During the Second World War, when England absolutely had to learn how to break very challenging Nazi cryptographic algorithms, they assembled the best mathematicians and cryptographers they could find at Bletchley Park. And they did not, then, place them all in separate offices (cubicles had not yet been "invented"), to slave away at their own pace in isolation. They placed them together as much as possible, encouraging and requiring them to interact with each other. These guys were, in fact, isolated from the rest of the world. They worked, ate, and lived together. It was from this tumultuous convergence that the brilliant ideas emerged that led to code breaking machines (computers!) that eventually cracked the Enigma. These ideas eventually helped win the war.
Many of us have experienced the team-building, "barn-raising" effects of a small community of folks working on the same problem in a fairly small space. Open-area "war-room" arrangements have repeatedly been shown to facilitate team communication enormously. When a programmer has a technical question, has a feature question, encounters an integration conflict, or just plain gets stuck, help is immediately available. People can more easily stay on process, stay focused on business value, and celebrate successes. When people can talk to each other at exactly the point when they need to, problems get solved faster, and get solved better. When really big problems arise, the best minds in the group are right there, available to brainstorm and throw big ideas at it together. Those who have given it a good-faith attempt typically report substantial benefits. Team cohesion, camaraderie, ambient trust and respect, listening skills, and other measures of social health all improve.
And this camaraderie translates directly into higher productivity. Teams that like, trust, and respect each other, and that actually enjoy working together, do better work, and do it faster. You would think that we would not even need research to verify something so self-evident.
In Extreme Programming, programmers are expected to all work within earshot of each other in a single room full of workstations, and at least one customer representative is also encouraged to work with them in the room. And while "facilities issues" are notoriously problematic politically and emotionally, lots of teams have made open areas work. There are ways to encourage people to work in such collaborative workspaces, without asking them to give up all of their private space or "space status."