium, because systems can exhibit self-organizing behavior and evolve naturally toward order without ever reaching a steady state” (Meyer et al, 2005, p. 470). It is a mistake to think that if we see patterns and order, that there is necessarily full coordination at work and an equilibrium in place. Patterns emerge too in far-from-equilibrium states — patterns such as power law distributions, for example. Only, these patterns are temporal patterns, meaning they become apparent by looking at what happens over time, rather than by taking a snapshot of a given moment.

The Paradoxical City
“Without Contraries is no progression. Attraction and Repulsion, Reason and Energy, Love and Hate, are necessary to Human Existence” — William Blake, “The Marriage of Heaven and Hell”

Society as a whole is maintained through the presence of paradoxical tensions; society collapses if the tensions which create it cease (Fraser, 1999, p. 103). Tensions create dissatisfaction, and dissatisfaction is what drives action (Mises 1949, p. 469), without which there cannot be interaction, meaning society cannot emerge. Without paradoxical tensions, simple behaviors dominate. The more paradoxical tensions, the more complex the behaviors which emerge. Spontaneous orders as such emerge between instinct and reason; spontaneous orders are “beyond instinct and often opposed to it, and which is on the other hand [. . .], incapable of being created or designed by reason” (Hayek, 1991, p. 21). If it is true, as Sanford Ikeda argues, that “Great cities are Hayekian spontaneous orders par excellence” (2004, p. 248), then it is important to understand the fundamental nature of spontaneous orders, which is simply another name for transformative self-organizing social processes (which means we need to understand them as such).

Cities have more paradoxical tensions than do more rural areas and thus exhibit more complex behaviors. In discussing critical systems, we have already observed that cities are neither stable nor unstable, neither ordered nor disordered (alone) but on the edge of chaos and thus in or near a phase transition between supercriticality and subcriticality. Cities are thus the kinds of networks in which we have the conditions where a large number of people are always ready to change or are actively changing from one kind of behavior to another.

Jane Jacobs noted the paradoxical nature of cities throughout her works, particularly noting that a city’s stability comes about from “a seeming paradox: To maintain in a neighborhood sufficient people who stay put a city must have […] fluidity and mobility of use” while “Neighborhood accommodations for fixed, bodiless, statistical people are accommodations for instability” because in order for a neighborhood to stay the same, the people in it must constantly change, which is destabilizing. To keep people in a neighborhood, the neighborhood itself has to constantly change (1961, p. 140). Cities are full of such paradoxical relations.

Why should we expect to see paradoxes at work in cities? Andreas Wagner argues that “the paradox makes the world a possibility, not a certainty” and that paradoxical tensions “are built into the foundations of the world” (2009, p. 3). If paradox is present, if it is in fact a driving force in the world, then life and every element of it, including the economy, is uncertain. Wagner points out that some of the very ideas which have proven to be central to economic growth, such as toleration and freedom, are themselves paradoxical in nature. Toleration created by good institutions allows for diversity, which allows for greater economic growth (Sobel et al, 2010, p. 273). However, “A wholly tolerant society will tolerate the intolerant — fanatics, zealots, and hate mongers of all stripes — who ultimately will do away with them.” Also, “an individual’s freedom to choose includes the freedom to abandon this freedom” (Wagner, 2009, p. 196–197). This latter, at least, is less insidious than it sounds, as a good example of abandoning one’s freedom is entering into an enforceable contract, which is a necessary element of the free market (and an example of how one can increase one’s freedom by choosing to restrict it). This is the basis of society itself. The individual makes constant demands on community, and community makes constant demands on the individual precisely because society is “a permanent conflict between conduct that supports the common good and conduct that supports the personal good” (Fraser, 1999, p. 39). Of course, Adam Smith (1776) pointed out that pursuing the personal good can result in the common good. This, however, comes about only when one has good institutions that are able to transform a conflict-only situation into a paradoxical relationship of conflict and cooperation, making the attractive element slightly stronger than the repulsive one. In other words, by adding another level of tension — conflict is turned into conflict-cooperation — the problems that would emerge if we had conflict alone is resolved. Bad institutions promote the repulsive element over the attractive, while good institutions promote the attractive element over the repulsive — but only slightly more, as pure attraction results in pure order, with the above observed resultant problems.

Indeed, Jacobs observed that cities go a long away toward solving the privacy-social paradox: “A good city street neighborhood achieves a marvel between its people’s determination to have essential privacy and their simultaneous wishes for differing degrees of contact, enjoyment or help from the people around” (1961, p. 59). Such public places foster weak social bonds and, thus, create public life. We end up being more social when weak bonds dominate over strong bonds. Housing projects try to create more strong bonds, which only drives people to try to be more private, with the result of a dissolving public life, which prevents trust from developing, with a concomitant increase in crime (1961, p. 46).

One could perhaps fill this paper by simply listing the paradoxes present in cities:

Love of one’s own Love of the other

Friendship Love relationship

Homosexual Heterosexual

One’s race/ethnicity Foreign

Family Nonfamily

Friend Stranger

Xenophobia Xenophilia

Competition Cooperation

Greed Generosity

Exchange Gift

Coordination Discoordination

Equilibrium Disequilibrium

Supply Demand

Attraction Repulsion

Order Chaos

Stable Unstable

Homogeneous Heterogeneous

Agglomeration Dissipation

Abundance Scarcity

Creation Destruction

Change Stability

Human action Human interaction

Even Uneven
 Individualistic Social

Nature Culture

Innate Learned

Matter Meaning

Part Whole

Control Anarchy

Continuous Discrete

Without going over every one of these, let us look at a few. As Adam Smith tries to teach us, “exchange teaches people to recognize their enlightened self-interest lies in seeking cooperation” (Matt Ridley, 2010, p. 87). The latter increases as we seek the former, and vice versa. As Koen dePryck (1993, p. 156) points out, we cannot make sense of this simultaneous increase in paradoxical opposites if we understand that their simultaneous increase results in the emergence of texture, of complex patterns out of what was once an undifferentiated, even distribution. Fujita et al (2001) also observe that an undifferentiated, even distribution of two or more groups is highly unstable — the symmetry will break, and texture, or clumping, will emerge.

Krugman (1995; 1996, p.76–7; with Fujita and Venables, 2001) points out that the paradoxical tensions between attraction and repulsion, or centrifugal forces “that promote dispersion of business” and centripetal forces “that tend to make businesses clump together,” is what creates the patterns of spatial distributions found in cities — and across economic geography in general. For example, economies of scale are attractive, but transportation costs are repulsive. This is why cars are made in several, well-separated, cities and not just one; indeed, this is why there are many cities and not just one big one. Further, when firms “Provide each other with markets,” we get attraction; when they compete, we get repulsion (Krugman, 1996, p. 89). Firms can provide similar, but not too similar, products or services. Agglomeration takes place only if attraction is stronger than repulsion; however, multiple subcenters emerge if repulsion is in fact a major force (Krugman, 1996, p. 102). This is most obvious in the presence and distribution of malls in a city. A quick glance at any online map will show malls are about equally separated from each other — close enough to overcome transportation costs, and far enough away to minimize competition. The presence of a mall, in turn, attracts other shopping, and restaurants. Attraction and repulsion together create texture, or polycentricity (Krugman, 1996, p. 91). Further, mobile factors, such as labor and capital, linkages, thick markets, and knowledge spillovers and other pure external economies work as centrifugal forces working to create agglomeration, while immobile factors, like land, commuting, congestion and other pure diseconomies, create centrifugal forces working against agglomeration (Krugman, 1996, p. 102).

While human capital and creativity are attractive forces, Florida, like Krugman (1996), points out the presence of repulsive forces:

The sprawl that demands and in turn is demanded by traffic congestion also wreaks havoc on our competitiveness. A stretched-out, sprawled metropolis, where professors no longer live near universities, where laboratories and high-tech firms can not co-locate, where entrepreneurs and newcomers are forced to the economy periphery, will lose the advantages that come from proximity, density, spontaneity, and face-to-face interaction. (Florida, 2005, p. 200)

If these forces come to dominate a city, creative people will become less creative and/or relocate, since to be creative, you cannot be stressed and anxious (Florida, 2005, p. 203). Most of these problems come about from the actions of city planners and economic regulators, though. I would prefer to walk to the local coffee house and grocery store — but zoning puts them so far away, I have to drive. And that keeps me in the house more often than I would otherwise be.

Krugman also observes, in agreement with Hector Sabelli (2005, p. 8), that “there must be a mixture of positive and negative feedback” (Krugman, 1996, p. 77). Bipolar feedback such as this gives rise to extremely complex patterns and creative processes (Sabelli, 2005, p. 80). One or the other gives rise to simple behaviors: negative feedback results in steady-state equilibrium while positive feedback results in boom-bust cycles (Meyer et al, 2005, p. 457). The two together gives rise to complex dynamics. For example, in economics we are familiar with the concept of decreasing returns: if you pay a worker more, you will get more work out of him; but each incremental increase in pay gets you a smaller incremental increase in output. There is only so much physically a man can do. However, both Florida (2005, p. xxii) and Krugman (1995, 1996, with Fujita and Venables, 2001) emphasize the fact that cities give rise to increasing returns. Further, Kauffman complains that “When economists make mathematical models of markets, decreasing returns help those models gravitate toward a stable equilibrium” (2008, p. 157). However, agglomeration economies and high technology sectors often have increasing returns which do not necessarily settle in on the most socially optimal equilibrium (Florida, 2003, p. 36). Decreasing returns is a kind of negative feedback giving rise to a single equilibrium; increasing returns is a kind of positive feedback giving rise to multiple equilibria (Krugman, 1996, p. 33). We get increasing returns in a variety of ways, including those ways Kauffman lists above. Another way is simply that “good people attract other good people, and places with lots of good people attract firms who want access to that talent, creating a self-reinforcing cycle of growth” (Branscomb, Kodoma, Florida, 1999, p. 606). Idea-generation is a positive feedback process. But so, too, is moving closer to inputs and outputs. Thus do similar industries aggregate, taking advantage of various common inputs and outputs as well as a common worker pool. Mass production, too, creates increasing returns — at least, for a while. As we get increasing returns, though, we get imperfect competition (Krugman, 1995, 1996 p. 33); but then, perfect competition only comes out of decreasing returns/equilibrium theory.

In cities, then, we see both decreasing and increasing returns at work, in paradoxical tension. In rural areas, the sparse population causes reduced interactions and, as a result, a subcritical economy emerges. Firms in rural areas are not typically able to take advantage of the conditions which create increasing returns, meaning we primarily only see decreasing returns, which are conditions more typical of those described by equilibrium theory. Rural areas are often subsidized to make up for this problem. The bipolar feedback of both increasing and decreasing returns creates a tension between general (city-wide) equilibrium and multiple equilibria that creates a far-from-equilibrium state (Kauffman, 2008, p. 157). Further, conflict from heterogeneity creates positive feedback, while homogeneity creates negative feedback; cities have both, simultaneously (e.g., a wide variety of races who, nevertheless, tend to live in mostly homogeneous neighborhoods), and thus create the conditions for creativity and more complex behaviors. While adaptation toward some sort of “optimal fitness” is a typical negative feedback process, coevolution, where companies are adapting to each other, is a positive feedback process (Meyer et al, 2005, p. 466). Again, both are present in any growing economy, with the later more likely to occur in cities with agglomeration economies. In the end, healthy growth is neither cancerous (positive feedback only) nor steady-state (negative feedback only).

Chaos and order are also balanced in cities. But not all balance is good. As one moves from chaos to order, or vice versa, one enters a region in which the two are balanced to a certain degree. Apparently random interactions can give rise to spontaneous, emergent order, and attempts to create order can in fact give rise to chaos. Examples would be the boom-bust cycle (in attempts to create orderly growth giving rise to a chaotic bust) and regulations having unforeseen consequences. Jane Jacobs (1961, p. 36) gives excellent examples in her paradox of policing and in the proper conditions for local, private policing. The smaller the city blocks, the more mixed (chaotic) the uses there are, the more people on the streets, the safer the streets will be and the fewer police one will need. Order emerges. On the other hand, the larger the city blocks, the more zoned, single-use the blocks, the fewer people on the streets, the more dangerous the streets and the more police one will need. Disorder emerges. Here is an example where less order creates more safety and a need for fewer police, while more order creates less safety and a need for more police. The police themselves are another kind of imposed order contributing to the chaos, which increases the need for more police, etc. until you get the complete order — and safety — of a police state (which comes with the dangers and disorders inherent in a police state as well). Neither pure chaos nor pure order are desirable, as pure chaos only breeds more chaos and pure order is crystalline death. Yet we also see that the balance too is precarious. Imposed partial order creates chaos. Only self-regulated, self-organizing chaos creates emergent order.

City Stability

Equilibrium theories are attractive to many theorists because stability is important for an economy to work well. However, far-from-equilibrium networks are also stable. But they are stable in such a way that they can balance the stable and unstable, predictable and unpredictable, creating and breaking bonds. For example, a stabilizing, bond-creating element that makes life more predictable is trust. Trust is a necessary element of order-creation (Jacobs, 1961, p. 56; Ikeda, 2004; Ridley, 2010, p. 96). Trust is necessary for trade. Indeed, every purchase is a demonstration of trust, making reputation central to success in a market economy. As a result, “the more people trust each other in a society, the more prosperous that society is, and trust growth seems to precede income growth” (Ridley, 2010, p. 97). Your reputation is essentially the story of your past interactions. Needless to say, a good reputation breeds greater trust, ensuring in a market economy more trades and, thus, greater wealth.

Trust requires one gets to know people (or institutions) well enough so one learns to trust them, and that requires complex social interactions, such as one finds in stores, on neighborhood sidewalks, etc. Trust in turn “serves as foundation for dynamic economic processes” (Ikeda, 2004, p. 255), encouraging mixed-use neighborhoods that in turn promote trust, in a virtuous circle. The heterogeneity of use that emerges from high levels of trust generates a large variety of “public and semi-public meeting and gathering places — e.g., coffee houses, restaurants, bookstores, university seminars, specialty shops, unusual neighborhoods, theaters, museums, and parts and plazas” that differ in both size and kind such that they help cities “serve as the primary incubators of new ideas and entrepreneurship” (Ikeda, 2004, p. 255). Trust acts as a stabilizing factor that makes diversity and heterogeneity work to maximize wealth and creativity rather than to destabilize and impoverish.

Trust and reputation are what are called “social capital,” which one can use to make social — including economic — interactions more likely. What, then, are we to make of the research done by Robert Cushing that showed that very wealthy “High tech regions scored below average on almost every measure of social capital? High-tech regions had less trust, less reliance on faith-based institutions, fewer clubs, less volunteering, less interest in traditional politics, and less civic leadership” than in “low-tech” regions (including, presumably, rural areas) (Florida, 2003, p. 274). It seems obvious that more trust is better than less trust — but if we disaggregate the data and understand what, exactly, this data means, we will see that it does not in fact undermine Jacobs or Ikeda. It becomes obvious what is happening when you understand that Cushing is talking about strong-bond trust, while Jacobs and Ikeda are talking about weak-bond trust. Indeed, Ikeda (2004, p. 250) points out that limiting trust to “kinship group or religious fraternities” results in fragmentation. Cultural creatives, such as artists, poets, computer programmers, and inventors, no doubt do have less of the kind of trust found among close-knit families and tribes, but they could not engage in any sort of business dealings if they did not and could not trust those with whom they did business. More, the presence of strong-bond trust (as found in tribal groups), which actually seems to undermine weak-bond trust (as exist among strangers and acquaintances), would result in the kind of fragmentation that can tear a city — or a country — apart.

Florida argues too that “creativity flourishes best in a unique kind of social environment: one that is stable enough to allow continuity of effort, yet diverse and broad-minded enough to nourish creativity in all its subversive forms” (2003, p. 35). Both elements Florida mentions, social stability and broad-mindedness, are stabilizing factors in city networks. More, such an environment is much more likely to be found in a city — and, as Florida argues, especially in particular cities (New York, Austin, San Francisco, etc.). Our social environments are more stable if we have predictable rules. Legally, this means that laws should change on a very slow time-scale, allowing people time to adapt when there is change. This also means the laws should be simple enough to understand and follow, and few enough to be known. Here we do see cities — and states and countries — too often failing, even though we know that simple rules can give rise to complex behaviors (Kauffman, 1993, 2008; Krugman, 1996).

Even though a healthy economy is one where bond-breaking and, thus, destabilization, is prevalent, and loss of trust is bond-breaking and destabilizing, we in no way would want a reduction in trust. Reducing trust is bond-breaking only and, thus, chaos-inducing. The best bond-breaking is the kind which is mutual. It is sometimes proper for two parties to move on and separate from each other. If they can do so while retaining trust, more opportunities remain open for both parties. People need to have a degree of certainty or stability to be able to put up with uncertainty or instability. Legal certainty, for example, actually allows for more economic uncertainty to be tolerated, such that more economic growth is possible. Network dynamics is thus maintained.

Density

One of the most obvious features of a city is its density. Density is a necessary element for self-organization to take place. The elements or agents have to be close enough together to interact. As Gordon and Ikeda point out, city density is important because “long-term growth cannot take place without relatively high levels of population density,” which generates “high levels of demand for local products and services” and encourages the “eyes on the street” which promote security, and forms social networks and social capital. In fact, “There is positive feedback as the expectation of economic opportunity in an area itself acts as an attractor. People then attract more people, and this tends to create more economic opportunities, which in turn increases density” (2011, p. 5). Further, denser populations grow wealthier faster, while less dense populations can stagnate or even lose knowledge as the society simplifies (Ridley, 2010, p. 77–83). As density also demands mixed use, and mixed use attracts outsiders, this further increases economic opportunities and development (Jacobs, 1961, p. 152). Density matters because “individuals discover profit opportunities in the course of interacting with people rather than in the course of solitary contemplation and observation of disembodied information” (Andersson, 2005). This is equally true of artists developing artistic works, philosophers philosophizing, and scientists making discoveries or inventing new things, which is why such people tend to be attracted to cities, and why one finds much higher densities of such people (and, eventually, the institutions that support them) in cities than in rural areas. Not even those typically considered solitary contemplators and observers (artists and philosophers) are too far from the real stimuli of new ideas: other people.

However, what matters is not density per se, but interactive (network) density. No more is going to happen if you have twenty people spread out over two hundred square miles than if you put them in an elevator. Put those same people in a coffee house, and who knows what ideas may emerge. Why? In the later case, the people are in an interactive environment. In the first two cases, they are either so spread out they cannot interact, or so crowded they are mostly just annoyed at each other and want to get out of the situation. In other words, as Gordon and Ikeda argue, the important kind of density is that which optimizes “the number of informal contacts” (2011, p. 10), or interactive density.

Also important is the nature of the network bonds. The same density of people with strong bonds or ties (friends and family) will not have the same productive potential as one with weak bonds or ties (associates and acquaintances). Weak ties are “the indispensible conduits through which knowledge of profit opportunities is transmitted,” and are the source of a variety of spillovers as well as the kind of neighborhood safety described by Jacobs (Gordon and Ikeda, 2011, p. 3). Our friends and families create our strong network bonds, but these people know all the same people as you, meaning they are unlikely to help you meet new people with new ideas. The people you recognize only by sight, whom you run into at church, the grocery store, or the coffee shop, are those who know people you don’t, people to whom they could introduce you, people who may have a job or an idea or a business opportunity for you. Weak bonds create the kind of “density and spontaneous interactions” necessary for both creativity and for the overall vibrancy of cities, but only insofar as they are not “tethered to too many complications” (Florida, 2005, p. 203). Cities of course allow one to maximize weak bonds — but they sometimes create complications as well. Thus, the interactive element of density is central. It is possible to have fairly dense regions, such as suburban residential areas, where few interactions take place. Few suburbanites know their neighbors — and this is no doubt due to the reduction in interactions in homogeneous regions created by zoning. This means that not just any location will do, just because it has density. There has to be interactive density.

This is also true of heterogeneity of location. While Florida emphasizes heterogeneity of location (2003, 2005), no economic geographer I have read neglects this issue. Pierre Descrochers (1998), however, makes explicit the fact that the knowledge spillovers driving differentiation revolve around indirect, or tacit, knowledge, which must necessarily be transmitted through face-to-face interactions with suppliers, customers, and competitors. For example, one is unlikely to think of an innovative way to mine coal living in Dallas, TX. There is more population density in Dallas, TX, but more tacit knowledge density about coal mining in Madisonville, KY. Density thus involves both the right network structures and the right people with the right kinds of knowledge.

Heterogeneity

The more, and more diverse, a person’s relationships are, the more opportunities they have and the wealthier they tend to be (Eagle, 2010). Heterogeneity was recognized by Hayek as being important for wealth creation, and as a consequence of the market itself. Hayek argued that order “presupposes differentiation of its elements,” and that the power of spontaneous orders “depends more on the variety of the elements than on their temporal or local position,” while the spontaneous order “in turn enhances the value of variety” (Hayek, 1991, p. 79). Homogeneity creates crystalline order, while heterogeneity contributes to the emergence of spontaneous order, which in turn drives heterogeneity. Of course, things are not really this simple. Heterogeneity can also result in conflicts which break down the possibility for spontaneous orders to emerge. The difference is in the nature of the institutions involved, such as whether or not you have good institutions such as property rights protections and “unimpeded entrepreneurial entry into both new and old markets” (Kirzner, 1997, p. 31). As with density, it is the kind of heterogeneity, and not the mere presence of it, which matters.

Cities foster a variety of heterogeneities. In most cities we tend to find a wider variety of cultures and subcultures, psychological states (Beck and Cowan, 2005), specialized niches, and economic specialization, which drives order and wealth creation: “The characteristic signature of prosperity is increasing specialization. The characteristic signature of poverty is a return to self-sufficiency” (Ridley, 2010, p. 133). As Ridley and Kauffman observe, an important element of a city’s heterogeneity is the heterogeneity of its goods and services and the specialization which naturally emerges in market economies. “The diversity of goods and services drives its growth” precisely because “The more goods there are in the economy, the more potential recombinations there are among them” (Kauffman, 2008). But this is true only if they are aware of the diversity. A city’s density and diversity make such awareness more likely, driving entrepreneurship (Kirzner, 1997; Florida, 2005). Thus, “economic growth is positively correlated with economic diversity. The more diverse the economic web, the easier is the creation of still further diversity” (Kauffman, 2008, p. 151). In short, “City diversity itself permits and stimulates more diversity” (Jacobs, 1961, p. 145). It is a positive feedback loop.

However, Sobel et al (2010, p. 272) point out that most of the economic literature actually argues that cultural and racial heterogeneity is negatively correlated with economic growth. Why then do Sobel et al, Kauffman, and Ridley all argue in favor of diversity? The difference between the kinds of places they discuss and the kinds others have discussed (places in Africa, for example), is the presence or absence of good institutions. Good institutions allow for the coordination of heterogeneous cultures in an area, while bad institutions create and foster destructive conflicts (when government is handing out the goodies, you get fractionalization — especially when those in government are primarily one race, and there are significant minorities in the population). Indeed, bad institutions, which are those that encourage “political entrepreneurship,” which includes using scarce resources to lobby for transfers (which can lead to ever greater wealth-destroying conflicts, including violence) and “squelchers” (Florida, 2005, p. xxiii, citing Jacobs), “interfere with inter-community signaling and generate negative impacts on the ability of individuals to realize gains from exchange across communities” (Sobel et al, 2010, p. 272). They point out that the problems that arise from ethnic fractionalization disappear “in areas with “good” political and economic institutions — those embodying the protection of property, free markets, the rule of law, and a free media” (2010, p. 272). When you have good institutions, you end up with

Greater interactions among individuals from different cultures or greater cultural diversity generate new entrepreneurial ideas, enhance existing business ideas and replace inefficient entrepreneurial initiatives by productive ones. Thus, entrepreneurial initiatives expand in the presence of greater cultural diversity or due to the production of higher cultural capital. (2010, p. 271)

This is due to the fact that different cultures have different ways of doing business, which creates a learning space, where people can learn new and better ways of doing business (2010, p. 271).

Cities are centers of capitalism because there is also greater capital heterogeneity in cities. Richard Florida lists creativity as a form of capital, along with “physical capital (raw material), investment capital (finance), land (functional property), human capital (educated people), and social capital (the kind that comes from people acting in groups)” (2005, p. 32). This is in addition to the fact that the production process also creates capital goods (Mises, 1949, p. 332). Further, Florida rightly argues that since “human capital” is measured by formal education, we need to add creative capital, occupational capital, and actual skills, since education is not necessarily correlated with creativity, occupation, or skills. As he observes, without considering these kinds of capital, “we tend to overlook extraordinary contributions made by entrepreneurs and cultural creatives who may not have completed college, people like Bill Gates, William Faulkner, or David Geffen” (2005, p. 32). The way human capital is measured can only give us at best the potential capital in an area. A person with a Ph.D. represents a high level of human capital — but if he is working at the front desk of a hotel, he has low occupational capital (relative to what he, perhaps, should have). His creative capital will depend on what, if any, creative projects he’s involved in, and his skills capital will vary depending on if we are looking at his creative work or if we are looking at his hotel work. Further, one can have high skills capital due to decades of experience, even if they are uneducated. Thus, a single person can represent four kinds of capital, and different levels of economic value.

But not all capital is equal. Florida (2003, p. 273–5) also observes that while creative capital correlates with high economic growth, human capital correlates with only modest economic growth, and social capital is in fact negatively correlated with economic growth. Cultural (and subcultural) capital, which is itself a measure of a certain kind of heterogeneity, also correlates with high economic growth. One must nevertheless keep in mind that these are tendencies which can change — and have changed. There was a time when social capital counted more than it does now. In the end, though, capital is not and cannot have any objective value: “From the perspective of the individual, capital value is the perceived value of a particular production plan or set of plans” (Lewin, 1999, p. 6). Just because something may have once had value, that does not mean it always will — values change and, thus, the value of capital changes. This, too, contributes to the heterogeneity of capital. It does seem, though, that city dynamics would make it more likely that a given set of capital would have higher value than the same set in rural areas simply because more people would be aware of the presence of this unused or misallocated capital, and take advantage of that information (Kirzner, 1997).

Finally, another kind of heterogeneity is mixed use. Urban theorists from Jane Jacobs (1961) to James Kunstler (2002) have argued for the value of mixed use over homogeneous use created by typical zoning rules. Kunstler argues that Atlanta is mostly a failure of a city precisely because of homogeneous zoning, observing that the most vibrant part of the city is Riverside, which was zoned mixed use, with “apartments with substantial office space and, at the ground floor level where they belonged shops and restaurants that could easily be used by people on foot,” meaning the region is pedestrian-friendly, resulting in a far-from-equilibrium state and, as a consequence, health and growth (Kunstler, 2002, p. 70). Certainly this kind of mixed-use created through zoning was not what Jabobs had in mind in her discussions of mixed use in urban environments, but the fact that even a simulacrum of mixed use creates a more vibrant urban environment than does single-use zoning is telling.

The Equilibrium Country

As anyone from a rural region knows, rural areas do not change much over time. For example, I grew up in White Plains, KY, which has had around 600 people from the time I was a child to now, for over thirty years. If rural areas do change, it is usually through loss of what little is there. While large city size allows for diversity and even variety in firm sizes, for example, towns and suburbs are “natural homes for huge supermarkets” and other large businesses (Jacobs, 1961, p. 146). Which is why Wal-Mart was so successful only opening stores in small cities and rural areas. Cities, with their large, heterogeneous populations, are able to have greater specialization and therefore much wider diversity. The tiny number of people in small towns who would go to a specialty shop prevents such shops’ success, and even prevents stores from diversifying much, as a friend of mine learned when he tried to introduce a wider variety of fruits and vegetables in his grocery store in Dawson Springs, KY (population 2980) and had to throw out all of the new varieties — except the leeks, which did sell, but only because everyone thought they were just large green onions (personal correspondence). This keeps small towns homogeneous even in their choices. Those who want the kind of variety found in cities end up having to move to a city — which only further drives rural homogeneity. Rural areas end up dominated by people with similar world views, religious beliefs, tastes, and psychologies. They are very comfortable places to live because they do not change much. Unless, of course, you have a different world view, tastes, etc. Then one can come to feel very isolated.

This homogeneity is of course cultural too (perhaps primarily), resulting in the phenomenon where “many of the poorest areas of the USA have the least range of cultural diversity. In West Virginia, for example, 94.5% of the population is Caucasian, and foreign-born individuals make up only 1.1%of the state’s population” (Sobel et al, 2010, p. 270). It is perhaps no coincidence that West Virginia is also one of the least densely populated states.

The one thing rural areas have more of than urban areas is social capital — but as observed above, this is not actually a good thing economically, since high social capital is negatively correlated with strong economic growth (Florida, 2003, p. 273–275). Social capital comes about from strong network bonds, which does not create many economic opportunities. Your relatives and friends may be very close to you, but they cannot do much for you economically.

Finally, rural areas are dominated by negative feedback, which drive their systems toward steady-state equilibrium. Homogeneity contributes to the maintenance of a steady-state equilibrium. Strong bonds dominate over weak bonds, and few opportunities are unknown or unexploited. In other words, the conditions in rural areas are those almost exactly described by mainstream equilibrium economics. We often see attempts to inject capital into rural areas through subsidies in order to get them out of their apparent downward spiral relative to urban areas, but such attempts, which have the ironic intention of trying to disequilibrate the rural economy, inevitably fail because the rural economy is dominated by equilibrating processes. Rural areas are inherently stable because of their lack of density and diversity. No amount of subsidies will fix that fact.

The Far-From-Equilibrium City

The simultaneous presence of both city-wide equilibrium and multiple equilibria — with the latter being created in part by the presence of Schumpeterian entrepreneurs, even as Kirznerian entrepreneurs try to move the system from multiple toward singular equilibrium — keeps the system in a far-from-equilibrium state. When a system is moving from one equilibrium to another — or from multiple equilibria to a single equilibrium — it moves through a far-from-equilibrium state. This state is where creativity occurs, where opportunities become apparent that entrepreneurs can take advantage of.

While most people associate cities with greater competition, Krugman points out that spatial dynamics actually drives competitors away from each other, creating what are in effect local monopolies (1996, p. 91). In fact, Schumpeter (1947), Mises (1949, p. 357), and Krugman (1997) all agree that monopolistic and imperfect competition (Chamberlain 1962; Robinson 1933/1965) is in fact the norm, especially at the local level, rather than perfect competition. As a result, economic equilibrium is not relevant for understanding how an economy works, as there is no prefect competition driving the economy in that direction. Schumpeter also argues that since “Capitalist reality is first and last a process of change,” that equilibrium theories are “hence almost, though not quite, irrelevant” (1947, p. 77). Since most real competition comes from new products that threaten the very existence of competitors (1947), and since each new product or innovation in production in fact creates at least a temporary monopoly, disequilibrium is more relevant than equilibration. So long as there is free entry into the economy, there is always the threat of disequilibrating creative destruction. Since existing businesses certainly prefer stability, and most people prefer the known over the unknown, the seen over the unseen, it is not difficult to get policies put in place (supported by economists with their equilibrium theories) to try to temper the destructive — which then necessarily means the creative, since creation necessarily precedes destruction (Sabelli, 2005, p. 8) — elements of the economy. This is the real reason we have barriers to entry, such as licensing and certification. They are designed to protect already-existing companies at the expense of new companies (and of considerable economic growth), usually with the excuse that such measures are needed to protect customers. In fact, the customers are mostly only protected from more and better choices, and economic opportunities, growth, and wealth.

In the end, cities, to even exist, must exist in a far-from-equilibrium state, located in the phase transition between equilibria. In fact,

We the living exist in a complex regimen in the phase transition between order and chaos. We are there because that is the only place we can be both ordered and adaptable, stable but able to evolve. Crystals are stable and ordered, but cannot adapt or evolve. Weather evolves but is unstable and cannot survive. (Macklem, 2008, p. 1844)

Cities are not and cannot be either crystalline or chaotic. It is important that we have the kinds of institutions and rules which create the conditions for cities to remain in a phase transition so the citizens of those cities are able to reap the benefits of city living, and are not merely living in overcrowded conditions.

Conclusion

In my research for this paper, I kept running across the same story. High density with bad institutions makes a city intolerable to live in; high density with good institutions makes a city healthy, wealthy, and creative. Greater cultural heterogeneity with bad institutions results in civil wars and genocide; greater cultural heterogeneity with good institutions results in economic growth, more entrepreneurial opportunities, and greater creativity. One can see the same thing in any of the above paradoxical tensions. The presence of conflict in and of itself is not good, and is very often bad; the presence of conflict in a culture with good institutions, which transform those conflicts into productive, creative tensions, gives rise to creativity and wealth. This means, of course, that we have to know what those “good institutions” are. As Sobel et al (2010) observed, this consists primarily of property rights protections, free markets, rule of law, free media, and which otherwise discourage political entrepreneurship and squelchers. Stability and instability, order and chaos will be kept in balance — how that balance is maintained, and whether it is beneficial or harmful, depends on the kinds of institutions present.

We have seen that the proper kinds of density and heterogeneity (with good institutions) increase knowledge. Knowledge increases creativity, resulting in more invention, which is disequilibrating in its role of creative destruction (Schumpeter, 1947). At the same time, knowledge in its role of arbitrage is coordinating and, thus equilibrating, since competition is a discovery process (Kirzner, 1997). As new knowledge (of new arbitrage opportunities or of new products) emerges, formerly coordinated actions are discoordinated as new coordinations form (Lachmann, 1981). Thus, the economy is always in the process of coordinating and discoordinating, equilibrating and diseqeualibrating. We have order and disorder coexisting, which is the realm of self-organizing criticality and creativity (Kauffman, 1993, 2008).

Yet we also see that, if we hold institutions more or less constant, low density leads to lower levels of economic growth than high density and high cultural homogeneity leads to lower levels of growth than high cultural heterogeneity. Which is no doubt why West Virginia, which has the least density and the highest homogeneity of any state, is the poorest state in the U.S. This continues to be true even as we become more apparently connected through the internet. While it is true that social networking sites allow us to create even more weak bonds, space continues to matter. My social connections on Facebook got me two adjunct professor offers that may have been able to lead to full-time positions at some point, but because of space — I am in Dallas, TX, and the jobs were in MA and NY — and because they were only part-time jobs, I could not accept them. Place still matters. And so does physical density. After all, “individual skills, cognitive capacities, and knowledge of specific external stimuli (e.g., facts, people, prices) depend on the spatiotemporal location, even if we accept that some skills are innate” (Andersson, 2005, p. 188). Facebook cannot replace face-to-face interactions.

Whether or not a city is in a far-from-equilibrium state, there seems little question that cities are anything but in a state of equilibrium, even if the steady-state is the only kind of equilibrium we consider. Cities are not in a steady state. They do simultaneously exhibit multiple equilibria, and disequilibrating and equilibrating conditions. The transition state(s) among these states is far-from-equilibrium. Creativity, which is mostly maximized in cities, is also a feature of the far-from-equilibrium state present in self-organized critical processes.

Spontaneous orders are a kind of transformative self-organized critical process, and cities are a kind of spontaneous order (Gordon and Ikeda, 2011). Self-organized critical processes exhibit power law distributions, which is yet another feature of cities, ranging from internal firm size and the lifespans of firms to city size distribution. Finally, self-organized critical processes have emergent properties, or patterns of behavior that cannot be predicted from the interactions of their parts. Among these is economic value, which Krugman argues is “an emergent consequence of a market process” (1996, p. 3). Patterns such power law distribution are also an emergent property. But most of these patterns, created by strange attractors exhibiting paradoxical tensions, are very complex and therefore difficult to discern. But then, Hayek (1952) did warn us that they would be, since a less complex process, like the mind, cannot fully understand a more complex process, like the economy.

All of this points to the high probability that cities are in a far-from-equilibrium state. Since the science of economics is dominated by equilibrium, we have the answer as to why mainstream economics has tended to ignore cities: they simply do not and have not had the proper conceptual system or theoretical apparatus to deal with the realities present in cities. But since cities are where the economic action is — a fact that has been true for far longer than our population has become majority urban — this necessarily means that much of our economics has been based on false premises. The economics of cities is economics. And that means, if we want to understand economics, we have to understand cities, which means we have to understand far-from-equilibrium processes.

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