THE 15% CLUB

Apr 24, 2018
Michael Matusik

Cities are the cause of the good life.  They are the centres of wealth creation, creativity, innovation, and invention.  They’re the exciting places.  They are these magnets that suck people in.

This post I want to continue our conversation about the Gold Coast and I want to discuss the concepts of ‘economies of scale’ and ‘returns to scale’.

This is what I call ‘The 15% club’.

My comments here aren’t exclusive, by any means, to just the Gold Coast.  They can apply anywhere where considerable population growth and urbanisation is taking place.  But they are very applicable to the Gold Coast.

5thand 6thplace

Let’s just pause for a second and consider just how extensive the Gold Coast has become.

It is the country’s 5th biggest tourist market and the 6th largest urban area.

When it comes to permanent residents some 600,000 people now live on the Gold Coast.  The local population is projected to grow by 12,500 new residents per annum, possibly reaching 700,000 permanent residents within the next decade.  Looking back, the local population has increased by 100% (doubled in size) over the last 20 years.

And the tourist numbers are even more impressive with 5 million tourists staying overnight on the Gold Coast in 2017.  They stayed for a total of 24 million nights.  This market is growing by 350,000 tourists (7%) per annum.

So, it is fair to say that the Gold Coast has a fair bit of grunt these days.

It is undergoing a process of urbanisation and a somewhat rapid one.

In a recent book physicist Geoffrey West has shown that there are both economies of scale (in infrastructure) and increasing returns to scale (in human creativity) from the process of urbanisation.

In his words: “Cities are … the cause of the good life.  They are the centres of wealth creation, creativity, innovation, and invention.  They’re the exciting places.  They are these magnets that suck people in.”

Economies of scale 

West and his colleagues at the Santa Fe Institute have identified two noteworthy statistical regularities.

First, “every infrastructural quantity…from total length of roadways, to the provision of sewers, to the number of buses needed… is scaled in the same way.”

That is to say, the bigger the city, the fewer the things that are needed per head of population.

And the economy of scale has a fairly consistent exponent of around 0.85. This means that, when a city’s population increases by 100%, it needs to increase the number of things per capita by only 85%.

Returns to scale

Secondly, and more surprisingly, is the socioeconomic impact – things like wages and the number of jobs, educational institutions, cafes, restaurants, shops and services etc. are upwardly scaled.

Instead of being an exponent less than one, indicating economies of scale, the exponent is bigger than one, indicating increasing returns to scale.

That says that systematically, the bigger the city, the more wages you can expect, the more educational institutions in principle, the more cultural events, the more jobs are produced and so forth.

In short, bigger places are more innovative.

The 15% Club

According to West’s work this seems to apply to nearly all places undergoing urbanization and more remarkably, all to the same degree.

There was a universal exponent which turned out to be approximately 1.15, which says something like the following:

If you double the size of a city, from say 300,000 people to 600,000 as in the Gold Coast’s case over the last 20 years, you get a 15% increase in productivity, jobs and wages (per capita) plus you get orderly 15% saving in length of roads and other general infrastructure needed.

People even walk disproportionately faster in big urban places than in small ones.  There is a wider range of possible jobs to do.  This is largely to do with bigger networks.

And this is why we are seeing population growth, not only in Australia, but elsewhere in the world, concentrate in a select few areas.  Cities are becoming bigger.  Big cities are becoming mega ones. This trend is expect to escalate.

End note

The Gold Coast is no longer a small coastal market.  It is undergoing substantial urbanization.

It is an active member of The 15% Club.

It acts like a capital city.  No scrub that.  It has become one.


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Michael Matusik

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