Chapter.2WhyDoCitiesExist?21THEINDUSTRIALREVOLUTIONANDFACTORYCITIESOur simple modelof thefactorycity suggests that a factory citydevelops becausescale economies make factory shirts cheaper than homemade shirts.The Indus-trial Revolution of the 19th century produced innovations in manufacturing andtransportationthat shiftedproduction fromthehome and the small shoptolargefactories in industrial cities. In contrast to the earlier trading cities, workers infactorycities produced products ratherthan simplydistributingproducts producedelsewhere.Innovations in ManufacturingOne of the key innovations of the Industrial Revolution was Eli Whitney's systemofinterchangeable parts formanufacturing,developed around 1800.Under thetra-ditional craftsman approach,thecomponentpartsofa particular productweremadeindividually—and imprecisely.Skilled craftsmen were necessary to produce theparts and then fit them all together.Under Whitney's system, the producer made alargebatchofeachpart,usingprecisemachinetoolstogenerateidenticalparts.Theidentical parts were interchangeable, so unskilled workers could be quicklytrainedto assemble the parts.The replacement of handcraft production with standardizedproduction generated large scale economies, causing the development of factoriesand factory cities.Whitney appliedthis system to the production of muskets for the army.To provetoPresident-electJeffersonandothergovernmentofficialsthathissystemwouldworkwithunskilledlabor,heunloadedarandomcollectionof partsontothefloorand had the officials assemble the muskets.He got the contractto manufacture10,000 muskets and built a factory in New Haven, Connecticut, close to a streamthathe used to powerthefactory.His system,which becameknown as the AmericanSystemofManufacturing,became thestandard systemfor massproduction.Thenewsystemofmanufacturingcausedthedevelopmentof factorycitiesNew machines,made ofiron instead of wood, weredeveloped tofabricateproductsin large factories. Manual production by skilled artisans was replaced by mecha-nized production using interchangeableparts,specializedlabor,andsteam-poweredmachines.Mass production decreased therelative cost offactorygoods,causing thecentralization of production and employment in large industrial cities.As an illustration of the role of scale economies in the development of cities,considerthe sewingmachine,whichwas developed inthemiddleof the 19th cen-tury. At the beginning of the century, about four-fifths of the clothing worn in theUnitedStateswashand-sewn inthehomeformembersofthehousehold,andtherestwashand-sewnbytailors.Thesewingmachine(patentedin1846)allowedfac-toriestounderpricehomeproducers,andby1890 nine-tenths of U.S.clothingwasbeing made in factories.New cities developed around the clothing factories.Asimilar storylineapplies to shoes.Before1700,mostshoes were producedin thehome or thelocal village.The cost of transportation was sohigh that localproduction was efficient.Over time,transportation costs decreased,and the putting-outsystemwasimplementedinthe170Os:Shoeproducersdistributedrawmaterialsto cottage workers, collected their rough output, and finished the shoes in a centralshop.As new shoemaking machines were developed, the number of operations per-formed inthecentral shopsincreased.TheMcKay sewingmachine(forwhichapatentwas granted to Lyman Blake in 1858)mechanized the process of sewing the
22Part 1MarketForces in the Development of Citiessoles to theuppers.The scale economies in shoe production increased to the pointthatshopsbecamegenuinefactories,andcitiesdevelopedaroundtheshoefactories.Innovations in TransportationInnovations in intercity transportation contributed to industrialization and urban-ization.As we saw earlier in the chapter, the dirt roads of the 1700s were replacedby turnpikes, and the construction of canals allowed a more dense network of in-land watertransport.Thedevelopmentof thesteamshipallowedtwo-waytravelonmajor rivers, and the railroad system increased the speed and reach of the transpor-tation system.Allof these innovationsdecreasedthe relativepriceof factorygoods,contributingtothegrowthoffactorycities.Innovations in AgricultureOne of the three conditions for the development of cities is an agricultural surplustofeedcitydwellers.TheIndustrialRevolutiongeneratedanumberof innovationsthat increased agricultural productivity.Farmers substituted machineryformusclepower and simple tools,increasing the output perfarmer.The increased agriculturalproductivityfreedpeopletowork inurbanfactoriesandcommercial firms.Between1800and1900,theshareofthepopulationlivingincitiesincreasedfrom6percentto35percent,reflectingthedecreaseinthenumberofagriculturalworkersrequiredtofeedcitydwellersConsider first the sowing side of agriculture.At the start of the 19th century,plowswerefragile,awkward,andoftenmadeof wood.Theseinefficientplowswerereplacedinthe183Osbythecast-ironplow,whichwasproducedinfactoriesinPittsburghand Worcester.Inthe184Os,JohnDeereintroducedthesteelplow,which was lighter,stronger,and easier to handle.Later innovations allowed thefarmerto adjust the depth and angle of the plow blade,increasing productivityfurther.Consider next the reaping side of agriculture.In 1831,McCormick combinedseveral earlierinnovations intoahorse-drawnharvestingmachinethatincreased theproductivity of the most labor-intensive part of agriculture.Using a horse-drawnreaper,twopeoplecouldharvest the same amount of grain as eightpeopleusingtraditional harvesting methods.Other innovations contributed to higher agricultural productivity.The develop-ment of agricultural science led to innovations in planting,growing,harvesting,and processing.Innovations in transportation cut transport costs and allowed eachfarmer to serve a wider market area. Because of rising productivity,the share ofemploymentinagriculturedecreasedoverthe19thand20thcenturies,fromover90percenttolessthan3percent.EnergyTechnologyandLocationDecisionsDuring the Industrial Revolution, the location pattern of factory cities reflectedchanges in energy technology. The first factories used waterwheels turned bywaterfalls and fast-moving streams to translate moving water into mechanicalmotion.The power was transmitted by systems of belts and gears.Textilemanufacturersbuiltfactories alongbackcountry streams inNewEngland and used
Chapter2Why Do Cities Exist?23waterwheels to run their machines.Some examples of waterwheelcities are Lowell,Lawrence,Holyoke,and Lewiston.The refinement of the steamengine in the second half of the 19th centurymadeenergyatransportableinput.AkeyinnovationwasJohnMcNaught'sdevelopmentof acompoundingengine(usingsteamtwice,atdescendingpressures,todrivepistons) in 1845.The steam engine could be operated anywhere,with the onlyconstraint being the availability of coal to fuel the engine.Some energy-intensivemanufacturers located near the coal mines in Pennsylvania.Others located alongnavigable waterways and shipped coal from the mines to their factories.InNewEngland,textilefirms shifted from backcountry waterfall sites to locationsalong navigable waterways.Production shifted to theFall River-NewBedford areaalong the southcoastof NewEngland.The later development of the railroad gavecoalusers anothertransportoption,causingthedevelopmentoffactories along thevast network of rail lines.In general,the steam engine widened thelocation optionsforfactoriesThedevelopment of electricity changed the location patterns of factories.Elec-tricitygenerators were refined in the1860s, and the electric motor was developedin 1888.Factories replaced belt-and-gear systems driven by a central steam enginewith small electricmotorsforindividual machines.The first factoryto use electricpower was adjacent to a hydroelectric generating facility at Niagara Falls.Rapidimprovements intheelectricitytransmission soonallowedfactoriestobehundredsofmilesfromhydroelectricandcoal-poweredgeneratingplants.Between19o0and1920,the shareoffactoryhorsepowerfromelectricmotors increasedfrom2percentto33percent.The development of electricitymadefactorices morefootloose.Afirm could tapwater power without locating close to the stream and use coal without shipping thebulkyfueltothefactory.Ingeneral,the developmentof electricitydecreased theimportance of energyconsiderations in location decisions,causing firmstobasetheirlocationchoices on theaccessibilityto other inputs andto consumers.ASYSTEMOFFACTORYCITIESWe can widen our horizon by looking at the entire region and consider the possibil-ity of additional factory cities.Firms can enter the shirt industry by building shirtfactories atdifferent locations,and each firm willhave alocal monopoly in the areasurroundingitsfactory.Recallthefifthaxiomofurbaneconomics:CompetitiongenerateszeroeconomicprofitIf there are no restrictions on entry, firms will continue to enter the market untileconomicprofitiszeroFigure 2-2 (page 24) shows the equilibrium in the region.The horizontal axismeasures distancefrom a coastline.Therectangularregion is 48mileswide,andin equilibriumhas threeshirtfactories,each witha market area 16mileswide.Themarket areas of thefactories span theregion:Everylocation in theregion lieswithinthemarketarea of somefactory.Thereis completelabor specialization:Workers infactorycitiesproduceshirts(andreceivebreadaswages),and workersinrural areasproducebread (and paybread togetfactory shirts).This is an equilibrium because each firm makes zero economic profit and work-ersareindifferentbetweenruralandcitylife:
24Part1MarketForces intheDevelopmentof CitiesFIGURE2-2SystemofFactoryCitiesCost of homemadeNet price of factory shirteaio1shirt24/12--16404882432Distancefrom coastlineEachfactory'smarketarea is16miles wide,so asystemoffactory cities developswithadistanceof 16miles berween cities,Inthis equilibrium,workers specialize,withshirtworkers in cities and bread producers in rural areas betweenthe citiesZero economic profit.The factoryprice of 4/12loaf equals the average cost.ofproducingshirts,includingthecostofurbanworkersandthecostofindivis-ibleinputs.Locational indifference for workers.The wage for factory workers is highenoughtocover(1)theopportunitycostofworkinginfactoriesratherthanpro-ducing bread in therural area and (2)the higher cost of urban living (land rent)What about rural residents? For a rural resident just outside the factory cities,thenetpriceofafactoryshirtis4/12loafofbread,comparedtoahomemadecostof one loaf.At the other extreme, a rural household eight miles from the factorypays a net priceof one loaf per shirt (4/12+8/12 in travel cost).Recall the firstaxiomofurbaneconomics:PricesadjusttoensurelocationalequilibriumInthiscase,thepriceof land inrural areas will adjusttomakepeopleindifferentbetween locations that differ in their accessibility to the shirt factory.The shorterthe distanceto thefactory,the lowerthe netprice of factory shirts,and themoreahousehold is willing to payforland.In other words,the price of land adjusts tofullycompensatefordifferencesinaccessibility.Landowners benefit from the scale economies in production that generate theregional system of factory cities. In the rural areas, the price of land is higher atlocations close to the factory city.In the factory city itself,competition amongworkers forlocationsnearthefactorybids upthepriceofland.RESOURCES-ORIENTEDFIRMSANDPROCESSINGCITIESUpto this point,wehave ignored the cost of transporting the raw materialsrequiredto produce urban goods (shirts).We have implicitly assumed that factory workersharvest wool from wild sheep who wander by the factory at just the righttimetobe shearedfor shirts.Inthelanguage of urban economics,wehaveassumedthatthe raw materials requiredfor production are ubiquitous-available atall locationsatthesameprice.This is anextremecaseofamarket-oriented industry,definedas
Chapter 2Why Do Cities Exist?25an industry in which the cost oftransporting output is large relative to the cost oftransporting inputs.The Appendix to this chapter explores the location decisions ofmarket-oriented firms.Consider theoppositeextreme.Suppose it is costlytotransport material inputs,but output can be transported at zero cost.This is the extreme case of a materials-oriented industry,defined as an industryfor which the cost of transporting materialinputs is largerelative to the cost oftransporting output.TheAppendix to this chapterexploresthelocation decisions of materials-oriented firms.Forexample,thesugar contentof sugarbeets is roughlyI5percent,so ittakes seventons of beetstoproduce one ton of sugar.Beet-sugarfirms locate theirplants close to the beet fieldsto economizeontransportcosts (HolmesandStevens,2o04).Beet-sugarproducers will cluster in the regions of the country where weather and soil conditions arefavorablefortheproductionofsugarbeets.ScaleEconomiesandMarketAreasThe process of transforming sugar beets into sugar is subject to scale economies.Processors use indivisible inputs and engage in factor substitution,so theaverageprocessing costsdecreaseasthequantityincreases.Thetypical sugar-beetprocess-ingplant employs186workers,aboutfourtimes the averagenumberof employeesper plant in manufacturing.The market area of a processing plant is determined by the net price farmersreceive.Thenetpriceequalsthepricepaid bytheprocessorminusthecostoftrans-porting the beets from thefarm to the processing plant.InFigure 2-3,the horizontalaxis measures the distance from a coastline.Consider a processing plant located40milesfromthecoastline.Ifthepricepaidbytheprocessoriss4o,thenetpriceis s40forafarmeracrosstheroad fromtheprocessor(pointf),anddropsto$35for a farmer20miles away (pointg).Farmers naturally sell to the processingplantthat generates the highest netprice,so this processing plant has a marketfrom thecoastlineto80miles inland.Figure2-3showsaregional equilibrium withthreeprocessingplants,eachwith amarket areaof 80miles.Each firmisthe singlebuyerof sugar beets withinFIGURE2-3Systemof ProcessingCities40aaoraoNet price of beet3016020024080120204060Distance fromcoastlineThe net price of beets (received by farmers) decreases as the distance to the processingplant increases. The market area of the typical sugar-beet processing plant is 80 mileswide, so a system of processing cities develops with a distance of 80 miles between them