Matt Yglesias has an interesting post Cities and Cities where he almost connects the dots. But its hard because his model of the city is Washington DC.

But I think that it’s important to try to be clear about what we mean by the word “city.” In an economic context, the most relevant concept is often that of a “metropolitan area”–a socially and economically integrated set of places that cross municipal boundaries. That’s different from “city,” a central municipality as opposed to a “suburb” which is a municipality that’s near a central municipality. And that’s also different from “city” in the sense of a walkable urban neighborhood as opposed to a “suburban” auto dependent neighborhood. Washington DC the metropolitan area is one of the richest in America, but Washington DC the municipality is merely above average. The Washington DC metro area also includes a large minority of transit-oriented walkable urban neighborhoods. Many of these neighborhoods are in the Washington DC municipality but some of them are in Arlington County, VA or Montgomery County, MD and some of the neighborhoods in the DC municipality are very auto-oriented and suburban and feel.
When someone talks about the economic value of cities that person (especially if he’s Ed Glaeser) could be plausibly talking about the economic value of metropolitan areas, in which case subsidization of rural and micropolitan places clearly is relevant. Alternatively, that person (especially if he’s Christopher Leinberger) could be plausibly talking about the economic value of walkable urban neighborhoods, in which case subsidization of rural and micropolitan places doesn’t seem relevant to me. Meanwhile, if I’m complaining about structural problems in city governance then I’m probably talking about municipalities, which is a whole different thing. I would put this all together by saying that metropolitan areas (mostly composed of people living in suburban neighborhoods in suburban municipalities) benefit from the existence of a strong urban core (composed of people living in walkable urbanist neighborhoods, most of them presumably in the central city municipality) which is more likely to happen if you have a functional municipal political system (in the central city municipality). That’s because if one particular suburban jurisdiction starts to be malgoverned, firms and households that want to be located in suburban neighborhoods can fairly easily relocate to a different-but-similar suburban neighborhoods in a different suburban jurisdiction. But in most cases, a firm or household that wants to be in a urban neighborhood often can’t just leave the central municipality for a different jurisdiction, it would have to go to a whole different metropolitan area.

There are two key elements that would help him connect the dots. The first is the idea that people vote with their feet (a la the Tiebout Hypothesis) which he alludes to but doesn’t name. The second is that we need competition in urban municipalities, like say, The Twin Cities, which enable people who need to be urban to live in one of two urban cores, and to choose one which has the best mix of taxes and services.
The problem is that the urban cores are monopoly governments in most metropolitan areas (and in areas that once had competition (e.g. New York) annexation combined them. The issue is the merits of competition in inducing innovation, reducing costs, increasing monitoring, benchmarking, etc. vs. the merits of economies of scale (so New York City might be more efficiently governed if Manhattan and Brooklyn are under one umbrella (or Westminster and the City of London, or Minneapolis and St. Anthony, etc.). This is an empirical question, I don’t believe there is a universal answer, it is very context-dependent (the context depending on technology, politics, etc.).