Within cities, real estate markets create new types of land use and make others obsolete—Schumpeter’s “creative destruction” in action. Dynamic cities harness this process to improve the long-term welfare of the urban population.
But in the short term, changes in land use–and corresponding changes in the spatial concentration of employment—can be disorienting and alarming for workers and firms. Local governments may be tempted to intervene in an effort to slow down the rate of change. However, resisting the transformation of obsolete land use often prevents new jobs from being created in its place.
Regulation can prevent land use changes but it cannot keep jobs from disappearing in obsolete areas. A city’s labor market will shrink when government keeps land under a use for which there is no more demand. Freezing obsolete land use won’t stop Schumpeterian destruction, just the creation that would otherwise follow.
The story of Mumbai’s cotton mills best illustrates the consequences of freezing obsolete land use in hopes of preserving jobs. Indian entrepreneurs built Mumbai’s first cotton mills in the middle of the nineteenth century in what was then an industrial suburb of Mumbai. In 1861, the American civil war contributed to a large price increase for Indian cotton cloth and business began booming.
At their peak in the 1930s, Mumbai’s cotton mills employed more than 350,000 workers and occupied 280 hectares of land, not including workers’ housing. Eventually, competition, both from elsewhere in Asia and from more modern mills in smaller Indian cities, made Mumbai increasingly uncompetitive in the world market for cotton fabric. The intense competitive pressure forced some mills to close.
Mill closures accelerated after World War II. Productivity continued to decline, in part because, as Mumbai developed, the cost of operating the mills in the middle of a congested metropolis became prohibitive, and in part because of obsolete factory layouts and technologies. In 1982, a workers’ strike lasting more than a year dealt the death blow to Mumbai’s cotton mills. So far, this story of growth and decay is not unique to Mumbai. Many European industrial cities like Manchester and Ghent went through the same cycles produced by the same external forces.
As the mills closed, the workers’ unions worked with local government to prevent mill owners from selling the land on which the now deserted mills had been built. They did so in the hope of preserving the high taxes and the well-paying industrial jobs that had historically been produced by the mills.
Later, when it became clear that the mills would never open again, the local government imposed such draconian conditions on the redevelopment of mill land that it became frozen in court cases. As a consequence, for more than 40 years an increasing number of mill sites stood empty in the middle of Mumbai. As the city grew, it had to expand its infrastructure further north, by-passing the 280 hectares of already well-serviced land occupied by the obsolete mills. When, in 2009, some of the mill land was finally auctioned off, the price of land reached more than US$ 2,200 per square meter—a strong indication that tremendously valuable land had sat idle, to the benefit of no one, for decades.
Urban activities are transient and subject to external market forces over which local players exert very little control. The failure to realize this pushed Mumbai officials and workers to try to maintain obsolete activities and land use by way of regulation. They assumed that the problem of the failing mills was local and could be solved through bargaining between local stakeholders.
In doing so, they prevented new jobs from being created on the very valuable land occupied by the vacant mills. The misunderstanding caused enormous hardship to the workers and to the urban economy. It prevented new jobs from being created to replace the ones that had been lost. It forced an extension of the city’s infrastructure into new more distant areas while already well-serviced land stood empty.
Tile image courtesy of Rigmarole via Flickr.