Economies of agglomeration

In Economists need to learn where we're at Ross Gittins writes about the work of economic geographers who "have long known there's also a lot of economic logic to where people settle" and the benefits of economies of agglomeration.

A couple of points from this column. Firstly there are economic benefits to having workers in a knowledge industry close to each other:

Being close to suppliers, customers and rivals helps businesses generate new business opportunities and ideas for products and services, and better ways of working. These transfers of expertise, new ideas and process improvements that occur through interactions between businesses are called ''knowledge spillovers'' (a class of ''positive externality'').

Within cities, CBDs and inner-city areas offer the most opportunities for face-to-face contact among workers, essential to benefiting from knowledge spillovers. Spillovers often involve combining and recombining knowledge to come up with new products and ways of working.

Workers build on each other's thoughts, jointly solve problems and break through impasses. Trust is essential, and these kinds of complex conversations are best had in person.

''High-speed broadband and other advances in communication technologies will never replace the importance of face-to-face contact,'' we're told.

Secondly transport infrastructure may limit the economic benefits of agglomeration:

Grattan's research finds that residential patterns and transport systems mean CBD employers have access to only a limited proportion of workers in metropolitan areas. Turning that around, many workers, particularly in outer suburbs, have access to only a small proportion of jobs across the city. For instance, in some outer suburban growth areas of Melbourne, just 10 per cent of the city's jobs can be reached within a 45-minute drive. If work journeys are made by public transport it's worse.

The report warns that unless governments lift their game, ''Australian cities are likely to continue to spread outwards, further increasing the distance between where many people live and the most productive parts of large cities.'' This would harm productivity - and workers' opportunity to get ahead.

The point is, governments need to understand the economy's spatial dimension and respond by ensuring transport networks better connect employees with employers, and businesses with their customers and suppliers. Continue letting congestion worsen and you cause productivity to be lower than otherwise, not to mention adding misery to people's lives.