According to Wikipedia, Manila is the most densely populated city in the world–and according to Ryan Avent’s Kindle Single The Gated City, density is the name of the game.
Adam Smith famously wrote that the division of labor was the source of the wealth of a nation, and “the division of labor is limited by the extent of the market.” Avent repeats the observation that very densely populated cities make possible a level of specialization that could not exist otherwise. In the restaurant industry alone, Avent observes:
Suppose that 1 person in 100 has developed a taste for Vietnamese cuisine, and suppose that a Vietnamese restaurant needs a customer base of 1,000 people to operate profitably. In a city of 10,000 people, there wouldn’t be enough people to support a Vietnamese restaurant. The only restaurants that could operate profitably would be those appealing to considerably more than 1 in 100 people — those offering less daring culinary fare. In a city of 10,000 people, there is little room for specialization, and less for experimentation.
A city of 1,000,000 people, by contrast, can support multiple Vietnamese restaurants. Not only will this larger city enjoy a cuisine that might not be available in less populous places, but its ability to support multiple producers of this specialty cuisine improves the price and quality of the Vietnamese food that’s served in them. The presence of multiple Vietnamese restaurants arouses the interest of sellers of the fresh ingredients used in Vietnamese cooking, who then invest in distribution of those products in the larger city. This, in turn, attracts the sort of discerning eaters who favor authentic, high quality Vietnamese food, reinforcing the concentration of Vietnamese eateries. The larger market facilitates competition, which boosts quality and reduces prices. This is good for consumers. But competition also means better service from suppliers and growth in the consumer market, which is good for the restaurants. This is a stronger, more productive, and higher quality microeconomy than one might find in the city of 100,000, where only one Vietnamese restaurant stays open, or the city of 10,000, where there is none at all.
Avent argues that the denser the population, the lower the cost of the process of trial and error which a dynamic economy and material progress in general depend upon. The risk of taking a job in software engineering in San Francisco is much less than most places, because there are a lot of other firms that could use your skills if the job doesn’t pan out. This encourages investment in those skills. The risk to a software engineer who tries to become an entrepreneur is likewise reduced because if the startup fails there’s a robust job market for their skills to fall back on. This encourages entrepreneurship, with all the benefits that come with it.
The purpose of The Gated City is to convince you that density is good and that people have created artificial barriers for increasing it in this country.
There are all kinds of zoning and permit regulations of course, but in Avent’s opinion the primary culprit is the NIMBY.
The short version: people already living in a neighborhood will always oppose measures to create the infrastructure for more population density–meaning, for the most part, knocking down old buildings and building new high rises. Local governments nearly always side with the locals and restrict the amount of development that can be done.
This is classic rent-seeking. Current residents are extracting value from property they do not own by keeping it at a certain capacity (and blocking noisy construction), while the people who would have moved there pay the price. And as the barriers put up by NIMBYs in every neighborhood add up, we all end up paying the price as the larger social benefits of density are lost.
Avent’s proposed solutions are very libertarian–basically, strengthen property rights. It’s a little more nuanced than that but that’s what it boils down to.
For its excellent survey of the benefits of population density and its clear framing of the problem, The Gated City is an excellent read and I highly recommend it.