The Future of the Center: The Core City in the New Economy Research

Joel Kotkin

November 1999

PART 3: ROOTS OF RECOVERY I: THE KNOWLEDGE-VALUE ECONOMY

Even as cities such as Detroit and St. Louis struggle to recover, the seed-corn of an urban renaissance has been planted in other urban centers. This recovery has its basis in a confluence of demographic, technological, and economic factors that have keyed the resurgence of downtowns and urban cores across the country.

Perhaps the most important has been the growth of an information-based economy and, equally important, a secular shift within it. Long associated with suburban expansion, the nature of the emerging postindustrial economy now draws heavily on the very attributes that have characterized cities since the beginnings of civilization. As society becomes ever more information based, what sociologist Simmel identified as the psychological characteristics of urbanites (i.e., intellectualism, individualism, and the ability to abstract economic relationships) arguably gain more pertinence.

This unique conjunction between urban culture and the emerging postindustrial economy will be nurtured and developed by the successful cities of the future. Fortunately, in many cities, the basis for future success already exists, virtually in vitro, with the genetic code already imprinted on their DNA.

The neoRenaissance reconstruction of cities marks a major departure from the supposedly grim fate of metropolis in the postindustrial era. As early as the 1970s the development of science-based industries—most provocatively described by sociologist Daniel Bell—suggested the emergence of a high-tech society where information supplants energy and conventional manufacturing as the critical source of wealth. By the 1970s, the shape of this society was already quite evident, particularly in places such as California and the eastern seaboard.

At first the result of this shift appeared distinctly hostile to the very idea of cities. The ascendancy of science-based industry over traditional manufacturing created a new paradigm in economic development, shifting emphasis from the traditional urban center's ports, railroads, and large pools of manual labor to those places where concentrations of educated workers could be lured and harnessed. Anchored by complex organizations with vast research and development capabilities, the emerging science-based industries early on gravitated not to core cities but to the suburban and even hinterland areas such as Raleigh-Durham, the Santa Clara Valley, Orange County, the Route 128 area outside Boston, and northeastern New Jersey.

At the onset of the new millennium, this shift has produced two consequences largely unpredicted during early transition to the postindustrial area. Although often strictly suburban or even rural at the time of their development, these science-based regions have become increasingly dependent on the close interaction characteristic of urban areas since antiquity. Despite the shift to digital communications advanced industries, even the most "wired," have displayed a powerful need to congregate and network, as can be seen in places such as Silicon Valley, the Houston "Energy Corridor," or the Southern California entertainment complex.

To be sure, these new urban agglomerations do not appear to function like traditional urban areas. They are, among other things, less tied to a defined center, multipolared, and dispersed. Mumford saw Los Angeles as "an undifferentiated mass of houses" headed towards a hellish future dominated by its own automobiles. The City of Angels, for the great urbanist Jane Jacobs, seemed a peculiarly devilish place, wracked by crime, smog, automobiles, "a deathless place for children utterly lacking in proper civic life."

This unique conjunction between urban culture and the emerging postindustrial economy will be nurtured and developed by the successful cities of the future.

Yet in reality, the multipolar metropolis—epitomized by cities such as Los Angeles, Houston, Dallas, San Jose, and Phoenix—represent less the antithesis of urbanism, than its further evolution. In many of these areas, the function of the center is in many ways also being assumed by their older suburbs. These older suburbs have evolved into what can best be characterized as midopolis, a kind of a new "middle landscape," suburban in outward character but increasingly cosmopolitan and city-like, becoming ever more ethnically diverse, dependent on a growing sense of place and proximity, albeit defined in vehicular, not walking, distance.

Second, and perhaps even less expected, the digital economy's continuing tendency to seek central points of contact creates the basis for a new, and potentially sustaining, role for the traditional urban center. Cities have benefited most particularly by the increasing importance of culture-based content in the evolving new economy. In contrast to the first phase of "post-industrialism" which focused on the rising influence of quantifiable "hard sciences" such as physics, chemistry, electrical and mechanical engineering, the emerging second phase of the digital economy encompasses a whole host of subjective skills more suited to the natural advantages of dense urban areas.

This stems, in large part, from the changes within the digital economy itself. In a trend first identified by Alvin and Heidi Toffler in the 1970s, the postindustrial economy did not, as had been previously thought, serve only as agent of standardization and corporate bureaucracy but also a new economy characterized by customized production, organizational flexibility, and individualized production. This new economy, it turned out, had not only a "hard" but also a "soft" face.

One indication of this change has been gradual shift of high-technology employment away from manufacturing to services. Unlike the "hard" side, with its rationalistic and quantifiable characteristics, this "soft" side intersects increasingly with such fundamentally subjective fields as entertainment, fashion, media, and leisure industries. Although the traditional "hard" industries remain a critical element of the emerging information-age economy, increasing importance lies in those areas where the two converge.

"Knowledge value" represents perhaps the most useful term to describe this convergence. Japanese economist Taichi Sakaiya developed the concept of "knowledge value." Rather than simply a function of superior "high technology," Sakaiya predicted future economic growth would accrue to those nations, regions, industries, or firms adept at incorporating cultural "knowledge," design distinctiveness, and fashionability into products or services. As Sakaiya noted in his landmark book, The Knowledge Value Revolution:

The significant criteria for the people of the next epoch will not be simplistic, reductive measurements of the quantity of goods or efficiency rates of services; they will be subjective criteria that conform to the ethos of the groups to which particular individuals sense they belong.

Traditional cities have proven remarkably adept at exploiting such "knowledge value" industries. Their historic role as places of dynamic interaction provides cities with the ability to help to define "the social setting value" of products in a whole realm of industries from high-end business services such as advertising to fashion, entertainment, and merchandising. The proliferation of live theater, opera, and new art museums has also tended to work in favor of cities, as a way of luring skilled creative workers, as well as visiting business people and tourists.

Particularly critical to the resurgence of the city economy has been the expanding role of media-related industries. By the mid-1990s firms in the new media-related fields were, on average, adding jobs at double-digit rates and enjoyed revenues per employee better than twice that of Fortune 500 companies. Even older media, like books, have enjoyed an enormous growth, with 430 more volumes published in 1995 than in the early 1980s. Overall, entertainment-related spending in the United States rose from $185 billion in 1995 to a projected $257 billion in 2000.

Urban areas, with their confluence of design, fashion, entertainment, and publishing, are unquestionably best suited to incubate the firms and industries to service this growing and diversifying market. Cities with low rates of start-ups, such as New York or Philadelphia, have nevertheless experienced rapid growth in these generally high-wage, culturally related fields. In the decade between 1982 and 1995, a time of precipitous drops in virtually all other employment fields in Philadelphia, publishing employment grew and advertising jobs rose smartly.

Increasingly cities can thrive in these "knowledge value" niches even as they continue to lose corporate headquarters. One of the fundamental characteristics of what historian Manuel Castells calls "informationalism" has been a "shift from centralized large corporations to decentralized units made up of a plurality of sizes and forms of organizational units." Since various aspects of a task can be linked by internet and other advanced communications, the necessity to do them all in one place has diminished. Larger firms may control more cash, but they tend to distribute their workload across a broader network of suppliers more Venetian than 1980s Gotham:

The new coordination technologies enable us to return to the pre-industrial organizational model of tiny autonomous businesses—businesses of one or a few —conducting transactions with each other in the market. But there's one crucial difference: electronic networks enable these microbusinesses to tap into global reservoirs of information, expertise and financing that used to be available only to large companies.

This diversification of function—combined with patterns of locational preference—underlies the transfer of key growth sectors to the urban geography. At such firms, most tasks are performed on a more project-by-project ad hoc basis, requiring the input of a diverse, often contingent workforce. Since the ability to marshal various elements quickly can make the difference between success and failure, there is often an intense motivation to locate close to a concentration of specialized firms and professionals, who can be called upon in short order to perform highly particular tasks. Jonathan Katz, founder of Cinnabar, one of Hollywood's premier prop-makers, observes:

Most people in the film business are organized on specific projects and you can't do that in Orlando or Chicago. We start a film on Friday. You have to have the resources and have a team on Monday available.

This decentralized, heavily networked model of production, in modern times, perfected by the Hollywood entertainment industry, has spread to other industries, notably multimedia production. Over the past decade this cultural industrial complex—which brings together Internet, entertainment, and computer-aided graphics—has mushroomed within a heavily urban environment. The multimedia industry, for example, which barely existed a decade ago, has concentrated most heavily in three cities, including Los Angeles (with 120,000 workers) and San Francisco and New York (with roughly 60,000 workers each).

The growth of such industries has profound geographical consequences, particularly for older districts in cities (see Table 1). Over the past decade, for example, many areas once associated with Los Angeles aerospace industry—most particularly in areas such as Glendale, Burbank, Culver City, as well as the coastal sections of Los Angeles—have been re-invented as dense clusters of entertainment, digital effects, and internet-related firms. These firms, like their counterparts in lower Manhattan, also see benefits in locating close to traditional media and advertising companies, who often play a critical role in marketing efforts. These areas, along with San Jose and Boston areas, also boast the largest number of internet hosts.

The need for proximity in these industries also helps explain the massive concentration of new industries—such as virtual reality, web-site development, digital imaging, and computerized animation and multimedia—in urban areas. Contrary to 1960s notions, such as those developed by French sociologist Alain Touraine, who saw a "lessening" in social relationships as a result of the postindustrial society, these new industries are largely sustained by interaction between specific groups who seek out, and find each other, uniquely in the urban milieu.

New businesses in this field generally share the particular architectural preferences of the emerging digital industries and usually locate in older factory or warehouse buildings not in high-rise offices. In Los Angeles, many have moved into the same sprawling facilities formerly used by aircraft and space firms; in Manhattan and other older cities, firms that once insisted on downtown prestige addresses by the late 1990s were relocating to the more open air, high-ceiling environments left behind by warehousing and light manufacturing firms. Such space, explains designer Marty Herz, President of New York-based Environetics Group, "lend themselves to the exchange of group creativity."

It is a matter of community spirit, an ambience that attracts both entrepreneurs and the people they need to build their companies.

But it is not just aesthetics of an individual firm that drive the growth of knowledge-value firms. It is also a matter of a community spirit, an ambience that attracts both entrepreneurs and the people they need to build their companies. Industries that attract highly mobile workers, such as animators, graphic artists, or software writers increasingly need to offer them a "place" that is appealing, exciting, and gives off the requisite "buzz."

Such "hot" districts now proliferate across the country, often in areas that just years earlier seemed consigned to oblivion; this is true throughout much of the western portions of Lower Manhattan, San Francisco's South of Market district and Seattle's Belltown. Not long ago, however, one such area, near Boston's South Station, was little more than a neglected relic of the city's industrial past. In the late 19th and early 20th centuries, the "leather district" adjacent to the station and the nearby Fort Point section once had been vibrant centers of the city's port trade, fishing, textile, and most particularly, the shoe industry. By 1872, it was home to roughly 300 wholesale leather dealers, 189 leather concerns, and one hundred related businesses.

The later decades of the 20th century brought with them a pattern of seemingly irresistible decline. Yet as industrial employers left, artists began to move into the deserted and now inexpensive warehouses and factories. Art galleries proliferated, and chic small cafes began to sprout up amidst the gritty greasy spoons, which served the remnants of the industrial community.

The Emergence of Boston's Cyber District

As the Boston economy recovered in the mid-1990s, the generally lower rents and the artsy ambience began to attract specialized media, advertising, and internet-software firms. High-income professionals working in these industries also began to move in. By 1999, condominiums and offices that were going for $100 a square foot, nearly three times the price five years earlier. Sitting in a restored old leather warehouse on South Street, Israeli-born real estate developer Ori Ron, one of the key players in what is now known as Boston's "cyber district," recalls:

When I bought this building people looked at me as the crazy Israeli who bought this building. … Then the artists and photographers discovered what great space this is. Then restaurants and nightclubs were looking for this kind of space. Now there are the Internet companies—people who are looking for space like this—they want something different.¹

At millennium's end, the old "leather district" teems with high-tech firms that employ an estimated 3,000 computer, Internet, and other information-related workers. Once neglected, the area around the South Station, extending all the way to the Fort Point Channel, has become a postindustrial beehive of activity, where the artisans of the digital age share ideas over sandwiches and coffee.

Such an atmosphere attracts entrepreneurs such as 30-year old Rebecca Donovan, an MIT graduate who formerly worked for large firms such as Salomon Brothers, Viacom, and Fox. Donovan chose to launch her Opholio, an on-line picture agency, in Boston's Fort Point Channel area rather than in the more conventional confines of the Route 128 suburban ring. Sitting in her high-ceilinged offices in a former warehouse building, Donovan exults:

It's fantastic to be in this part of Boston. We have a great connection here. There are photographers everywhere, computer companies in the area. People are opening businesses up and down. It's a creative environment for young talent. . . . It's a lot better than dragging people out to the suburbs.²

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¹ Ori Ron, interview with author.

² Rebecca Donovan, interview with author.

The appeal of these urban districts rests fundamentally on the emergence of a new urban class made up primarily of aging boomers, childless couples, "empty nesters," and singles. This group—the prime demographic of recovering cities—has been growing rapidly over the past generation, their number doubling over the past quarter century. Over the past decade, the percentage of single or single-parent households has grown from 29 percent to 38 percent; of the 17 million new households created in the 1980s, a majority were formed by single people and unrelated individuals.

These are precisely the kind of people who tend to flock to cities. Andrew Segal, a 31-year old budding real-estate mogul who has purchased and retrofitted class B office space in such cities as Houston, Dallas, Baltimore, and Hartford, observes, "It's where the single people are, where you go to a bar to meet them. That's what makes it work. In Houston there are few places for people to walk around and promenade—downtown is the exception."

In contrast to most middle- or working-class Americans, these demographic groups tend to hold far more positive views of city life. For the most part, these are city dwellers by choice, what one demographer calls "very sophisticated consumers of place." They tend to like the pace and cultural offerings of cities. During the 1990s, for example, New York City lost many middle-class families, but these were largely replaced by younger, better-educated people, many of whom considered the proliferation of "cultural institutions" as one of the key reasons for settling in the city.

The decade-long reduction in crime rates in many favored cities, notably New York, Los Angeles, and Chicago, may also have accelerated this trend. So too, in the first decades of the century, will be a sea change in generational demographics. The Y or "baby boom echo"— roughly twice the size of the now 20-something "X" generation—will reach maturity and pass their parents' generation in total numbers by 2010, virtually assuring a steady supply of young, single, unattached, and childless professionals with a proven proclivity for city living.

The Y or "baby boom echo" will pass their parents' generation in total numbers by 2010.

These often-unattached new urbanites constitute the critical fuel for the postindustrial urban economy. Companies, wherever they might be located, rely increasingly on skilled urban professionals in fields from fashion design, entertainment, and internet commerce to international trade, investment, specialized retail, banking, and other business services. The demand for such people, and their services, has burgeoned with the shift to a digital economy, sparking strong economic rebounds in and around older urban neighborhoods in cities as diverse as New York, Los Angeles, San Francisco, Seattle, Denver, Dallas, Houston, and Chicago.

The emergence of the "soft" side of the technology industry, that which is most cultural or "knowledge-value" oriented, spurs this transformation. As the Internet, once largely a tool for scientists, becomes increasingly a device for marketing entertainment and news, dramatic changes in the skills, the kind of person, and thus the best place for the new industry occur. "You can put a chip firm in Boise, Idaho but you'll never have a major media play operating there," noted Tom Lipscomb, founder of Infosafe, a New York-based multimedia software firm and founder of the Center for the Digital Future. "You can't get the kind of creative people you need to move to Plano, Texas. They want to be somewhere they sense there's action."

By its nature, Lipscomb observes, the culture-intensive nature of knowledge-value production draws upon a different, often younger, demographic base, one often more attracted to a distinctly urban environment. Software giant Microsoft, working out of its classically nerdistan headquarters, has seen the need to hire more creative media workers, yet has been stymied in efforts to bring such employees to their sprawling Redmond campus.

Much of this has to do with the proclivities of creative workers. One New York editor, who himself refused to move, has been asked to help recruit such people for Microsoft, but doubts many would want to join the firm as long as it required moving to the Seattle suburbs. Sitting in his apartment in Chelsea, one of the city's growing new media centers, he explained:

I have talked to a dozen people in New York about this but only one even bothered to fly out for an interview. Microsoft thinks they'd like to bring in the culture but they don't understand that creative people usually like to work in an urban area where there are options to see and do a variety of things—that's what makes the city a joy.

Yet, it would be mistaken to suppose that this demographic reinvention of the central city—so marked in places like Seattle, San Francisco, Manhattan, and along Chicago's lakeshore—comes without a price. For one thing, this promises to degrade the center's historic role as incubators of the broader society. In the past, the core served not only an economic function, but as a place where middle- and working-class families raised their children, and where youngsters adjusted, amidst the often discordant rhythms of urban life. Today many of these neighborhoods—Boston's North End, Greenwich Village, Seattle's Ballard—are losing or already have lost this character, as they become instead domiciles for an increasingly affluent and childless population.

Children, of course, still live in cities, but they are increasingly congregated in the poorer and heavily minority sections. Nationwide, almost two-thirds of all city children are non-white; to an increasing extent, cities have only a small fraction of middle-class, Anglo children. In New York, for example, the outer boroughs, notably Brooklyn and the Bronx, once bastions of the white middle and working classes, remain heavily family-oriented, with a rate of children ages five to seventeen over 50 percent higher than Manhattan. But most of these children are minority and many are poor. In Brooklyn and the Bronx, notes economist Robert Fitch, per capita family incomes are closer to those in Detroit than Manhattan.

The prospects for these low-income residents, and more importantly, their children are not necessarily brightened by the evolution of the "knowledge-value" economy. This is particularly true in older industrial areas, such as parts of Brooklyn, Baltimore, south Los Angeles, and Detroit where the traditional bulwark of the economy—ship-building, auto manufacturing, and textiles—as well as the migration of large corporate bureaucracies has left a legacy of abandoned shopping districts, ravaged neighborhoods and broken people. This has led some, such as historian Manuel Castells, to define the post-industrial metropolis as by nature a "dual city," which suffers a kind of "urban schizophrenia" divided between an alternately ravaged and flourishing economy.

Nationwide, almost two-thirds of all city children are nonwhite.

This dichotomy can be seen in the epicenter of inner city revival, Manhattan, which boasts among the highest per capita income in the nation and one of the lowest percentages of children aged five to seventeen. As Manhattan began to resurge in the latter part of the '90s, it was largely due to in-migration of young, educated singles, while older couples with children continue to leave in large numbers. A 1998 survey of residents in New York's now fashionable downtown area near Wall Street—where some 2,400 housing units have been converted from former office space—found nearly 88 percent were under 45, 60 percent were single, and a similar percentage had household incomes in excess of $120,000 annually.

A similar process can be seen in Chicago, where desirable close-in neighborhoods such as Lincoln Park and Buck Town have become both increasingly childless and expensive. Housing prices have soared, rising as much as 40 percent annually by the late 1990s. In the 1950s, the average residence in Chicago's Lincoln Park, an increasingly fashionable northside neighborhood, had over four occupants; by 1998 that had dropped to less than two. Once, notes Robert Bruegmann, an urban scholar at the University of Illinois at Chicago and Lincoln Park resident, the area was made up of working-class families and surrounded by poorer areas. "Gentrification takes on the character of an invasion pattern," says Bruegmann. "It goes to the center and drives poverty out. . . . My neighborhood is nice because a lot of people left, the poor people left—that's why we like it."

Perhaps nowhere is this shift away from traditional families more evident, and less expected, than in Seattle. When he first arrived in Seattle back in 1955, University of Washington demographer Richard Morrill encountered a city that was "very middle class, union blue collar, home owning," with a large preponderance of families. But in the last census, he notes, the city had the lowest percentage of population between five and seventeen (10.8 percent) of any major American city, followed closely by Boston, Manhattan, Denver, and San Francisco.

As in these other cities, Seattle's demographic transformation lies in the attraction of upwardly mobile professionals, many of whom have postponed childbearing or intend to remain childless. Today, notes demographer Morrill, once family-oriented, close-in Seattle neighborhoods such as Fremont, Queen Anne, and Capitol Hill have become simultaneously fashionable and almost childfree, with the percentages of five to seventeen year olds as low as 5 percent. Overall traditional families have become a distinct minority in the city population while the number of school children in the public schools dropped in half between 1962 and 1990.

Seattle's demographic transformation lies in the attraction of upwardly mobile professionals, many of whom have postponed childbearing or intend to remain childless.

At the same time, Morrill suggests, child-bearing couples are propelled outwards, both by the generally poor quality of urban education and high real-estate prices; fully one-third of all children born in Seattle move out within five years. "Even the people who want to stay and keep the urban lifestyle have to move. You can't buy a decent house here for less than $240,000," notes Seattle developer David Sucher. "And even if you can pay that, in the end, the schools force the issue for almost everybody. You have kids, you move to the suburbs."

In the process, Seattle's once strong reputation as a blue-collar, white ethnic town has faded into an image more akin to its most famous chain, Starbucks, the quintessential meeting place of the end-of-century upwardly mobile. Pioneer Square, close to the original Skid Row and once scruffy Belltown, has been quietly gentrifying from a homeless haven to a condo heaven for Microsoft millionaires and other professionals. A city that gave the country its first general strike and whose working-class politics once led Postmaster James Farley to refer to Seattle as center of the "Soviet of Washington" has lost virtually every trade of its proud proletarian culture.

Even the Ballard neighborhood, long a bastion of Scandinavian union-belonging families, seems to have lost the last traces of ethnic character. "There used to be a strong sense of Scandanavianness in places like Ballard, but now it's just become another yuppie neighborhood," observes Eric Scigiliano, a widely respected columnist for the local alternative Seattle Weekly. "You can't even get a decent smorgasbord there."