In this blog post, we’ll examine why cities form and grow from the perspective of urban economics, and explore how factors such as the efficiency of trade and production, economies of scale, and the Industrial Revolution have shaped today’s major cities.
What Is a City?
Today, people around the world live in “cities”—political, economic, and cultural hubs ranging from major metropolises like Seoul, New York, Beijing, Tokyo, and London to countless small towns whose names we’ve never even heard of. People communicate and interact with one another within cities, and at times, this gives rise to various conflicts—both between cities and within them. In 1950, the urbanization rate—the proportion of the global population living in cities—was less than 30 percent, but today it has risen to a level far exceeding half of the world’s population. According to the United Nations’ “World Urbanization Prospects 2025,” when applying country-specific definitions of “cities,” the global urbanization rate is projected to be approximately 57.8% in 2025 and to reach about 67.3% by 2050. These figures are based on the latest data and represent an update from previous projections. South Korea is also a country with a high urbanization rate; based on UN data, the World Bank estimates that South Korea’s urban population ratio will reach approximately 81% in 2024. The urbanization rate is also used as an indicator to gauge a country’s level of economic and social development. Given that more than half of the world’s population already lives in cities, what are the reasons behind the continued pace of urbanization? Let’s examine this situation from the perspective of urban economics.
First, before exploring the rationale behind cities, we need to clarify what a city actually is. In urban economics, a city is viewed as a geographic space where a large number of people reside and economic activities are concentrated within a relatively limited area. In other words, it refers to an area with a higher population density compared to surrounding regions, and this definition comprehensively encompasses everything from small towns to massive metropolises. High population density means that people within a city can interact with one another more frequently than those scattered across surrounding areas. This implies that interactions among people engaged in different economic activities can yield positive effects. Furthermore, based on this definition of a city, we can see that the efficiency and benefits generated through economic activity are key factors that enable cities to exist.
Why Do Cities Exist?
“Why do cities exist?” is the most fundamental question in urban economics. To answer this question, urban economists begin by examining the conditions necessary for a city to exist. Looking back at the history of cities, several key conditions are necessary for a city to emerge. First, people living outside the city—that is, in rural areas—must produce a sufficient agricultural surplus to supply not only themselves but also urban residents. Second, urban residents must produce goods or services that can be exchanged for the agricultural surplus produced in rural areas. Finally, an efficient transportation system must exist to facilitate the exchange of these goods. These three conditions ultimately demonstrate that for a city to emerge, “exchange”—one of humanity’s most fundamental economic activities—must take place efficiently between the city and the countryside.
As we have seen above, cities emerge when economic activity is frequent and flows smoothly; to understand this in greater detail, it is necessary to grasp two fundamental propositions that are central to urban economics. The first is that “production operates under economies of scale.” Economies of scale occur when the average cost of production decreases as output increases. The reason average costs decrease as production volume increases is, first, that expensive equipment or factors of production—that is, indivisible factors of production—required to produce something can be utilized for multiple production processes in a single location. Furthermore, it is far more efficient for workers to specialize in specific tasks through a division of labor rather than each producing a single good from start to finish, thereby reducing production costs. Second is the principle that “competition brings economic profit to zero.” This means that in a market economy, as long as firms, producers, or sellers can earn economic profit, competitors will enter the market; consequently, competition continues until economic profit approaches zero in the long run. This does not mean that economic profit, in an absolute sense, yields no profit at all. Rather, it means that excess economic profit disappears, and firms reach a state where they can earn normal profits and sustain their operations.
How do trading cities and industrial cities form?
Let’s return to the point that economic activity is the fundamental condition for the emergence of cities and gain a deeper understanding of the causes of urbanization. Suppose there are two distinct regions prior to the emergence of a city. For the sake of convenience, let’s call these the Eastern Region and the Western Region. Assume that the Eastern Region is more efficient at producing bread than shirts, while the Western Region exhibits higher productivity in producing shirts than bread. In this case, rather than each region producing and consuming all the bread and shirts it needs on its own, if they focus on the goods in which they each have relatively higher productivity and trade with one another, they can reduce the effort and costs involved in producing bread and shirts. However, we cannot ignore the costs associated with exchange. Transportation costs and other additional expenses may arise depending on the distance, and if these costs exceed the benefits gained through exchange, trade between regions will ultimately not take place. At this point, we can reconsider the proposition that “production operates under economies of scale.” When transportation companies are established to transport goods between regions, they can utilize indispensable factors of production—such as large trucks or other modes of transportation—and, since transportation is carried out by specialized personnel, economies of scale can be achieved. Consequently, we can see that the costs of exchange are sufficiently reduced, enabling profitable trade between regions. These transportation companies tend to cluster around locations conducive to transportation, such as intersections, river confluences, or ports, which drives up land prices in these strategically advantageous locations. Furthermore, high population densities form to facilitate efficient land use, leading to the emergence of “trading cities.” These trading cities can be viewed as a very basic form of urban development. Another form of city is the “factory town.” If the eastern and western regions mentioned earlier decide to produce bread and shirts, respectively, they can also leverage economies of scale to further reduce the average cost of production.
Consequently, factories producing bread or shirts would flock to each region to generate profits, leading to a process where firms continue to locate there until economic profits disappear, in accordance with the proposition that “competition brings about economic profits.” This results in an influx of workers into the region, and as population density increases, a “factory town” is formed. Urban economics views these two types of cities as the predominant forms prior to the Industrial Revolution; it also considers the basic functions of cities—such as religious activities and defense against other regions—as one of the reasons for their existence.
How did the Industrial Revolution create megacities?
As described above, three innovations brought about by the Industrial Revolution can be cited as the background for the growth of these basic forms of small towns into the megacities we see today. First is innovation in agriculture. The development of agricultural tools and innovations in farming techniques significantly increased food production and raised per-farmer output, eliminating the need for large numbers of people to work in agriculture. Consequently, the population engaged in urban factories and commerce grew, playing a major role in the expansion of cities. The second was innovation in transportation. Advances in transportation expanded the speed and range of transport systems, helping to reduce shipping costs for factory-made goods and lower product prices, which in turn played a major role in the large-scale expansion of “factory cities.” Furthermore, these advancements significantly influenced the spatial reach of cities, leading to their gradual expansion. The third factor is innovation in production. Following the Industrial Revolution, factories shifted from producing entire goods to a system centered on mass production of components, and machines came to replace a significant portion of human labor. Consequently, production costs decreased while output increased substantially, leading to the growth of large-scale “factory cities.” For these reasons, cities continued to develop and expand, giving rise to the megacities we see today.
Will urbanization continue in the future?
To summarize, from the perspective of urban economics, the formation of cities can be seen as a result of humans pursuing efficiency while engaging in economic activities. Therefore, the urbanization currently underway is also highly likely to continue as long as economic activity and urban agglomeration persist. However, the global urbanization rate is not expected to continue increasing at the same pace as in the past but rather to proceed with significant regional variations. According to the latest projections from the United Nations, based on each country’s definition of an urban area, the global urbanization rate is expected to rise from 57.8% in 2025 to 67.3% in 2050. For the reasons outlined above, if cities continue to form and urbanization progresses, I cautiously predict that in the distant future, an even greater number of people living on Earth will enjoy the various conveniences and economic opportunities that cities provide.
