Friendships matter for urban economies

Updated: Dec 21, 2018

The culture and social structure of a metropolitan region is as important as it’s physical architecture and infrastructure, if not more so.

Economic development is a process of social interactions between people within and across organisations.

Yes people need the built environment to interact, but the nature of that interaction is a function of the culture and architecture of social relations within which each of us is embedded.

Initial factor endowments do not determine economic outcomes just as Lego pieces do not determine what they can produce.

But if people are unaware and passive observers of their unfolding collective destinies, their future becomes determined by the path they are on.

To be sure, factor endowments limit the scope of what is possible and the priorities that need attention, but the range of possible future outcomes is as broad as the imagination. People can pave their own path towards their imagined futures.

This is why the field of economic development has come to focus on innovation as the holy grail to economic success. Innovation is about imagining and co-creating our emerging future.

Ideas and innovation allow people to break out of passive path dependence and pro-actively shape their own destinies. This is what the error term is telling us in growth regressions.

Economic development emerges from combining and re-combining people, assets, resources and ideas within and across regions. This combinatory process is embedded in social relations.

By recognising the social context as the initial driver of urban and regional development, development practitioners gain awareness and visibility of a crucial dimension of the development process which we strive to guide towards greater public purpose.

This fact has spurred a huge body of research in the field of economic sociology and has spilled over into the fields of mainstream economics and economic geography.

The emergent theory from this school f thought is, at its most conceptual level, very simple and intuitive: Greater diversity, trust and cross-cutting social relations within communities and society, together with appropriate perspectives and world views are good for economic development.

Diverse and connected networks of people allow the fusion of different knowledge, perspectives and ideas, which are more likely to give rise to innovation and entrepreneurship.

The evidence substantiates this claim. I’ll use this opportunity to highlight a recent piece of research before I humbly present findings from our own research.

Tom Kemeny and Abigail Cooke’s recent research, through masterful use of econometrics, found that cities in the US that are more diverse and trusting enjoy higher income growth. This is a major finding which deserves attention, and their article is certainly worth a read (links below).

In my research published with Sage’s Environment and Planning C Journal, I analyse the structure of board interlocks amongst the 60–70 largest firms in the Bay Area and Southern California in 1980, 1995 and 2010.

This makes for an interesting comparison because over this period of three decades, the per-capita incomes of these two regions diverge significantly as both regions respond differently to the challenges and opportunities of the New Economy (the subject of our co-authored book, see previous Blog post).

With the support of my dedicated research assistants, we find that the social structure of the high-end business community in the Bay Area, a highly innovative and entrepreneurial region, maintains and in some measures increases its connectivity and diversity between 1980 and 2010 (see Figure 1 below).

The LA social structure on the other hand fragments as it slides down the US income hierarchy (From top-10 in 1980 to 29th in 2010. The Bay Area is #1).

Figure 1. (a) LA and SF networks of board interlocks, 1980 and (b) LA and SF networks of board interlock, 2010.

Source: Author’s calculations using UCINET14 and NET-Draw