The Mills Model

Abstract

Mills (1967) —a widely cited paper in its area—was among the first to present a model of an urban economy operating under perfect competition . Even by today’s standards, the model is bold in scope; it contains 4 industry sectors, 3 factors of production, and two geographic zones (CBD and suburb). In terms of the global economy , this is an open model ; factors flow freely into or out of the city in response to market prices. My intention here is to simplify and clarify the model so that we can better understand its significant implications. Mills implicitly assumes that the state has already enabled competitive markets locally in commodities, housing, transportation , land, labor, and capital . The state has decentralized its authority by empowering property and labor rights and creating incentives for individuals to participate in markets fully enough for everyone in a given market to be a price taker (small player). In market equilibrium , the city reaches a size where the unit cost of production (including land rent , wages, and paid and imputed interest)—the same for each firm in the sector—is just equal to price. No firm is able to earn any profit. Workers who in-migrate to the city are implicitly no better off as a result than those who did not in-migrate. Each unit of capital that flows into the city earns the same rate of return: presumably the same as it could earn outside the city. Despite its elegance, the absence of an algebraic solution make the Mills model difficult to understand. Further, the lengthy set of assumptions made make it difficult to separate out the significance of any one assumption.