Arnold Kling  

Economic Activity, Outsourcing and Cities

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Alex Tabarrok writes,

I was surprised at how close the association is between state level GDP and the urbanization rate

GDP measures economic activity. Economic activity is outsourcing. If my daughter does her own laundry, her work does not get counted in GDP. If she outsources it, the work does get counted. In cities, outsourcing is easier and more natural.

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COMMENTS (10 to date)
B.B. writes:

Does your point imply that if we could (accurately) include the value of home production in GDP, that the association would disappear?

Mentha Trecenta writes:

speaking of city economics, i just sit before a pile of amazon books on the topic and dont know which to buy as a semi-initiated. any pointers plz?

Gabriel writes:


I'd say that there would have to be efficiency gains to the monetary system in a city compared to a more favour-barter based rural economy, so there would still be a difference, but maybe not so drastic.

Eric Hosemann writes:

Outsourcing your laundry to a laundromat is-from an economic point of view-no different than buying an efficient washing machine. Surely GDP takes the purchase of the washing machine into account. Couldn't that explain the association just as well?

John Thacker writes:


The issue is that any equally efficient (from an economic point of view) method that involves personal household labor is going to result in lower GDP, because the household labor isn't priced, right?

So areas where household labor is used more have illusory lower GDP.

However, there could still be a relationship even so.

Nathan Smith writes:

Yes! This is a point that tends to elude economic theory because the Walrasian tradition is inconsistent with increasing returns. My dissertation points the way out of the trap.

@ B.B. I think the difference would be smaller domestically, though it would not disappear since people with specialized skills concentrate in cities. It would disappear domestically because people are free to move, which pretty effectively arbitrages away real rural-urban differences in living standards. But historically and internationally, the urbanization/prosperity link would be strong, precisely because, as Adam Smith knew, "the greatest improvement*17 in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour," and "the division of labor is limited by the extent of the market."

Nate writes:

@Eric and John,

Vermonter here. I saw that chart and was surprised at the dead last ranking of Vermont. It's quite common here for people to have chickens, vegetable gardens, and other in-sourced HH production. I guess that would make up some of the difference.

PrometheeFeu writes:

Of course, there is some lack of counting household production. But focusing on that fact is highly misleading because the big loss is in lack of specialization. I'm a software engineer. I'm good at it, I love doing it and I produce a highly valued product when I do it. On the other hand, I hate doing my laundry and I'm not particularly good at it. I therefore specialize in software engineering and have somebody else doing my laundry. The specialization creates enormous wealth.

Joe Cushing writes:

Maybe it's because I'm single and Male but Laundry just doesn't take a lot of my time. It's far more efficient for me to do my own than it would be for me to take is somewhere or pay somebody to drive here and do it for me. If a 7 minute each way commute were added either by me or a worker I hired it would easily double the labor needed to do my laundry. The only way it would make sense for me to hire somebody would be if they were a general house cleaner who also did dishes and other chores. I avoid dry clean only clothes whenever possible.

R Richard Schweitzer writes:

The services obtained or costs incurred via the revenues transferred to the urban "entities" need to be accounted for (not that "GDP" is the accurate way) in determining the economic effects of urbanization. I have and have read the C-S report.

Missing are methods of examining the effects on productivity, transaction costs, distribution efficiencies and changes in consumption patterns.

You can't just walk around with one ruler in your hand (GDP) and claim to get a measure of life.

Urban areas are known (empirically) to enhance that collaboration of efforts required by the division of labor. How that occurs and why it is effective deserves closer study.

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