Why are people more productive in big cities?

A big city makes people more productive because being near lots of other workers and firms lowers costs and speeds up learning. Economists call this agglomeration: the advantages that arise when firms, workers and customers are located near one another. In one OECD study, doubling a city's population went with roughly a 2 to 5 percent rise in productivity.

Notice the odd part. A firm can benefit from the crowd around it even if the firm itself stays small. The economy around it does the work, which is why economists call these external economies of scale.

The mechanisms fall into three groups: sharing, matching and learning. Sharing: many firms can support specialized suppliers and facilities that none could afford alone. Matching: in a bigger job market, employers are more likely to find the exact skills they need, and workers a job that suits them. Learning: ideas spread through people who change jobs, through suppliers and customers, and through plain conversation.

A classic illustration is Silicon Valley. In 1957, eight engineers walked out of William Shockley's company to found Fairchild Semiconductor. Shockley called them the "traitorous eight". Two of the eight, Robert Noyce and Gordon Moore, later founded Intel. A worker who can quit and start something next door is agglomeration in action.

Crowding also has costs: congestion, high land and housing prices, pollution. The balance between the two helps decide how big and how dense a city gets.