As Johnson's great book "The Ghost Map" points out, physcial density can also lead to the rapid spread of bad things, like cholera.

I’ve always believed that companies that need to be highly creative in order to survive should be housed in small, cramped offices in buildings with other companies that are housed in small, cramped offices. It might not always be pretty or comfy, but I think the physical closeness of people and ideas spurs innovation. The excellent writer Steven Johnson agrees with me, in an article he’s written for the Financial Times, about New York City’s current tech-company explosion. (It’s linked to the publication of his new book, Where Good Ideas Come From: The Natural History of Innovation.) Physical density, he argues, is key. An excerpt:

“The physical density of the city also encourages innovation. Many start-ups, both now and during the first, late-1990s internet boom, share offices. This creates informal networks of influence, where ideas can pass from one company to the other over casual conversation at the espresso machine or water cooler. When we started outside.in, we shared a Brooklyn office with a documentary film company for its first year of existence. Today, our much larger office in Manhattan also houses three other smaller start-ups working on unrelated projects. By crowding together, we increase the likelihood of interesting ideas or talents crossing the companies’ borders. The proximity also helps to counter the natural volatility of start-ups: in outside.in’s early days, we ‘borrowed’ a few talented employees from the documentary film company, which was temporarily downsizing. When the projects picked up again, some of those employees moved back. Others had found a new calling in the web world and stayed with us.

Economists have a telling phrase for the kind of sharing that happens in these densely populated environments: ‘information spillover.’ When you share a civic culture with millions of people, good ideas have a tendency to flow from mind to mind, even when their creators try to keep them secret.”