DETROIT’S newest industry is “ruin porn”—photos that document the city’s rotting physical infrastructure. The Motor City is an extreme example of a decline that has beset industrial cities across America’s Midwest and northern Europe. Their rise and fall (and, in some cases, renaissance) illuminate the deeper forces that hold cities together and pull them apart.

It is not obvious, to economists anyway, that cities should exist at all. Crowds of people mean congestion and costly land and labour. But there are also well-known advantages to bunching up. When transport costs are sufficiently high a firm can spend more money shipping goods to clusters of consumers than it saves on cheap land and labour. Workers with specialised skills flock to such clusters to be near to the sorts of firms that hire them. Such workers make a city still more attractive to growing companies. The deep pool of jobs and workers improves matches between employer and employee, boosting productivity and pay.

There are benefits to being close to the competition, too. In the car industry’s early days Detroit’s entrepreneurs kept a close eye on rivals, learning to tweak designs and business models until a lucky few succeeded spectacularly. Silicon Valley’s technological metabolism is powered by similar competitive co-operation.

When new firms or workers create more value for other residents than they add to the costs of congestion, a city enjoys what economists call “increasing returns to scale”: a metropolis becomes more attractive and productive as it grows. Increasing returns are a recipe for breathtaking growth. From 1880 to 1940 the population of the Detroit metropolitan area grew by nearly 1,300%. Population growth often slows as housing and congestion costs rise (although investments in housing and infrastructure can keep the engine going). But big shifts in the cost of doing business can destroy a city’s gravitational pull altogether.

The inflation-adjusted cost of moving goods fell by 90% during the 20th century. Cheaper transport meant firms no longer needed to crowd together to gain access to deep markets, and could move to places with cheaper land and labour. Factories decamped from city centres to suburbs, and thence to poorer regions and abroad. Industry maturation helped the process along. As carmakers evolved from disruptive entrepreneurs into staid blue-chip firms, for example, the opportunities for employment and income growth that industrial cities offered also grew more slowly, deflecting migrants to more enticing places.

Once started, a slump can develop a life of its own. The erosion of the local tax base amplifies decay because it leads local governments to raise taxes and cut public services. As finances deteriorate municipal borrowing becomes more costly, crimping investment. The city of Detroit has been doubly battered by this process, suffering from both the loss of richer households to the suburbs and the decline of the wider metropolitan area. Its bankruptcy is the endpoint of a fiscal death spiral.

Decline may also create a poverty trap. In a 2005 paper* Edward Glaeser of Harvard University and Joseph Gyourko of the University of Pennsylvania note that the housing built during a city’s boom era does not vanish overnight. Rather, it adds to a supply overhang that depresses prices as the economy sags. When housing prices drop below construction costs new building activity screeches to a halt, and the overall housing stock deteriorates. Tumbling prices attract poorer and less-skilled workers from other places, Messrs Glaeser and Gyourko reckon. The increasing attractiveness of the city to the poor and less productive slows the process of depopulation but it reduces the odds that the city can stage a turnaround.

In Detroit chronically bad government further worsened chances of a revival. But misfortune is not always terminal. Nearly all the rich world’s industrial cities fell on hard times between 1950 and 1980, but some, including Boston, New York and London, rebounded soon after. Hardscrabble places like Baltimore, Pittsburgh and Liverpool have also enjoyed revivals.

In a new paper Gilles Duranton of the University of Pennsylvania and Diego Puga of the Centre for Monetary and Financial Studies in Madrid suggest that a pool of skilled workers and a diverse economy are among the best predictors of long-run success. Such characteristics offer cities the best hope of stumbling on new sources of increasing returns to scale.

Falling transport and communication costs gutted New York’s textile-manufacturing industries, for instance, by allowing lower-cost rivals to compete. But these forces also increased the return to the city’s knowledge industries, like fashion, media and finance. Technology made it easier to move money around the world but both finance firms and workers chose to stick close to hubs—to stay abreast of trade practices, to be near business-services firms, and to find the best job matches. New York, London and regional centres were the beneficiaries.

Smokestacks and ivory towers

In Pittsburgh and Baltimore grand research universities provided both the economic diversity and the skills base to launch new technological and life-science clusters. Detroit, by contrast, seems a victim of its own success. Its dominant carmakers created a one-industry town; their robust demand for blue-collar workers at good wages stunted the supply of workers with other sorts of skills. Henry Ford also neglected to provide the city with a major university to match the one that Andrew Carnegie and Andrew Mellon, two other industrial barons, gave to Pittsburgh. Industrial cities unlucky enough to lack new sources of economic fuel may discover that decline is inevitable.

Sources

"Cities, regions and the decline in transport costs", Edward Glaeser and Janet Kohlhase, Papers in Regional Science, 2004

"Urban decline and durable housing", Edward Glaeser and Joseph Gyourko, Journal of Political Economy, April 2005

"Did the death of distance hurt Detroit and help New York?", Edward Glaeser and Giacomo Ponzetto,Agglomeration Economics, 2010

"The growth of cities", Gilles Duranton and Diego Puga, CEPR Discussion Paper, August 2013