Urban Studies, Vol.
36, Nos 5 6, 811 842, 1999
Geographical Econom ics and Urban
Com petitiveness: A Critique
M artin Boddy
[Paper received in nal form, October 1998]
1. Introduction
Since the late 1980s, Paul Krugm an has rap-
idly established him self as amongst the most
prom inent of econom ists, particularly for his
work on `new trade theory and com petitive-
ness. Samuelson, adm ittedly in the preface to
Krugm an s 1994 book The Age of Dimin-
ished Expectations, refers to him as the
rising star of this century and the next . The
proli c and often controv ersial Krugm an has
clearly made a major im pact within his own
discipline. This im pact has been aided by the
com bination of the polem ical, accessible
and, he would argue, well founded manner
of his attacks on som e of his fellow
econom ists and more particularly on policy
advisers (Krugm an, 1997), together with his
contributions to form al econom ics. Increas-
ingly, as well, he has attracted interest within
econom ic geography, regional studies and
urban studies. In part this is because he has
explicitly set out to incorporate geography
and space into form al econom ic models of
trade and com petitiveness revisiting in the
process a range of standard `models of econ-
om ic geography and spatial science. In par-
ticular, he has challenged the conventional
concept of trade as re ecting prim arily com -
parative advantage, emphasising instead the
role of increasing returns to scale. He has
vigoro usly challenged the popula r notion of
com petitiveness in global markets as the key
Martin B oddy is in the School for Policy Studies, University of B ristol, 8 Priory R oad, Bristol, BS8 1TZ, UK. Fax: 1 44(0)117954-6756.
E -mail: martin.boddy@ bristol.ac.uk. This article draws on work supported by the Economic and Social R esearch Council through
the `Cities, Competitiveness and Cohesion P rogramm e, grant num ber L130 30 100 116.
0042-0980/99/05/0811-32 1999 T he E ditors of Urban Studies
to national prosperity and the threat to `de-
velope d nations posed by cheap labour in
developing countries. He has also addressed
questions around the clustering and agglom -
eration of econom ic activity at the sub-
national scale, linking com petitiveness and
trade to developm ent at the regional and
urban scales (Krugm an, 1991a, 1995). In-
creasingly, as well, Krugm an s work has
touche d on clustering and the localisation of
econom ic activity at the level of the urban
agglom eration or city scale. There are clearly
also, questions as to the relationship between
cities and the clustering of activity at the
regiona l scale. He has addressed these issues
from a form al econom ic perspective deriving
models of clustering and agglom eration in
highly abstract terms. He has also referred
more generally, and in his terms discursively,
to processes of urbanisation and the growth
of cities and regions his 1997 book attack-
ing P op Internation alism concludes with a
prose essay on `The localisation of the world
econom y com paring the historic develop-
ment of Chicago and Los Angeles.
As within econom ics, his ideas have at-
tracted both appreciation but also concern
from a geographical perspective (Knox and
Agnew, 1994; Martin and Sunley, 1996;
Dym ski, 1996). Concern has derived in par-
ticular from his insistence on form al econ-
812 MA RT IN BODD Y
om ic m odelling as both value free and the
only source of clear understanding (Krug-
man, 1991a, p. 80) and his whole sale dis-
missal of the bulk of urban and regional
studies and, in particular, approa ches
ground ed in `social econom ics . Dym ski
(1996, p. 439), for example, has suggested
that Krugm an is engaged in a form of econ-
om ic neo-colon ialism, with his work having
becom e:
less an invitation to geographers to enjoy
mutual gains from trade than an incursion
into underdeveloped theoretical terrain.
An earlier review of Geograph y and Trade
(Krugm an 1991a) had referred to Krugm an s
perspective on econom ic geography as
`highly simplistic and `patronisin g (John-
ston, 1992). Both Dym ski, and Martin and
Sunley (1996) have provide d a critical ap-
praisal of Krugm an s `geographical econom -
ics . Martin and Sunley in their more
extended critique of Krugm an s work, point
to the parallels, but also the distance be-
tw een, Krugm an s work on agglom eration
and much of the recent work on industrial
districts, networks and clustering and the
links betw een innovation and com petitive-
ness ground ed in ideas of post-Fo rdism ,
social econom ics and institut ional econom ics
of which Krugm an is particularly scathing.
Here, therefore, the intention is to examine
Krugm an s work in particular as it relates to
cities, urban grow th and com petitiveness.
Initially, however, it will be useful to look
brie y at Krugm an s overall approach to
econom ic modelling and the process of ab-
straction, as this goes a long way to explain-
ing the distance between his work and much
recent work within geography and urban and
regional studies.
2. The New Geograph ical Econom ics
Krugm an s overall approach turns on a cri-
tique of form al econom ic models based on
perfect com petition. Both international trade
and the location of econom ic activity in
space more generally are, in practice, charac-
terised by increasing returns to scale and
external econom ies. This viola tes a key as-
sum ption of econom ic models which assume
perfect com petition and equilibr ium . In the
absence of perfect com petition , it is im poss-
ible using what had been conventional, main-
stream econom ic models to derive a unique
equilibrium outcom e. M arket structure de-
pends not simply on the interaction of supply
and dem and but on the decisions, including
location decisions of producers.
As the mainstream orthodo xy within eco-
nom ics became increasingly focused on for-
mal, mathem atically coherent, equilibrium
models, argues Krugm an, this led to the ne-
glect of both developm ent econom ics and of
spatial aspects of econom ics more generally.
This, he argues, explains the lack of attention
within mainstream econom ics to urban and
regiona l econom ics. Developm ent econom -
ics, for example, declined because:
the leading development econom ists failed
to turn their intuitiv e insights in to clear-
cut models that could serve as the core of
an enduring discipline (Krugm an, 1995,
p. 24).
The one basic reason for this, moreover, was:
the dif culty of reconciling econom ies of
scale with a com petitive market structure
(Krugm an, 1995, p. 25). M yrdal s work on
circular and cum ulative causation and
Hirschm an s work on linkages, stim ulating
and in uential in the 1950s and early 1960s,
had, by the 1970s, com e to seem not so
much wrong as meaningless (Krugm an,
1995, p. 27). L acking the tools to address
the increasing returns, external econom ies
and im perfect com petition which were
fundam ental to these areas, the increasingly
form alised mathem atical modelling of main-
stream econom ics simply ignore d them . In
the past few years, argues Krugm an:
It has becom e apparent that during the
1940s and 1950s a core of ideas emerged
regarding external econom ies, strategic
com plem entarity, and econom ic develop-
ment that remains intellectually valid and
may continue to have practical applica-
tions. This set of ideas anticipated in a
 GE OG RAPH ICA L ECO NO MICS
num ber of ways the cutting edge of mod-
ern trade and growth theory. But these
ideas have had to wait to be discov-
ered. Only recently have changes in
econom ics made it possible to reconsider
what the developm ent theorists said, and
to regain the valuable ideas that have been
lost (Krugm an, 1995, p. 7).
It was a parallel story, according to Krug-
man, in terms of the failure of econom ics to
take account of space and to provide accept-
able explanations for spatial agglom eration
or the location of econom ic activity in space.
The problem as Krugm an sees it is, put
simply,
to account for the highly uneven spatial
distribu tion of econom ic activity we actu-
ally see, in which most people live on the
small, urbanised fraction of the land and in
which most urban areas them selves are
highly specialised (Krugm an, 1995, p. 35).
In contrast, in a world consisting of a hom o-
geneous, featureless plain, with no econom -
ies of scale but subject to transport costs,
econom ic activity would itself be evenly
spread across the plain in order to avoid any
transport costs. Uneven distribu tion of natu-
ral resources could account, according to
Krugm an, for only a fraction of the observed
unevenness of econom ic activity across
space he points to mega-cities such as Los
Angeles or Sa o Paulo as an extrem e case.
The answer, as with developm ent econom ics,
relates to market structure in the face of
increasing returns, the need to deal with scale
econom ies and oligopo listic rms:
in order to talk even halfway sensibly
about econom ic geography it is necessary
to invoke the role of increasing returns in
som e form . And that means that even to
get started on the subject one m ust get into
the issues that did so much to make
high developm ent theory unacceptable to
mainstream econom ics (Krugm an, 1995,
p. 36).
Again, how ever, econom ists avoide d look-
ing at the spatial aspect of econom ies be-
813
cause they knew they had no way to model
that aspect (Krugm an, 1995, pp. 3637). As
with developm ent econom ics
there was a set of core ideas that make
considerable sense in light of recent econ-
om ic analysis, but that were unacceptable
to mainstream econom ics because they
could not at that tim e be modelled (Krug-
man, 1995, p. 37).
Krugm an goes on to review a range of `mod-
els or approaches from within traditional
econom ic geography and location theory.
Each of these approaches, in one way or
anothe r, de es form al m odelling due to the
problem s which space poses in terms of in-
creasing returns and market structure. Hence
the failure of mainstream econom ics to em-
brace or develop locational models. W ebe-
rian location theory, for example, aimed to
explain the location of a single factory in
terms of minim ising transport costs to sev-
eral suppliers and several markets. In econ-
om ic terms, how ever, it is unclear how actors
might make decisions and how the decisions
of actors might interact to produce a given
outcom e as required by an econom ic model
as such. It simply reduces the problem to one
of minim ising transport costs given certain
assumptions including, for example, a sin-
gle production site. The example is less rel-
evant, in any case, in terms of agglom eration
and the growth of cities.
Central place theory argued that the trade-
off between econom ies of scale and transport
costs leads producers to cluster together into
hexagonal market areas (L osch) or a hier-
archy of nested market areas (Christaller).
This introdu ces scale econom ies but, as
Krugm an argues, from an econom ic perspec-
tive, it is not clear who is making the deci-
sions and what form the market structure
takes it represents, as Krugm an puts it, a
schematic way to organise your though ts
rather than an econom ic model in which the
observed structure can be explained by
deeper (meaning market-based) causes. Prob-
lems of modelling im perfect markets given
the trade-off between econom ies of scale and
814 MA RT IN BODD Y
transport costs, moreover, prevented devel-
opm ent of a form al model (Krugm an, 1995,
p. 41).
Sim ilar argum ents apply to social physics
and the idea of market potential in space
which offer plausible stories, som e striking
empirical regularities, and a useful basis for
empirical work (Krugm an, 1995, p. 45).
Again, im plicit is the notion of increasing
returns and monopoli stic com petition allow-
ing rms to reap the rewards of locations
with higher `market potential . M odels of
cum ulative causation, on the other hand, run
into the proble m of circularity and multiple
equilibria: rms locate where markets are
large, but markets are large where rms
locate (Krugm an, 1995, p. 46), leading to
the possibility of self-reinforcing grow th (or
decline). He reiterates this in his more recent
paper, referring to Harris (1954) work which
had dem onstrated that the heavily industri-
alised regions of the US were in general
those with exceptionally high market pote n-
tial (Krugm an, 1998a, p. 162). This similarly
underlies Pred s `model of regional grow th
(Pred, 1966) based on replacing im ports of
goods subject to scale econom ies with local
production. T his draws in workers from else-
where, which expands the local market; this
may reach a point where a further round of
im port substitution becom es possible :
The large markets might make it pro table
to produce goods that had previously been
im ported from other regions; this would
increase the multiplier on the region s ex-
port base, leading to a further expansion of
incom e, which would lead to still more
local production, and so on (Krugm an,
1998a, p. 162).
This is, as Krugm an observes, intuitively
reasonable, yet econom ists failed to consider
it until around 1990. It remained more a set
of boxes and arrows suggesting relationships
but defying construction of any form al econ-
om ic model based on an understanding of
market structure. T he reason, according to
Krugm an was that:
underly ing the work of Harris (1954) and
Pred (1966) is the im plicit assumption that
there are substantial econom ies of scale at
the level of the plant. In the absence of
such scale econom ies, producers would
have no incentive to concentrate their ac-
tivities at all: they would simply supply
consum ers from many local plants, vitiat-
ing Harris s argum ent. And any expansion
of a regional market would not predictably
lead to any increase in the range of goods
produced within that region, vitiating
Pred s. Increasing returns, in other words,
were central to the story (Krugm an, 1998a,
p. 163).
More directly relevant to explaining agglom -
eration and spatial clustering is, as Krugm an
observes, the role of local external econom -
ies referring back to Marshall s major contri-
butions to the eld. Essentially, clustering of
producers in a particular location yields ad-
vantages and these advantages, in turn, ex-
plain clustering. This simple notion of
clustering needs conside rable unpacking and
is explored in greater depth below. Krugm an
him self notes (1995, p. 51) the intrinsic im -
portanc e of external econom ies as a real-
world issue . Krugm an s point in relation to
mainstream econom ics is its surprising ne-
glect of local externalities. Mainstream eco-
nom ics simply ignored external econom ies
where market size was a factor and where
increasing returns to scale and im perfect
com petition were therefore an issue. This
would include the ability of larger local mar-
kets to suppor t ef cient-scale specialist sup-
pliers of intermediate inputs or the bene ts of
larger, pooled labour markets. The main-
stream allow ed for external econom ies but
only `pure externalities or spillove rs such as
the exchange of inform ation which takes
place in local clusters of rms but which, it is
assumed, is not mediated by market pro-
cesses; hence scale effects do not contravene
the assumption of perfect com petition. Krug-
man goes on to suggest that
if you were to ask a mainstream econom ist
at any tim e between, say, 1930 and the last
few years why cities exist or why som e
industries are so concentrated in space, he
 GE OG RAPH ICA L ECO NO MICS
or she would surely answer in terms of just
such local externalities (Krugm an, 1995,
p. 51).
The sources of agglom eration were in effect
`made safe for neo-classical econom ics by
assuming them to be pure, technolog ical
externalities. How ever:
This strategic evasion has been costly in
terms of both credibility and research-
ability the pure-externality assum ption
puts these effects into a black box, where
nothing more can be said you have no
deeper structure to examine, no way to
relate agglom eration to m ore micro-level
features of the econom y (Krugm an, 1995,
p. 52).
It is worth noting in passing that while this
may be true from a form al econom ic per-
spective, this assumes that the objective is to
derive macro-level patterns from micro-level
market behaviour. This is Krugm an s com -
plaint. As he observes som ewhat disparag-
ingly:
Oh, you can try to measure them empiri-
cally, and there has been som e im portant
work along those lines. But you have
no deeper structure (Krugm an, 1995,
p. 52).
It is this which lies at the heart of the gulf
betw een Krugm an s work on externalities
and much of the recent work in econom ic
geography, urban and regional studies which
also addresses issues of clustering, agglom er-
ation and externalities and has similar roots
in Marshall s work. This is an issue which
will be returned to below.
Von Thu nen s model of land rent, on the
other hand, illustrates, as Krugm an observes,
many of the features of neo-classical market
econom ics. Mainstream econom ics could
therefore deal with von Thu nen s model. In
terms of understanding spatial agglom er-
ation, however, it is of no assistance in that it
simply assumes a central urban market
around which it explains the distribu tion of
econom ic activity under a range of assump-
tions. As Krugm an puts it:
815
E conom ists understood why econom ic ac-
tivity spreads out, not why it becom es
concentrated and thus the central model
of spatial econom ics became one that
deals only with the way that com petition
for land drives econom ic activities away
from a central market (Krugm an, 1995,
p. 54).
Sim ilar criticisms apply to the `new urban
econom ics which aimed to explain the loca-
tion of econom ic activities around a central
core in the sense that the latter was as-
sum ed rather than derived from the model. It
needed, as Krugm an puts it, an appeal to
loosely speci ed agglom eration econom ies
to com plete the model (Krugm an, 1995,
p. 58). They also shed little light on the
emergence of the polycentric city or `edge
city growth readily observable in the US.
This, according to Krugm an, is epitom ised
by the eclipse of Chicago, the archetypal
monocentric city focused around the down-
town Loop, by Los Angeles with no single
centre and a dozen or more of ce districts
which com pete with each other.
Sim ilarly, regional science and Isard s
(1956) attempts to develop an overall ap-
proach in Location and the Space-econom y
failed ow ing to the fact that one cannot view
location simply as anothe r substitutable fac-
tor of production in a general equilibrium
model since one has to take account of
increasing returns and hence im perfect com -
petition . Krugm an argues that the half
worked out models of regional science which
made little contribution to econom ic theory
were undeniably useful for a variety of
practical purposes (Krugm an, 1995, p. 56)
even if they fall well short of an intellectu-
ally satisfying or coherent structure . In al-
lowing, more charitably than in other of his
writing, for the practical bene ts of a col-
lection of tools, som e crude, som e fairly
sophisticated (p. 56), Krugm an again illus-
trates his de nition of the intellectually satis-
fying and coherent model.
According to Krugm an, therefore, the in-
ability of conventional mainstream econom -
ics to incorpo rate im perfect com petition
816 MA RT IN BODD Y

arising from situations in which increasing He, him self, set out, therefore, to develop
returns and the role of space were key factors such models both in relation to international
led to blindsp ots. trade and developm ent and as the basis for
understanding agglom eration and the cluster-
Development econom ics, or more
ing of econom ic activity in space. His per-
speci cally the set of ideas that I call `high
spective set out in his lecture on `Models and
developm ent theory had a huge initial
metaphors (Krugm an, 1995) was that the
in uence. But it then faded away, virtually
insistence on models is right, even when it
disappeared from econom ic discourse.
som etimes leads us unfairly to overlook good
Sim ilarly, ideas . Dealing with com plex systems in-
evitably, he argues, requires a process of
to this day the silence of standard econom - abstraction and simpli cation. He offers cri-
ics on such subjects as the location, size or teria for a good model: success in terms of
even existence of cities is startling (Krug- explaining or rationalising som e of what you
man, 1995, p. 67). see in the world in a way that you might not
have expected; predictive success particu-
This was exacerbated by the increasing em-
larly where this is rati ed by the marketabil-
phasis within the discipline of econom ics on
ity of the ideas; im proved insight into why
form al mathematical models as the core of
the vastly more com plex real system behaves
the discipline, models in which macro-
the way it does. Sim pli cation inevitably
behaviour and the resulting patterns could be
entails som e narrowing of vision, hence
derived from micro-m otives in a market con-
blindsp ots lim itations of one s framework
text. It was this which led to the sidelining of
and tools lim itations which, he argues
developm ent econom ics. It was this, as well,
can only be ended de nitively by making
which lay behind the lack of attention to
those tools good enough to transcend those
space and geography within mainstream eco-
lim itations (Krugm an, 1995, p. 73). None of
nom ics and which explains the unsatisfactory
this in itself de nes effective modelling
nature from the perspective of mainstream
uniquel y as con ned to the form al mathemat-
econom ics of a range of models within econ-
ical models of econom ics. Krugm an, goes
om ic geography and regional science. It also
on, however, to assert this to be the case and
explains the partial and unsatisfactory treat-
to de ne all other approaches as essentially
ment of local externalities as the basis for
`metaphors rather than models perhaps pro-
spatial agglom eration and the neglect of
viding, at best, useful insights and raw mate-
much of what Marshall had to say on the
rials for true modelling to draw on.
subject. Unable to pursue these topics with
M ainstream econom ics, he argues, rests on
the `rigour expected of them , econom ists
the two key principles of maxim isation and
largely ignored them .
equilibrium or, as he puts it, obvious oppor-
The solutio n, so far as Krugm an is con-
tunities for gain are rarely left unexplo ited,
cerned, lay not in any dilutio n of the essential
and things add up. It is the success of econ-
tenets of econom ic modelling but in the de-
om ic models which apply these basic princi-
velopm ent of a new set of models which
ples to com plex situations which justi es the
could, successfully in his terms, incorpo rate
approach.
im perfect com petition and hence cope with
increasing returns, the effects of geography T hinking carefully about how self-inter-
and location: ested individ uals would act in a particular
situation, and how these actions would
The reason why space has nally made it
interact, can often produce powerful and
into the econom ic mainstream is therefore
surprising insights (Krugm an, 1995,
obvious: im perfect com petition is no
p. 75).
longer regarded as im possible to model
(Krugm an, 1998a, p. 164). Critics of this approach, the simpli cations
 GE OG RAPH ICA L ECO NO MICS
and assumptions, he suggests are often
politically motivated driven by values
rather than analysis or put off by the appar-
ent disregard for what people actually think
and feel or by the mathematical com plexity.
The alternatives to mainstream econom ics
have, he claim s as an empirical prop-
osition been notably unsuccessful , citing
Galbraith s work on the modern corporation
as an example im pressive-sounding neo-
ligism s which make few useful predic-
tions (Krugm an, 1995, p. 77). Krugm an
goes on simply to assert that there is no
alternative to models (Krugm an, 1995,
p. 79) meaning, again, form al econom ic
models. Anything else, such as Hirschm ann
on econom ic developm ent, is at best meta-
phor, a suggestive heuristic device but, in
Krugm an s view, an intellectual dead-end .
He calls in evidence, as well, the failure of
som e to understand the nature of the trade-
balance or high-va lue-added industries
points which are returned to below .
In terms of developm ent econom ics (refer-
ring to Murphy et al.) and `geographical
econom ics , he argues that his case is made
by the success of new models of im perfect
com petition. The new econom ic models are
able, he claims, to capture the essentials
without trying to
capture the richness of reality, either with
a highly com plex model or with the kind
of lovely metaphors that seem to evade the
need for a model (Krugm an, 1995, p. 83).
Krugm an him self has developed a series of
models in which he has explored central
place theory, market potential, the localisa-
tion of econom ic activity and the idea of
circular and cum ulative causation (Krugm an,
1991a, 1991b, 1993a, 1993b, 1995).
Econom ic geographers on the other hand,
according to Krugm an, when they could not
produce models which could derive macro-
behaviour from micro-m otives,
essentially settled for what they could do:
schematic descriptions of the data or or-
ganising princ iples that made intuitive
sense and/or seemed to t the facts fairly
817
well, without having the deeply satisfying
logic of, say, the von Thu nen model
(Krugm an, 1995, p. 85).
(which of course Krugm an had him self criti-
cised earlier for its need to assume rather
than derive the central location around which
the model distributed activity).
He refers disparagingly as well to what he
calls `the antim odel backlash in econom ic
geography of the 1970s, distinc t from the
neo-classical tradition itself and drawing on
Marx and, som ewhat curiously, Derrida
whom he sees as an im porta nt in uence on
`post-Fordism and `the regulationist school .
Backtracking som ewhat, Krugm an allow s
that Keynsian econom ics, while itself falling
short of a fully speci ed model, has never-
theless, practical utility. The goal, how ever,
is the `clean model . Ultim ately, he believes,
there will be a happy ending; in the end,
we will integrate spatial issues into eco-
nom ics through clever models (preferably
but not necessarily mine) that make sense
of the insights of the geographers in a way
that meets the standards of the econom ists
(Krugm an, 1995, p. 88).
Krugm an has, then, a particular disciplinary
com mitm ent to form al econom ic modelling.
This he vigorou sly asserts as the way for-
ward for econom ics as a discipline; he is in
the process dism issive of attempts to under-
stand the world which, in his eyes, fall short
of this ideal. Clearly, much of social science
would dispute the idea of form al econom ic
modelling as the holy grail. Many would
simply dism iss his claims as irrelevant
simply the latest version of econom ic im peri-
alism while acknowledging that econom ics
has its insights and contributions. In this
sense, there is much in Krugm an s work
which is interesting and suggestive in rela-
tion to the agglom eration of econom ic ac-
tivity and the com petitiveness of cities and
regions both in its own right and in
counte rpoint to other work within econom ic
geography and urban and regional studies.
Much of the latter would clearly fall into his
category of metaphor and seeks to capture
818 MA RT IN BODD Y
som ething of the richness of reality work
with which he would appear to be largely
unfam iliar. It should be noted as well that
Krugm an him self is not averse to discursive
reasoning and speculation with little direct
foundation in his touchstone of the form al
econom ic model his essay on Chicago and
Los Angeles is a case in point (Krugm an,
1997, pp. 205214). W hen he turns to em-
pirical evidence for corroboration, this can
also as Martin and Sunley (1996, pp. 278
279) observe in relation to his work on
regional specialisation be som ewhat crude.
3. Cities and Com petitiveness
International Trade, Com petitiveness and the
Regional Econom y
Krugm an makes a strong case for the im port-
ance of linkages betw een international trade
and com petitiveness and the sub-national
level:
One of the best ways to understand how
the international econom y works is to start
by looking at what happens inside nations.
If we want to understand differences in
national grow th rates, a good place to start
is by examining differences in regional
grow th; if we want to understand inter-
national specialisation, a good place to
start is with local specialisation (Krugm an,
1991a, p. 3).
As he observes:
Step back and ask, what is the most strik-
ing feature of the geography of econom ic
activity? T he short answer is surely con-
centration (Krugm an, 1991a, p. 5).
This geographical concentration is, more-
over, he argues clear evidence of the per-
vasive in uence of som e kind of increasing
returns (Krugm an, 1991a, p. 5). The new
trade theory argued that much trade repre-
sents arbitrary specialisation based on in-
creasing returns, rather that an effort to take
advantage of exogenous differences in re-
sources or productivity (Krugm an, 1991a,
p. 7) i.e. increasing returns rather than
com parative advantage. This specialisation is
in turn re ected at the level of spatial con-
centration within national territories. Search-
ing for a way to explore ideas of increasing
returns, im perfect com petition , multiple
equilibria and an often decisive role for his-
tory and accident, Krugm an turns to the sub-
national level:
W hen one turns to the location of pro-
duction within countries, the evidence for
what Nicholas Kaldor called the irrel-
evance of equilibr ium econom ics is far
more com pelling. The long shadow cast by
history and accident over location of pro-
duction is apparent at all scales, from the
smallest to the largest And this clear
dependence on history is the most con-
vincing evidence available that we live in
an econom y closer to Kaldor s vision of a
dynam ic world driven by cum ulative pro-
cesses than to the standard constant returns
model (Krugm an, 1991a, pp. 910).
Increasing Returns and the Localisation of
Econom ic A ctivity
Krugm an sets out to explore the idea that
increasing returns represent a key factor in
international trade and in the localisation of
econom ic activity arguing at the outset that:
increasing returns affects econom ic
geography at many scales. At the bottom
of the scale, the location of particular
industries clearly often represents the
`locking in of transitory advantages. At
an interm ediate level, the existence of
cities them selves is evidently an increasing
returns phenom enon. At the grand
level, the uneven developm ent of whole
regions can be driven by cum ulative
processes that have increasing returns at
their root (Krugm an, 1991a, p. 10).
He poses the question as to persistent con-
centration of manufacturing in the north-east
US. This was in essence because each indi-
vidual manufacturing facility stayed within
the manufacturing belt because of the advan-
tages of being near other manufacturers. And
 GE OG RAPH ICA L ECO NO MICS
the apparent incentive for manufacturers to
cluster together explains the persistence of
the manufacturing belt even after the bulk of
US prim ary produc tion had shifted to other
regions. Once the belt had been established,
it was not in the interest of any individu al to
move out (Krugm an, 1991a, p. 14).
A range of different explanations might be
plausible. Initially, however, Krugm an ar-
gues that:
Given suf ciently strong econom ies of
scale, each manufacturer wants to serve
the national market from a single location.
To minim ise transportation costs, she
chooses a location with large local
dem and. But local demand will be large
precisely where the majority of manufac-
turers choose to locate. Thus there is a
circularity that tends to keep a manufactur-
ing belt in existence once it is established
(Krugm an, 1991a, p. 14).
The forces which tend to make manufactur-
ing concentrate emerge from the three-way
interaction of scale econom ies, transport
costs and factor mobility . The argum ent is
thus based simply on the interaction of in-
creasing returns at the level of individ ual
rms, transport costs and dem and local ex-
ternalities which he discusses at length else-
where are not, here, a factor. He supports his
argum ent using a simple two-country model,
dem onstrating that a range of different equi-
librium outcom es are possible dependent on
the starting-poin t and the parameters. Given
suf ciently large econom ies of scale, low
transport costs and suf cient footloo se indus-
try not tied down by natural resources, a
single location will result. T his, he suggests,
is part of the story behind the emergence of
the US manufacturing belt. More generally,
it represents one, highly simpli ed way of
deriving the spatial concentration of econ-
om ic activity from a simple, form al model.
He goes on to argue that better transport
links focused on core regions can contribute
to the lock-in of historic al advantage and
contribute to cum ulative causation. T his is
because higher traf c volum es will generate
econom ies of scale in the transport sector
819
itself, characterised as it is by high xed
costs. T his is im portant in its own right.
Krugm an goes on to argue that:
M ore im portant than its im mediate
signi cance, however, is what the history
of manufacturing location says about the
nature of our econom y in general. And
what it says is that increasing returns and
cum ulative processes are pervasive and
give an often decisive role to historical
accident (Krugm an, 1991a, p. 25).
This has similar im plications, potentially, at
the level of particular urban agglom erations.
Krugm an goes on to make tw o further
points on the basis of the simple model, both
potentially of wider signi cance. First, the
circular process whereby the location of de-
mand determines the location of production
and vice versa can tend to lock into place
existing patterns including centre and periph-
ery relationship s. W hen change does happen,
how ever, it can in theory at least be quite
rapid. Gradual change in the underly ing
parameters can push the model throug h a
threshold generating quite sudde n change in
geographical structure. A peripheral market,
for example, can gradually grow to a point
where it can support ef cient-scale manufac-
turing which is therefore pulled away from
elsewhere. Rational expectations might
smooth the change but this would depend
on the inform ation available in practice. The
simple model suggests, therefore, that change
in patterns of agglom eration and the shift
from one equilibrium state to another can be
rapid.
Secondly, again using the simple two-
country model, Krugm an dem onstrates that
under certain circumstances, expectations
and the anticipation of change can becom e
self-ful lling. In other words, expectations
can determine outcom es and outw eigh the
cum ulation of initial advantage. As Krugm an
observes, this suggests that local `booster-
ism serving simply to create optim ism
(rather than confer concrete advantage) may
be justi ed under certain circumstances (par-
ticularly when the speeds of adjustm ent in
location are rapid): the analysis suggests
820 MA RT IN BODD Y
that in principle, at least, boosterism may
make perfectly good sense (Krugm an,
1991a, p. 33). The reverse may also be true.
Again, this is based on a highly simpli ed
model. It does, how ever, provide som e sup-
port from the perspective of form al econom ic
modelling for policies of boosterism.
He goes on in later work to dem onstrate
num erical models which can, again in a
highly simpli ed manner, handle multi-
regional situations. In one such model, re-
gions are assumed to be arranged around a
circle, with transport possible only around its
circumference the `race-track model. An
even spread of manufacturing across the re-
gions represents one equilibrium position .
The circular logic of concentration means,
however, that any slight unevenness can
cause the spontaneous developm ent of one or
more local concentrations of manufactur-
ing typically, in simulations generating
tw o concentrations on opposite sides of the
perim eter of the circle (Krugm an, 1998a,
pp. 170171). He also develops a version of
the original von Thu nen model in which the
central city is not simply assumed; instead,
manufacturing concentrates in the city be-
cause of forwards and backw ards linkages
generated by that concentration itself (Fujita
and Krugm an, 1995). M ore com plex models
but still only in one-dimensional space
spread along a line have been constructed
(Fujita and Mori, 1996a); while Fujita and
Mori (1996b) have also modelled the cluster-
ing of manufacturing around ports and trans-
port nodes.
Econom ies of Scale and Spatial Concen-
tration
Discussing trade, Krugm an argues that the
nature of the externality generating agglom -
erative tendencies at a broad regiona l level:
com es from market size effects in the face
of transportation costs from the forward
and backward linkages that make produc-
ers want to concentrate near large mar-
kets and puts large m arkets where
producers concentrate (Krugm an, 1991a,
p. 71).
By `region he is talking roughly at the scale
of US states or Europe an nation-states. Trade
in this model is the means of achieving econ-
om ies of scale by localising production in
particular industries and exporting to other
regions (meanwhile im porting goods from
other regions which similarly achieve econ-
om ies of scale in the sectors in which they
specialise). T he lower transport costs and the
larger the potential econom ies of scale, the
stronger the tendency towards agglom er-
ation.
Krugm an develops this argum ent partly to
discuss the effects of trade and tariff barriers
and the possible effects of moving towards a
single European market. Econom ic inte-
gration by facilitating trade, it is argued, will
tend to increase the tendency towards ag-
glom eration. He also makes the point, how-
ever, that trade prote ction and/or other
policies may under som e circumstances, en-
able a region to secure or protect a localised
agglom eration of econom ic activity. Using
again a simple two-region model, he shows
that as transport costs fall (or econom ic inte-
gration increases) a point will be reached
where it is more ef cient to produce in one
region only and export to the other. In these
circumstances, a tem porary tariff barrier, for
example, may enable a region to protect the
grow th of industry to the point where
suf cient lead is established and the barrier
can later be removed. This is close to what
he acknowledges to be the largely discredited
infant industry im port-substitution policy.
Using the example of Canada from the late
19th century, he argues that an expanding
market can suppor t the growth of industry to
a scale where it can survive without the need
for protection. In the case of Canada, such
grow th was fuelled by im migration. It is also
observed that, with econom ies of scale,
cheapening transport costs will not necess-
arily encourage econom ic activity to move to
more peripheral, cheap labour regions. The
advantages of such a move may be out-
weighed by the additional econom ies of scale
 GE OG RAPH ICA L ECO NO MICS
achievable in the core region lower trans-
port costs enabling the peripheral market to
be supplied from the centre. If transport costs
were to fall further, then the point might be
reached where the low costs of production in
the periphery outw eighed the gains from
concentrating production in the core area.
In essence, Krugm an argues that the com -
bination of econom ies of scale and the fact
that there are costs to transactions across
space will tend to generate the spatial con-
centration of econom ic activity:
Because of econom ies of scale producers
have an incentive to concentrate pro-
duction of each good or service in a lim -
ited num ber of locations. Because of the
costs of transacting across distance, the
preferred locations for each individual pro-
ducer are those where dem and is large or
supply of inputs is particularly con-
venient which in general are the loca-
tions chosen by other producers. Thus
concentrations of industry, once estab-
lished, tend to be self-sustaining; this ap-
plies both to the localisation of individ ual
industries and to such grand agglom era-
tions as the BostonW ashington Corridor
(Krugm an, 1991a, p. 98).
The num ber of such agglom erations and any
tendency towards concentration or decentra-
lisation will depend on the balance between
econom ies of scale and the transaction costs
im posed by space (including, for exam ple,
tariff barriers as well as transport costs).
At one level, as Krugm an acknowledges,
none of this is particularly novel. The differ-
ence now, he suggests, is that these ideas can
be incorporated into mainstream econom ics
thanks to recent advances. He goes on to
claim that it is now possible to do geogra-
phy as rigorou sly as you like . Observing as
well that: T he geographers them selves prob-
ably won t like this: the econom ics pro-
fession s simultaneous love of rigor and
contem pt for realism will surely prove infuri-
ating (Krugm an, 1991a, p. 99). Regional
com parison represents, however, a huge, al-
most untapped source of evidence about how
our econom y really works (Krugm an,
821
1991a, p. 99). He concludes by emphasising
the im portance of `path dependence cum u-
lative causation xing historically deter-
mined patterns QWE RTY econom ics,
making the analogy with the persistence
of the original layout of early typew riter
keyboards.
External Econom ies and Agglom eration
In Geography and Trade, Krugm an (1991a)
also develops a parallel argum ent linking the
localisation of econom ic activity to Marshal-
lian-type external econom ies. This represents
an alternative or possibly com plem entary ex-
planation there is som e suggestion that ag-
glom eration based on scale econom ies
operates at a broader national or regiona l
level while external econom ies apply at a
more localised level (Krugm an, 1991a,
pp. 7071). Quite why, and at what scale,
each account is applicable is unclear. It is
here, how ever, that Krugm an s discussion of
externalities com es closer to current debates
within econom ic geography and urban and
regiona l studie s. T he starting-point is the
striking localisation of particular industrial
sectors which, as Krugm an observes, has
generated a very extensive literature from
Marshall through Hoover to, more recently,
Porter. Krugm an goes back to Marshall s
original account of the localisation of indus-
try based on labour market pooling ,
specialised inputs and services, and know -
ledge and inform ation.
Labour market pooling . First, as Marshall
had argued, the concentration of enterprises
in a particular location perm its a pooled
labour market for workers with specialist
skills, to the bene t of both workers and
rms. Using a simple two-region model,
Krugm an dem onstrates how clustering
means that rms will at tim es (but not al-
ways) be able to recruit the additional labour
which they require; similarly, workers will,
at tim es (but again not always), be able to
obtain employm ent which otherw ise they
would not, by switching employers. Over
tim e, clustering is m ore ef cient and both
822 MA RT IN BODD Y
employers and workers bene t. This, Krug-
man argues, assumes increasing returns with
scale othe rwise employers could split their
production into smaller plants and distribute
them across a dispersed labour force. It is the
com bination of increasing returns and uncer-
tainty which makes concentration more
ef cient. Going beyond Marshall s argum ent
and reinforcing it, Krugm an also dem on-
strates that this is the case even if wages rise
and fall readily with dem and; he also shows
that an open and com petitive labour market
is more ef cient than a captive labour force
(Krugm an, 1991a, pp. 4349).
Specialist inputs and services. Secondly, the
localisation of industry can generate dem and
at a scale which makes possible the ef cient
provision of specialist inputs and services.
An industrial cluster can suppor t a larger
range of such inputs and allow the producers
of those inputs to generate additional econ-
om ies of scale, making them more ef cient.
The producers of these inputs will tend, then,
to locate alongside industry to minim ise
transport costs, furthe r reinforcing the clus-
tering of econom ic activity. Again, as Krug-
man demonstrates, the argum ent turns on
econom ies of scale. W ithout scale econom -
ies, a cluster of any size could replicate the
full set of specialist inputs.
Know ledge and inform ation ow s. T hirdly,
the localisation of industry facilitates the
ow of know ledge and inform ation between
rms. These represent in econom ic terms,
`pure or `technologi cal spillov ers or exter-
nalities. Given that they do not depend on
scale econom ies, they do not violate the as-
sum ptions of conventional econom ic models
and could thus be assumed away. As Krug-
man argues, unable to handle increasing re-
turns, econom ists conve ntionally ignored the
rst tw o types of externality. His own ap-
proach attempts to rehabilitate them . He also
notes that modern high-technolo gy clusters
including Silicon Valley and Route 128, with
the acknowledged im portance of ows of
know ledge and inform ation, have been used
to argue for the im portance of pure, techno-
logical spillovers. He suggests that the fact
that much clustering pre-dates Silicon Valley
and is evident in low-tech sectors suggests
that other form s of externality are im portant.
He attempts to back this up with a simple
empirical examination of the concentration
of different industrial sectors across the US
which suggests that low -tech industries are in
som e cases more concentrated than high-tech
ones. This is som ething of a non sequitur
since technological spillovers could, in the-
ory at least, be the dom inant form of local
externality, applicable historically and across
different sectors.
He also argues that technological
spillovers are assumed true by de nition,
rather than modelled; they also leave no vis-
ible trace which can be examined directly.
This sugge sts that investigation should con-
centrate on form s of externality which can be
more directly addressed:
Know ledge ows, by contrast are invis-
ible; they leave no paper trail by which
they may be measured and tracked, and
there is nothing to prevent the theorist
from assum ing anythin g about them that
she likes. A sociologist might be able to
help with survey methods; but I would like
to get as far as possible with drab, down-
to-earth econom ic analysis (Krugm an,
1991a, p. 55).
Again this is a relatively weak argum ent
and underestim ates the researchability of
technological spillovers.
Krugm an s point that the full range of
local externalities needs to be considered,
rehabilitating the elements of M arshall that
mainstream econom ics sidelined is, how ever,
very valid. Cum ulative processes are pervas-
ive (Silicon Valley is only the latest glitzy
version), he concludes, and labor pooling
and the supply of specialised inputs, play a
large role even when pure technological ex-
ternalities seem unlikely to be im portant
(Krugm an, 1991a, p. 62). Over tim e, he ar-
gues, the bene ts of localisation decline:
There is a kind of product cycle, in which
emergent new industries initially ourish in
localised industrial districts, then disperse as
 GE OG RAPH ICA L ECO NO MICS
they mature (Krugm an, 1991a, p. 63)
althoug h the only argum ent he offers is that
autom ation would reduce the im portance of a
pool of skilled labour.
Krugm an also argues, again, for the im -
portance of history and of small, accidental
events which determine the initial location of
particular sectors which then becom e locked
in by cum ulative processes, illustrating this
with anecdotes of the folk-origins of, for
example, carpet-making:
An accident led to the establishment of the
industry in a particular location, and there-
after cum ulative processes took over
(Krugm an, 1991a, p. 61).
And again:
small accidental events start a cum ulat-
ive process The resulting pattern may
be determined by underlying resources and
technology at som e very aggregative level;
but at ground level there is a striking role
for history and accident (Krugm an, 1991a,
p. 67).
He also makes the point that while much of
service activity follow s the distribution of
popula tion (and one would add econom ic
activity in general), other service activities
are among the most highly localised and
given the increasing ef ciency of infor-
mation transfer increasingly so.
Trade and Com petitiveness
A major them e in Krugm an s work has been
his critique of those who maintain that com -
petitiveness in the global econom y is vital to
the continu ed econom ic success of the `de-
veloped countrie s and that their position is
seriously threatened by the transfer of pro-
duction to low -wage econom ies which would
then ood the dom estic market with cheap
im ports, destroying dom estic industry and
employm ent. Trade de cits in manufactured
goods have pushed up dom estic unem ploy-
ment and forced workers into much low er-
paying service-sector jobs. The econom ic
problem, according to this view is essen-
tially one of com petiting on world markets
823
(Krugm an, 1997, p. 4). The argum ent is po-
tentially signi cant in terms of what it might
im ply for the nature of com petition between
cities and urban agglom erations particu-
larly given Krugm an s emphasis on the close
relationship between international trade and
the sub-national concentration of econom ic
activity.
According to Krugm an, however,
this view of com petitiveness is ` atly
wrong : com petitiveness is a meaningless
word when applied to national econom ies.
And the obsession with com petitiveness is
both wrong and dangerous (Krugm an,
1997, p. 22).
Sim ilarly:
It is simply not the case that the world s
leading nations are to any im portant de-
gree in econom ic com petition with each
other, or that any of their major econom ic
problems can be attributed to failure to
com pete on world markets (Krugm an,
1997, p. 5).
A country , he argues, is not a corporation
and has no nancial bottom -line, making
com petitiveness at the outset hard to de ne.
Growth in real incom e or living standards, he
argues, essentially equals rates of growth in
dom estic productivity by dom estic factors
rather than by som e form of com petition for
world m arkets. In part this is because trade is
relatively small com pared with production
for the dom estic market around 10 per cent
of value added in the US. More fundam en-
tally, while com panies with similar product
lines may com pete, trade betw een the major
industrial countries is essentially bene cial
providing both export markets and useful
im ports often at low er prices and of better
quality than those produced dom estically:
International trade is not a zero-sum
gam e while com petitive problems
could arise in principle, as a practical,
empirical matter the major nations of the
world are not to any signi cant degree in
econom ic com petition with each other
(Krugm an, 1997, p. 10).
824 MA RT IN BODD Y
The manufacturing trade de cit argum ent, he
argues, falls on the basis of simple arithm e-
tic any possible reduction in real wages
falling far short of the observed shift in the
US in recent years. He is also critical of the
com mon association made between com peti-
tiveness and high-technolo gy industry capi-
tal and labour need to ow into high
value-added sectors (meaning value added
per worker) which are com monly believed to
be synonym ous with high technology. Krug-
man argues however, using US statistics, that
`high value-added sectors are those with a
large volum e of xed capital relative to
labour. They include, for example, oil
re ning and cigarettes. Even steel and car-
making are signi cantly ahead of aircraft and
electronics where value added is around the
average for manufacturing as a whole. The
obsession with com petition , he argues,
re ects a com bination of the exciting im ages
conjured up, the attractions of blam ing other
nation-states for dom estic concerns, the rela-
tively simple policy agenda such argum ents
seem to offer, and the political convenience
of such argum ents. T hey re ect as well the
misguide d application of corporate strategy
concepts, with their emphasis on head-
to-head com petition , to national industrial
policy.
Such argum ents have been prom oted by a
range of policy advisers and supposed ex-
perts who are the target for much of Krug-
man s critique. One propon ent, he argues:
asks us to accept `com petitiveness as a
kind of ineffable essence that cannot be
either de ned or measured. Data that seem
to suggest the im portance of the essence
are cited as `indicators whatever that
means, while those that do not are dis-
missed as unreliable (Krugm an, 1997,
p. 32).
The danger, he argues, is of the misallocation
of resources, protectionism and trade wars
com bined with failure to recognise the gains
in terms of international trade from specialis-
ation. The key reason for the stagnation in
US living standards, he argues, is lagging
productivity gain in the now -predom inant
service sector.
He develops his line of argum ent and his
attack on various propon ents of com petitive-
ness in series of articles and lectures col-
lected together in Pop Internationalis m
(Krugm an, 1997). He also shifts or at least
clari es his earlier positio n on `strategic
trade theory , based on the new theories of
international trade referred to above whereby
intervention to prom ote exports in particular
sectors could stim ulate growth and raise real
incom es. He argues that subsequent research
has indicated the problem s in practice of
identifying relevant sectors and appropriate
form s of intervention, while the pay-offs
even from a highly successful strategy would
be extrem ely modest: the stakes involve d
are very small, on the order of a few tenths of
one percent of national incom e (Krugm an
1997, p. 69). He reiterates this in his review
of Tyson (1992) a self-declared cautious
propon ent of strategic trade theory as a
policy measure. It is the very com plexity
of intervening in im perfect markets for
example, outcom es depend on the dynam ic
strategic responses of different actors to
policy interventions which makes such
theory so dif cult to apply in practice.
Krugm an subsequently adds to his argu-
ment more speci cally in relation to the sup-
posed threat to W estern econom ies posed by
com petition from low -wage nations. The ar-
gum ent, as sum m arised by Krugm an, is that
with increasingly free trade, many industries
will be tempted into relocating in countries
with low labour costs which will attract capi-
tal and technology. These countries will run
huge trade surpluses creating either large-
scale unem ploym ent or sharply falling wages
in the form erly high-w age nations. T his, he
argues, runs com pletely counter to the basic
fact of national incom e accounting whereby:
savings 2 investm ent 5 exports 2 im ports
Thus, if investm ent rises in low wage coun-
tries through an in ow of capital, then over-
all they will run a trade de cit not a trade
surplus. The reason for this is that wage rates
 GE OG RAPH ICA L ECO NO MICS
will rise along with average productivity.
Individ ual modern factories may achieve
high productivity with relatively little in-
crease in their ow n wage rates (since average
productivity rates and wage rates across the
country as a whole will rise only marginally).
They may therefore be able to com pete effec-
tively and increase exports. T his, according
to Krugm an, simply re ects com parative ad-
vantage and does not contradict the broader
conclusion relating to the econom y as a
whole and its relation to the high-w age
countries. The latter bene t, in fact, from
im porting goods more cheaply than they can
be produced dom estically and from the
overall trade de cit run by the low er-wage
countries. Paradoxically at rst sight, it is
rising wages in the low -wage countries that
may im pact adversely on the higher wage
rather than continu ing low wages. As wages
rise throug h productivity gains in som e sec-
tors (for example, cars) goods in other export
sectors (for example, footw ear and clothing)
may becom e more expensive re ecting the
increase in average wages. International
trade, as he puts it elsewhere: is not about
com petition, it is about mutually bene cial
exchange (Krugm an, 1997, p. 120). Krug-
man s argum ent essentially suppor ts the con-
cept of free trade whereas the logic of the
counter argum ent, as he observes, leads in
the other direction. And overall, he maintains
that the predom inant im pact of productivity
growth in developing countries is higher
wages in those countries with generally no
adverse im pact overall in developed coun-
tries.
Elsewhere, how ever, he argues the seem-
ingly contradictory point that, in theory at
least, a ow of investm ent from the devel-
oped, high-w age countries to low -wage
countries (if, for example, manufacturers
shifted dom estic produc tion to low -wage
countries), could result in a drop in produc-
tivity and real wages in the developed coun-
tries. Here he argues that, in practice, given
the scale of capital ow s to the low -wage
econom ies relative to the overall size of the
developed world econom y, the effect on real
wages has been negligible. The theoretical
825
argum ent put by Krugm an, moreover, relates
speci cally to the capital diversion from the
productive sector of the US econom y not
the im pact of wage levels as such or produc-
tivity in the developing countries, which as
argued earlier have little im plication.
Localisation and the W orld Econom y
Krugm an provide s a further perspective on
the relationship between international trade
and the localisation of econom ic activity in
his essay com paring the Chicago of a century
ago with present-day L os Angeles (LA). An
argum ent which is, he claims, growing in
popular ity among econom ists is: that a par-
ticularly good way to unde rstand the Ameri-
can econom y is by studyin g American cities
(Krugm an, 1997, p. 206). He makes three
main points about LA as a city. First, the
most striking feature of LA is: what we
might call the abstractness of the m odern
city s econom y the way it seems so discon-
nected from the physical world (Krugm an,
1997, p. 298). Echoing his argum ents out-
lined earlier as to the role of history coupled
with cum ulative causation, he suggests
(pp. 208209) that:
T ry to understand why any of LA s most
characteristic industries are there now, as
opposed to how they got started, and you
always nd a circular argum ent. The lm
studios are there because of the large pool
of people with specialised skills, and the
skilled people are there because it s where
the jobs are.
The city s econom y, he argues, seems
strangely detached from any sense of place
(p. 210). This is reinforced by the sense in
which the working people of LA, the build-
ings in which they work and whole city look
very much like anyw here else. Secondly, the
export base of LA is highly specialised; de-
spite the city s im mensity, it is dependent on
a few key industries. It sells a surprisingly
narrow range of goods and services to the
world at large. Thirdly, most employm ent is
in `non-b ase activities, goods and particu-
larly services provide d by local workers for
826 MA RT IN BODD Y
local consum ption. Com paring this (p. 211)
with Chicago a century ago:
Although we talk a lot these days about
globalization, about a world grown small,
when you look at the econom ies of mod-
ern cities what you see is a process of
localisation: a steadily rising share of the
work force produces services that are sold
only within that same metropoli tan area.
Chicago a century ago was, in any case,
strongly tied in with a world-w ide web of
markets, trade and nance.
It is this more recent process of localisa-
tion, he goes on to argue, which:
explains what would otherw ise seem a
paradox for the world econom y: the fact
that international trade is not much bigger
now , as a share of world output, than it
was a century ago (p. 212).
Tradeable goods represent a steadily shrink-
ing share of the econom y as a whole , even
though elements of production seem increas-
ingly internationalised and transport and
com munications so much more effective.
This re ects the greatly increased productiv-
ity achieved in the production of goods than
in services. Or rather, the fact that while we
have made:
rapid progress in eld where the infor-
mation is relatively easy to form alise, to
embody in a set of instruc tions to a robot
or com puter; we have made much less
progress in activities, from cutting hair to
medical care, where the inform ation pro-
cessing is of the exceedingly subtle and
extremely com plex kind that we call com -
mon sense (p. 213).
Given this increase in productivity (and re-
duction in employm ent), the econom y in-
creasingly focuses on the `non-tradeable (by
which he means `non-exportable ) activities
that make up the `non-b ase employm ent that
occupies most people in modern cities:
And that s why most people in Los Ange-
les produce services for local consum p-
tion, and therefore do pretty much the
same things as most people in London,
Paris and modern Chicago (p. 213).
This, he suggests, is also why `deindustriali-
sation , the disappearance of m anufacturing
jobs, is not the concern it is som etimes
thought to be.
4. Summ ary
It is useful at this stage to sum marise the key
ideas arising out of Krugm an s work which
are most relevant to the form ation and
grow th of cities, trade and regional develop-
ment, agglom eration and localised externali-
ties, know ledge-transfer and inform ation.
(1) The spatial concentration of econom ic
activity at a broad regiona l level (US states,
Europea n countries) can be derived from for-
mal models which com bine scale econom ies
related to market size, and transport costs.
Econom ies of scale encourage concentration
of production. Transaction costs across space
encourage location where dem and is large
and/or the supply of inputs is particularly
convenient. Such models dem onstrate that,
depending on the value of the param eters,
either a single agglom eration or m ultiple ag-
glom erations may be derived a range of
different equilibrium points being possible.
(2) The lower the transaction costs across
space (including transport costs and tariffs)
and the greater the econom ies of scale, the
greater the tendency towards agglom eration
and the smaller the likely num ber of clusters.
(3) External econom ies play a key role in the
clustering of industries in a particular loca-
tion. These, however, include not only the
`pure or `technological externalities of con-
vention al mainstream econom ics (which do
not violate assumptions of perfect com pe-
tition) such as ows of know ledge in a
localised cluster of rms. They also
include as Marshall had argued earlier the
role of market size in support ing ef cient-
scale specialist suppliers of goods and ser-
vices and labour market pooling . The effects
of both depend on increasing returns to scale
and therefore im ply im perfect com petition.
 GE OG RAPH ICA L ECO NO MICS
(4) The striking feature of econom ic activity
is its spatial concentration. In order, there-
fore, to understand how the international
econom y works or to unde rstand differences
in national growth rates, a good place to start
is by looking at differences in regional
growth and at local specialisation.
(5) Increasing returns of one form or another
affect econom ic geography at a range of
different scales including the location of par-
ticular industries, the existence of cities
them selves and developm ent at the broader
regional level of US states or European coun-
tries.
(6) Scale econom ies are at least as im portant
as com parative advantage in explaining trade
betw een territories. Much of international
trade represents arbitrary specialisation based
on increasing returns. Such scale econom ies
re ect both backwards linkage s whereby
ef cient-scale suppliers are suppor ted and
forward linkages to markets.
(7) The agglom eration of econom ic activity
in space in part re ects processes of cum ulat-
ive causation activity tends to cluster where
markets are large and markets tend to be
large where activity clusters. This is rein-
forced by, for example, the concentration of
transport infrastructure to serve such clusters,
such infrastructure itself being subject to in-
creasing returns.
(8) Much of the localisation of econom ic
activity within countries re ects historic al
accident and seemingly trivial initial events,
coupled with cum ulative causation.
(9) Cum ulative processes tend to `lock in
patterns of uneven developm ent. Patterns of
econom ic developm ent are subject to `path
dependence or QW E RTY econom ics.
(10) Expectations and the anticipation of
change can becom e self-ful lling. Local
boosterism may therefore be justi ed.
(11) Trade is generally bene cial, a positiv e-
sum gam e based on strategic com plem entar-
ity rather than zero-sum . The supposed
dangers posed by an increasingly com petitive
827
world econom y and the shift of production to
low-wage countries pop international-
ism is a misleading and dangerous obses-
sion. Countries are not generally in
com petition a nation is not a corporation.
(12) Decline in manufacturing employm ent
and output by value in high-w age countries
largely re ects increased productivity in
these industries com pared with the growth of
employm ent in a range of service activities
where this has been much slow er. T he effects
of a trade de cit in manufactured goods, of
deteriorating terms of trade or a net shift of
investm ent overseas to low-wage countries
have been negligible.
(13) The levels of national incom e and of
living standards re ect, above all, dom estic
productivity and are largely unaffected by
shifts in produc tivity in other countries. The
key reason for the relative decline in US
living standards has been lagging productiv-
ity gain in the service sector which accounts
for an increasing share of consum er expendi-
ture.
(14) Strategic trade policy protectionism ,
subsidy or suppor t for key industries can in
theory generate longer-term com petitive ad-
vantage. This will particularly be the case
when resources, including labour and capital,
can be drawn in from othe r regions. In prac-
tice, how ever, strategic trade polic y at the
national level is hard to im plem ent and the
scale of im pact is likely to be very lim ited.
(15) Attempts to boost com petitive ness by
support ing high value-added sectors which
com monly associate these with high technol-
ogy are misguide d. High value-added sectors
are those where capital content is high rela-
tive to labour and in the US, for example,
include cigarettes and oil re ning. E lectron-
ics and aerospace are about average for man-
ufacturing as a whole and well below steel
and cars.
(16) E xternalities as a source of clustering of
econom ic activity are evident historically and
across different industrial sectors. They are
by no means con ned to modern, high-tech-
828 MA RT IN BODD Y
nology industry as typi ed by Silicon Valley
or Route 128 and where `know ledge
spillov ers are com monly seen as dom inant.
(17) The export base of modern cities in the
developed world is narrow and highly spe-
cialised. An increasingly large share of their
popula tions produce `non-b ase goods and
services for local consum ption. E conom ic
activity is in this sense increasingly localised
despite the apparently increasing internation-
alisation of produc tion and im provem ents in
transport and com munications. Tradeable
(export) goods account for a decreasing share
of employm ent and the econom y as a whole.
This re ects the greatly increased productiv-
ity achieved in these industries com pared
with much of the service sector.
5. Discussion and Critique
This section goes on to take a more critical
look at som e of the key ideas arising out of
Krugm an s work. The paper then goes on, in
the light of this discussion, to look at a
broader albeit related range of work
within the recent econom ics literature.
Agglom eration and Increasing Returns
Krugm an dem onstrates that agglom eration
can result from the interaction of increasing
returns and transaction costs. Using simple
form al models, he can derive single-cluster
and multi-cluster outcom es. From the per-
spective of the econom ics profession, this
dem onstration of form al derivation may be
of key im portance. The question is, how ever:
how im portant or relevant is this more gener-
ally? It does suggest that increasing returns
and transport costs may in practice be am ong
the factors generating agglom eration. It can-
not reasonably support any claim that this is
the only or even the most im portant factor.
The model of necessity assumes away the
`com plexity of the real world including the
operation of other factors. It does not provide
any way of com paring the relative im port-
ance of other factors. From the perspective of
econom ic geogra phy or urban and regional
studies then, how im portant is it that the
effects of one possible (inde ed likely) factor
generating agglom eration can be modelled to
the satisfaction of professional econom ists?
External Econom ies
This problem of disting uishing between dif-
ferent factors contributing towards agglom er-
ation is apparent in Krugm an s own work.
He sees agglom eration as generated by the
interaction of increasing returns and trans-
action costs across space what Henderson,
(1986, in Glaeser et al., 1992) has termed
`urbanisation externalities . He also argues
for the im portance of localised external econ-
om ies to the localisation of econom ic activity
in space. T hese rest on the Marshallian trin-
ity of labour pooling , specialised inputs and
know ledge transfers. How the two relate is
not however made clear. The increasing re-
turns/spatial transaction costs model, labour
pooling and specialised inputs have in com -
mon the im portance of increasing returns
(whereas know ledge transfers, it is assumed,
do not). The source of those increasing re-
turns seems, however, to differ among all
three. In relation to the pure increasing re-
turns model in fact, Krugm an does not seem
to be very speci c the assumption seems to
be that increasing returns relate to xed start-
up costs (and possibly the costs of R&D). It
is not clear whether labour pooling and
specialised inputs are to be taken as sub-
categories of this general case.
T here is also som e suggestion in Krug-
man s work that the pure increasing returns/
spatial transaction costs model with market
size a key factor operates at a broader re-
gional scale, at the level of US states or
Europea n countries, generating inter-regiona l
centreperiphery patterns. Localised external
econom ies on the other hand operate at a
smaller spatial scale, generating local clus-
ters at the level of the single city or small
cluster of cities (Krugm an, 1991a, pp. 70
71). T his suggests, perhaps, that pure in-
creasing returns operate at a broader
inter-regional scale while Marshallian exter-
nalities are som ehow the glue holding
 GE OG RAPH ICA L ECO NO MICS
together industrial clustering at a more lo-
calised level. T his is not, however, made
explicit or elaborated. It is not clear whether
both pure increasing returns and local exter-
nalities operate simultaneously; what might
determine the relative im porta nce of each; or
whether there is a cross-over point in term s
of their relative im portance for exam ple,
related to scale. Krugm an may have set out
to incorporate space more effectively into
mainstream econom ics but he is yet to ad-
dress the issue of scale.
In discussing the Marshallian trinity of
localised externalities, Krugm an discusses
the possible relative im portance of labour
pooling and specialised inputs versus pure,
technolog ical spillov ers (in the context, for
example, of Silicon Valley and Route 128).
He argues that the rst two are im portant
factors at least, because industries other than
high technology have been characterised,
historically, by clustering (Krugm an, 1991a,
pp. 53, 59). This argum ent in itself relies on
the assumption that the clustering of high
technolog y derives from factors different
from those operating in other industrial sec-
tors, in particular, from know ledge transfer
an assumption im plicit in Krugm an s
argum ent (Krugm an, 1991a, p. 53). Later,
however, he also argues that high technology
clusters relate, in part at least, to pooling of
skilled labour (Krugm an, 1991a, p. 65), un-
derm ining his earlier assumption. The key
point is that the relative im portanc e of the
three main sources of local externalities
clearly cannot be derived from Krugm an s
form al models. His argum ent is based, there-
fore, on relatively weak empirical and his-
torical evidence and on what is at tim es
som ewhat confused verbal reasoning. He
also argues for highlig hting labour pooling
and specialised inputs because they can be
modelled, whereas know ledge transfers
which, he claims, leave no visible trace, can
only be assumed. Here he is guilty of what
he identi es as a key trait in modern eco-
nom ics, that of sidelining what cannot appar-
ently be modelled a shortcom ing which he
would presum ably see as justi ed. And
whereas it may be dif cult to model know -
829
ledge transfers as such, there is a growing
body of what Krugm an would refer to as
`sociological research identifying and inves-
tigating processes of know ledge transfer
(Jaffe et al., 1993; Scott and Storper, 1992).
It is questionable, as well, whether know l-
edge transfer is in fact unaffected by scale
econom ies, as conventionally assumed by
mainstream econom ics and Krugm an as well.
A larger cluster of enterprises would seem to
give more scope for useful transfer of know l-
edge and inform ation. Spatial clustering
translates into both low er transaction costs
and also wider opportu nities for matching
needs and capabilities and for the inter-
change of useful know ledge and inform ation
(Scott and Storper, 1992).
Again, from the perspective of form al eco-
nom ics, it may be signi cant that the oper-
ation of labour pooling , for example, can be
derived from a sim ple two-country model
and captured in a form al, mathematical deri-
vation (Krugm an, 1991a, pp. 123128). Iden-
tifying the centrality of increasing returns to
a range of processes generating agglom er-
ation adds to an understanding of how these
operate. The lack of purchase on the relative
im portance of different form s of scale econ-
om ies in relation to agglom eration dem on-
strates, however, the severe constraints on
the scope of the form al modelling process.
History
Krugm an makes a strong case for history in
the sense of initial location patterns which
then becom e locked in by path dependency
generated by processes of cum ulative
causation.
T he long shadow cast by history and acci-
dent over the location of production is
apparent at all scales, from the smallest to
the largest (Krugm an, 1991a, p. 9).
In this sense, he argues, history matters:
And this clear dependence on history is the
most convincing evidence available that
we live in an econom y closer to Kaldor s
vision of a dynam ic world driven by
830 MA RT IN BODD Y
cum ulative processes than to the standard
constant-returns model (Krugm an, 1991a,
pp. 910).
This focuses attention on the tendency of
clusters or agglom erations of econom ic ac-
tivity in cities and regions to persist and
consolidate over tim e. M artin and Sunley
(1996) highlig ht this as an im portant if not
particularly novel feature of his work. It sug-
gests the need to examine, in practice, the
processes by which this happens. From
Krugm an s perspective, path dependence and
lock-in derive essentially from increasing re-
turns re ecting the com bination of pure in-
creasing scale effects togethe r with localised
externalities and, in som e circum stances, ex-
pectations or active policy. He neglects,
however, the role of local embeddedness and
the in uence of local infrastructure, institu-
tional, social and cultural practices the
`socio-institut ional externalities emphasised
by the geogra phical literature and social eco-
nom ics of urban and regional studies. Again
this re ects his disparagem ent of social eco-
nom ics and his sidelining of factors which
cannot readily be modelled.
Martin and Sunley point out, however, that
despite an emphasis on history in the sense
of path dependence and lock-in, Krugm an
pays too little attention to history in the sense
of change and developm ent:
He claim s that the same broad locational
forces which explain the growth of nine-
teenth-century concentrations also underlie
the continued tendency to agglom eration.
Indeed, this is one reason why he is reluc-
tant to emphasise technological spillovers
as a key determinant of contem porary
clusters (Martin and Sunley, 1996, p. 269).
Krugm an makes this point, for exam ple, in
discussing Silicon Valley com pared with ear-
lier low -tech clusters. In his form al models,
he allows for the fact that parameters may
change and different equilibria emerge. He
makes general references to historical change
in various of his writings for exam ple,
when contrasting Chicago and Los Angeles.
As Martin and Sunle y conclude, however,
the historical grounding of his approach
remains unclear and clouded in ambiguity
(p. 269). Krugm an him self might well argue
that his models simply capture the core of the
processes at work as successfully now as in
the late 19th century.
His emphasis on continu ity in the factors
accounting for agglom eration is, as Martin
and Sunley point out, in marked contrast to
the recent emphasis in econom ic geography
on restructuring throug h tim e and the con-
stant reworking of the econom ic landscape.
So too is his emphasis on the random nature
of the initial location of econom ic activity
with all subsequent locational decisions sub-
sum ed within `cum ulative causation . This
again ignores the com plex overlaying of lo-
cational decisions on inve stment (and disin-
vestm ent) over tim e in response to the
com bined and interacting im pacts of a wide
range of factors.
Local Dependency
Krugm an, as we have seen, emphasises the
role of the pure increasing returns/spatial
transaction costs argum ent in generating ag-
glom eration of econom ic activity in space.
This in itself should point us in the direction
of inve stigating the operation of this in prac-
tice. It is likely to be one key factor in
explaining the growth of cities and regions
or, more accurately, of industries and indus-
trial sectors. He also, as noted, emphasises
the im portance of local externalities, going
beyond the conventiona l acceptance by
mainstream econom ics of pure technological
spillovers to rehabilitate and extend M ar-
shall s broader range of processes. Recent
work within econom ic geography and urban
and regional studies has, however, gone con-
siderably further in exploring the nature of
such `externalities .
T here are a num ber of related strands to
this work. Initial work based in ideas around
post-Fo rdism and exible specialisation
tended to see clusters and agglom eration in
terms of neo-M arshallian externalities. Shifts
in technolog y and markets had increasingly
led to horizontal and vertical disintegration
 GE OG RAPH ICA L ECO NO MICS
and to the developm ent of analogous internal
organisational structures within larger enter-
prises. Spatial proxim ity then served to min-
im ise transaction costs between networks of
functionally interlinked enterprises. The rise
of exible specialisation has led, it is argued,
to a renew ed emphasis on agglom eration.
There has been an increasing emphasis in
later work on the key role of networking,
linkages and collaboration as a basis for
innova tion and grow th. Spatial proxim ity
from this perspective is about more than
simply minim ising transaction costs. It fos-
ters the transfer and exchange of form al
know ledge and inform ation (pure technologi-
cal spillovers). It also, however, facilitates
the developm ent of trust, shared values and
conventions on which successful collabora-
tion is based and it fosters the exchange of
tacit inform ation embedded in the know ledge
and experience of the workforce and the
everyday practices of enterprises included
in what Storpe r (1997, p. 80) terms untraded
dependencies . Individ ual enterprises are
`embedded in com plex networks and rela-
tionshi ps both market-based and non-m arket.
This is reinforced by the developm ent of
institutional structures and infrastructure sup-
portive of spatially concentrated clusters of
enterprises and processes of learning and
innova tion.
Krugm an him self is particularly disparag-
ing of such work with its emphasis on social
econom ics and lack of rigour. It is not with-
out its own dif culties. As Martin and Sun-
ley (1996) point out, accounts based in
exible specialisation im plicitly assum e a
move towards perfect com petition. Empirical
research indicates an overemphasis on the
local interconnectedness of enterprises. The
continu ing dom inance of large rms is also
underplayed. Vertical disintegration has been
very lim ited with larger, oligopo listic enter-
prises if anythin g of increasing im portance.
As Martin and Sunley argue, internal econ-
om ies of scale may be increasingly im portant
in generating agglom eration as opposed to
external econom ies perhaps closer in som e
ways to Krugm an s pure increasing returns/
spatial transaction costs model. T hese short-
831
com ings stem to som e extent from the
reliance of much of this work on a lim ited
num ber of case studies purposively selected
as representing dynam ic industrial districts.
On the other hand, this work demonstrates
the multiple and com plex form s of externali-
ties which contribute to agglom eration
through their im pacts on productivity and
grow th (although little attention has been
paid to assessing the relative im portance of
different factors). It emphasises and elabo-
rates, in particular, factors which Krugm an
dism isses as pure technological spillovers in
the form of know ledge transfer. It also em-
phasises the overall regional or sub-regional
context, blurrin g the distinction between the
individ ual enterprise and the broader set of
enterprises and institutional structures as a
spatially concentrated production system:
econom ic activities are em bedded in and de-
pendent upon social and cultural contexts.
Thus this work emphasises the partial nature
of Krugm an s ow n account of the relevant
factors. Krugm an s account, on the other
hand, as Martin and Sunley (1996, p. 273)
point out, emphasises the continu ing need to
consider the im portance of market-based in-
teraction alongside the non-m arket, non-hier-
archy relationships emphasised by the new
regiona l geography. As they argue, his
focus on pecuniary externalities, especially
market-size effects, and the role that large
oligopo listic produc ers can play in indus-
trial agglom eration suggests that industrial
geographers need to adjust their accounts
(p. 285).
It is a useful counter to the emphasis in the
exible specialisation literature and related
accounts on local externalities among small
com petitive rms which cluster togethe r to
minim ise transaction costs. T his represents a
particular strength of his work.
At the same tim e, a key lim itation of his
work is his rejection of non-m arket externali-
ties; this rests prim arily on the fact that they
cannot be modelled and therefore have to be
assumed. W hile this may rule them out from
a form al econom ic perspective, as the new
regiona l geogra phy dem onstrates, they can
832 MA RT IN BODD Y
and have been exam ined from alternative
methodo logical and disciplinary perspec-
tives. This leaves him , however, reluctant to
discuss the spatial im pacts of technolog ical
or know ledge spillove rs or the wider range of
local externalities suggested by the new re-
gional geographical literature. T his is som e-
what contrary since, as Martin and Sunley
(1996, p. 273) point out, Krugm an s
own dem onstration of the possible role of
expectations in regional developm ent itself
suggests the need to understand their form a-
tion which is itself essentially a social
process.
Trade, Competitiveness and Policy
Krugm an argues, as noted above , that inter-
national trade is generally bene cial, that
trade is a positiv e rather than zero-sum gam e
and that concerns over national com petitive-
ness are therefore misplaced. Given his argu-
ment as to the close relationship between
international trade and the clustering of econ-
om ic activity at the sub-national scale, his
case for international trade has im plications
in turn for econom ic prosperity at the re-
gional and possibly sub-regional or city
scale. On the other hand, his argum ent has
not gone unquestioned. As Martin and
Sunley (1996, p. 275) point out, both dim in-
ishing returns and increasing returns can mit-
igate the bene ts of trade. But, as they also
observe (p. 285), one of the key strengths of
his work is:
his linking of external econom ies and
regiona l industrial agglom eration with
trade [which] provid es an im portant
corrective to the new industrial geography,
in which regional industrial developm ent
is view ed overwhelm ingly as an indige-
nous process and the role of trade is typi-
cally either subord inated or neglected
altogether.
Krugm an also argues that where increasing
returns encourage a greater degree of special-
isation, this may render sub-regional agglom -
erations more vulnerable to external shocks
from , for example, change in dem and or
technology. Regionally speci c recession
and crisis are more likely and as Krug-
man s own models have suggested, crisis
when it happens can be relatively rapid.
Questions of specialisation, growth rates and
vulnera bility to crisis of the specialised `ex-
port sector are equally relevant at the sub-
regiona l and city scales possibly more so,
given the tendency towards greater specialis-
ation in smaller areas. As Martin and Sunley
(1996, pp. 278279) again point out, how-
ever, there is no simple relationship between
regiona l specialisation and vulnerability to
regiona l shock. This will depend in part on
the exibility of industrial structures (ar-
guably greater where exible specialisation
is more developed) and labour market
exibility. Krugm an s focus on the im plica-
tions of region-speci c shocks is, how ever,
as Martin and Sunley observe, an im portant
feature of his work. It is at the same tim e
lim ited in the sense that it fails to shed much
light on why particular econom ies can ex-
perience a rapid reversal in fortune or why
others are better able to adjust, industrial
specialisation and labour market exibility
being only part of the possible explanation.
W hile his view s have shifted over tim e,
Krugm an has also argued for the role of
`strategic trade policy targeting key sectors
where protection, export subsidy , support for
R&D or other form s of assistance could gen-
erate increased returns. Sim ilar argum ents
are advanced in relation to `boosterism at
the city scale, where expectations may also
play a role. Such advantage may subse-
quently be locked in by increasing returns,
market size effects or other cum ulative ef-
fects. Regional and local clusters are central
to this process for it is at that level, accord-
ing to Krugm an, that advantage can most
effectively be created. To quote M artin and
Sunley (1996, p. 282), this im plies that:
not only are regional and local industrial
clusters conside red to provide empirical
proof of the im portance of external econ-
om ies, such clusters help to de ne what
industries should be suppor ted. Geographi-
cal clustering provid es the justi cation for
 GE OG RAPH ICA L ECO NO MICS
industrial intervention, and the aim of that
intervention should be to foster local ex-
ternalities [emphasis in the original].
W hile this goes som ewhat further than Krug-
man him self, it is close, as Martin and Sun-
ley point out, to Porter s view on the role of
local and regiona l econom ic developm ent
policies in fostering national com petitiveness
(see, for example, Porter, 1990). It is also
close to those who have argued for the
exibly specialised industrial district or com -
plex securing multiple local externalities as
the model for indige nous local econom ic de-
velopm ent (Cooke, 1990; Storper, 1992a,
1992b; Hirst and Zeitlin, 1989).
However, the question, again, is whether
this leads to increased specialisation and
therefore vulnerability to external shock, or
whether increased exibility can ensure the
adaptability of localised industrial com plexes
to such events. The extent to which active
industrial policy does in fact lead to in-
creased specialisation or whether a multi-
sector approa ch is possible is clearly an
issue. At a more speci c level, Krugm an
him self has questioned the emphasis in trade
and industrial policy on high-technolo gy in-
dustries in particular, arguing that this
rests on a misunderstanding of high value-
added. This is at one level a useful counter to
the often uncritical attachm ent to the pro-
motion of high technology and misguided
attempts to recreate Silicon Valley. The
case for high technology, how ever, rests not
simply on issues of value-added, but on po-
tential growth rates, the stim ulus to inno-
vation and other positiv e externalities, so
Krugm an s case is not as clear-cut as he
makes out.
Rigour M ortis?
Krugm an is widely acknow ledged to have
extended the bounda ries of form al econom ic
modelling. He also makes clear his suppor t
in this respect for the professional standards
of the econom ics profession. Krugm an
dem onstrates that form al econom ic models
can, given appropriate simplifyin g assump-
833
tions, handle a range of situations in which
increasing returns and hence im perfect com -
petition are of central im portance. As noted
earlier, he claims af nity with Kaldor s be-
lief in the irrelevance of equilibrium eco-
nom ics . As both Dym ski (1996) and Martin
and Sunley (1996, p. 275) argue, how ever,
this does not involve moving very far from
mainstream rational choice equilibr ium mod-
els. It does not, therefore, make much in the
way of inroads into the com plexities of real-
world situations. As Martin and Sunley
(1996, p. 287) observe:
In his quest for econom ic rigor, Krug-
man s mathematical form alization of the
processes of industrial agglom eration and
uneven regional development has taken
him away from the richness of Kaldor s
original approach tow ard the lim ited ab-
stract landscapes of regional science the
ghosts of constrained maxim isation and
equilibrium solutio ns still haunt much of
his analysis.
The breakthrough s of Krugm an and othe rs in
recent years may look like a signi cant ex-
tension to the bounda ries of the discipline as
seen from within the con nes of professional
econom ics. From the perspective of econ-
om ic geography and urban and regional stud-
ies, on the othe r hand, they do not appear to
have made much of an inroad into the com -
plexitie s of real-world processes. Indeed,
from this perspective, the speci c advances
in terms of form al modelling look relatively
trivial.
T his brings us back to the issue of Krug-
man s methods and approa ch; as indicated
earlier, many of these argum ents are based in
form al econom ic models. These focus, in
particular, on situations in which increasing
returns and therefore im perfect com petition
are central. Increasing returns represent a
com mon thread to the issues addressed by
Krugm an and to the models developed to
cope with them . They represent, as well,
highly abstract form al models. He frequently
uses simple two-country or two-region mod-
els to develop his case. His argum ent as to
834 MA RT IN BODD Y
the bene ts indeed necessity for this were for example he juxtaposes sim ple form al
noted above.
Krugm an s case for form al, mathematical
econom ics as the holy grail of social sci-
enti c know ledge and his disparagem ent of
other form s of social science has been dis-
cussed at length elsewhere and is not the key
issue here. It can simply be noted in passing
that his case is true only by de nition. The
sociology of `scienti c know ledge tells us
that different disciplines develop their own
criteria as to what is acceptable and have
different ways of representing the world,
with different criteria of evidence, proof and
objectivity. That different branches of eco-
nom ics have made major contributions both
to our understanding of and practical engage-
ment with the world clearly goes without
saying. There may also be considerable pro-
fessional satisfaction to be had from form al
mathematical econom ics. Krugm an clearly
and presum ably deliberately missed the
point in talking about models and metaphors.
Social science across the board is engaged in
a process of abstraction from `reality a
process of model buildin g. It is simply that
the criteria applied from different perspec-
tives are different. A key issue, however, is
whether the sacri ces and simpli cations re-
quired by the ideals of form al modelling are
simply such that at tim es they negate its
utility other than as an elegant intellectual
exercise.
Krugm an him self, moreover, is not the
consistent purist which might be im plied
from his own discussion of method and his
suppor t for form al econom ic modelling. His
approach is in fact more varied and in fact
the broader relevance and value of his work
derives, in part, from this. His discussion of
international trade and new trade theory, for
example, rests in part on these developm ents
in modelling to which he has him self con-
tribute d. He also, however, draw s on inter-
national econom ics, national incom e
accounting and `simple arithm etic to make
his point. He draws as well, in som e cases,
on empirical inform ation to make or back up
his case. Here and elsewhere in his work
on the concentration of econom ic activity,
models with narrative accounts or simple
empirical material. He also in places argues
that while, theoretically, there may be a num -
ber of possible outc om es, empirical material
dem onstrates that in practice this has not
been the case. It is im portant to be aware of
this and to recognise that his contributions
and claim s rest only in part and som etimes
remotely on truth-claims ground ed in form al
models. As M artin and Sunley conclude:
It is perhaps less the speci c results of
Krugm an s analyses that are im portant for
econom ic geography than the general
stim ulus they provide for further enquiry
(Martin and Sunley, 1996, p. 285).
Krugm an s own perspective, expressed
som ewhat more soberly in his most recent
com mentaries addressed to the econom ic
mainstream (Krugm an, 1998a, 1998b) , ac-
know ledges as much. T he new geographical
econom ics has opened the door to analytical
discussion within econom ics of interesting
and im portant issues and the new models are
novel and engaging but, he asks:
are they relevant An unfortu nate feature
of much of the new theorising since the
1970s is that it has failed to lead to much
validating empirical work (Krugm an,
1998a, p. 172).
There are clues but the results are so far
inconc lusive. The new geographic al econom -
ics, then,
has been more successful at raising ques-
tions than answering them , better at cre-
ating a language with which to discuss
issues that at creating the tools to resolve
those discussions (Krugm an, 1998a,
p. 173).
It is nevertheless better, he argues, to have an
unresolved discussion about the spatial as-
pects of the econom y than to ignore them.
6. City Growth
This nal section takes the discussion be-
 GE OG RAPH ICA L ECO NO MICS
yond the work of Krugm an him self to con-
sider a broader range of studie s within the
econom ics literature focusing in particular on
urban agglom eration, externalities, inno-
vation and city grow th. They are generally
ground ed in much the same area conceptu-
ally, drawing on `new growth theory , `new
trade theory or the `new econom ic geogra-
phy . They represent, however, a som ewhat
more empirical approach to the issues around
urban agglom eration and city growth.
Empirical studies drawing on the new geo-
graphical econom ics and new grow th theory
have generally tried to relate growth at na-
tional or metropolitan scale to a range of
postulated positiv e and negative in uences
by means of cross-sectional regression analy-
ses. As Krugm an observes, however, these
have generally failed to offer much in the
way of direct testing of the speci cs of the
models generated by these theoretical devel-
opm ents. The work of Glaeser and associates
com es closest perhaps (Glaeser et al., 1992;
Ades and Glaeser, 1995; Glaeser, 1998).
Reviewing a wide body of econom ic
analysis focusing in particular on the costs
and bene ts of urban agglom eration and the
im plications of this work for the future of the
city. Glaeser (1998, p. 140) observes that
from an econom ic perspective, simply put,
a city is just a dense agglom eration of
people and rms. All of the bene ts of
cities, the contribution of cities to produc-
tivity, com e ultim ately from reduced trans-
port costs for goods, people and ideas.
The costs of cities include health costs, pol-
lution, congestion and com muting costs,
crime and social problems. T he future of
cities depends on the balance betw een the
bene ts and costs of urbanisation and how
these change in the future.
The bene ts of urban agglom eration are
dem onstrated by the preference of individ u-
als and rms for this as a location pattern but
also by the wage prem ium paid to workers in
urban areas. W ages are positively related to
city size, other things equal (Glaeser and
Mare, 1994). The willingn ess of rms to pay
835
higher wages to the same workers in urban
areas re ects the higher productivity of
workers in such areas. This is so even though
the higher costs of urban living offset the
bene t of higher wages to workers them -
selves. W orkers may also bene t from non-
work-related factors such as a more active
social environ ment facilitated by proxim ity.
Agglom erative Effects
Minim ising the cost of moving goods has
historic ally been the key factor in the con-
centration of manufacturing in urban areas,
offering market access to residents and more
widely from transport hubs. Glaeser, like
Krugm an, emphasises that:
If there weren t xed setup costs or in-
creasing returns of som e sort, factories
would subdivide and locate throug hout
space to be close to every consum er
(Glaeser, 1998, p. 144).
It is the combinatio n of transport costs and
increasing returns which generates agglom er-
ation. The geographical concentration of
manufacturing has tended to reduce with the
lowering of transport costs and a lessening of
increasing returns with more custom ised pro-
duction and greater inform ation content.
New manufacturing plants still tend to locate
near suppliers and markets but the effect is
very small (Glaeser et al., 1995). The costs
of urban location for most manufacturing are
now much higher than the bene ts.
Dense urban areas also m inim ise the fric-
tions of distance between people. Access to a
large m arket allow s individuals to specialise
more, generating increasing returns from a
ner divisio n of labour. City size thus allow s
for greater specialisation. They also perm it
labour pooling , as argued by Krugm an. The
presence of many alternative employe rs also
increases the bargaining power of workers;
this in turn encourages them to invest more
in their ow n hum an capital in the know ledge
that they will be able to reap the return on
this. Higher levels of unemploym ent in urban
areas might mitigate this but may re ect
836 MA RT IN BODD Y
the fact that cities may attract people who are
prone to unem ploym ent. Dum ais et al.
(1996) suggest that labour pooling has been
the most im portant determinant of which in-
dustries locate together over the past 20
years. Gains, moreover, from specialisation
and from insuring against rm- or industry-
speci c shocks are probably increasing
(Glaeser, 1998). The costs of moving people
are also likely to be increasing with longer
journey tim es such that reducing the distance
betw een people is also likely to be increas-
ingly im portant.
Glaeser (1998) also argues, starting with
the exam ple of Silicon Valley and Stanford,
that the geographical proxim ity created in
urban areas allows ideas to travel more read-
ily and rapidly both by form al and inform al
contact and by workers shifting rms (the
latter, althoug h Glaeser is not speci c on
this, presum ably because proxim ity between
rms increased the probability of their gain-
ing useful know ledge through recruitm ent).
Earlier, it had been argued that:
If geographical proxim ity facilitates the
transm ission of ideas, then we should ex-
pect know ledge spillov ers to be particu-
larly im portant in cities. After all,
intellectual breakthroughs must cross hall-
ways and streets more easily than oceans
and continents (Glaeser et al., 1992,
p. 1127).
Jacobs (1969) and Lucas (1988) had also
linked city grow th and the localised spread of
ideas. Jaffe et al. (1993) show that new
patents are more likely to cite a prior patent
that is close spatially.
Two issues have been raised by alternative
models of know ledge transfer and inno-
vation: rst, whether diversity or industrial
concentration is more conduciv e to growth;
and, secondly, whether a com petitive, small-
rm structure fosters innovat ion or whether
larger rms with a degree of local monopoly
encourage innova tion because the bene ts
can be internalised and captured. Rom er
(1986) in line with Marshall s and Arrow s
earlier work, argued for concentration and
local monopoly ; Porter (1990) argued for
concentration but with local com petition fos-
tering innovat ion and rapid adoption. Jacobs
(1969) saw local com petition as im portant
but argued that innova tion was stim ulated by
variety and diversity in geographically con-
centrated industries rather than narrow
specialisation. These different models all
stress the role of `dynam ic externalities
speci cally, know ledge spillovers for city
grow th.
According to these models, cities grow
because people in cities interact with other
people, either in their own or in other
sectors, and learn from them . Because they
pick up this know ledge without paying for
it, these know ledge spillov ers are external-
ities. T he frequency of interaction with
other people is ensured by their proxim ity
in a city. Because this proxim ity makes
externalities particularly large in a city, all
the models predict that cities grow faster
than rural areas (Glaeser et al., 1992,
p. 1130).
Exam ining the evidence for these alternatives
by means of an empirical study of US cities,
Glaeser et al. concluded rst that industries
grow more slowly in cities in which they are
heavily over-represented. Secondly, indus-
tries also grow faster in cities in which the
rms in those industries are smaller than
average size. If a smaller rm structure is
taken to be more com petitive, then this may
be stim ulating the spread of know ledge and
grow th in line with Porter and Jacobs (al-
though Glaeser et al. are ignorin g other poss-
ible connections betw een rm size and
grow th rates, such as the age and maturity of
rms). Thirdly, city industries grow faster
where the rest of the city is more diverse.
This is com patible with Jacobs case that
diversity stim ulates know -ledge spillov ers,
innovat ion and grow th.
T he fact that, in practice, many cities are
specialised in a few industries, it is sug-
gested, re ects the fact that externalities
other than know ledge spillov ers (which
re ect diversity) are more dom inant
Marshall s labour pooling or specialised in-
puts and services. These `static spillovers
 GE OG RAPH ICA L ECO NO MICS
can account for city specialisation as such.
Knowledge spillov ers, how ever, are essen-
tially `dynam ic spillovers , linked to inno-
vation and grow th. Glaeser et al. thus
disting uish between static spillovers which
can account for the degree of specialisation
and dynam ic spillovers which can account
for growth. As Glaeser observes in a later
paper, however, the evidence is inconc lusive
and: our belief in the intellectual role of
cities com es mainly from case studies and
anecdotes rather than overwhelm ing hard
evidence (Glaeser, 1998, p. 147). Apart
from know ledge spillov ers, urban agglom er-
ation and higher urban density could also
operate throug h accelerating learning throug h
interaction and hence hum an capital accumu-
lation. E vidence suggests that younge r work-
ers learn faster in cities and thus experience
faster wage growth (Glaeser, 1998, pp. 148
149).
It has been argued that inform ation tech-
nology will reduce pressures for agglom er-
ation by making face-to-face contact
obsolete. Cities will continu e, however, to
facilitate unplann ed inform ation ows and
com binations of ideas, which IT generally
does not. Increasing ef ciency and density in
electronic com munication may actually in-
crease the overall num ber of relationships
and in fact increase face-to-face contact
overall. Telecommunic ations does not appear
to be a substitute for face-to-face contact.
People in cities are more likely to use telecom-
munications; those who are close physically
are more likely to com municate; business
travel has increased over tim e, even holding
prices constant. High technology, with cut-
ting-edge com munications technology, is
characterised by a high degree of clustering
(although this could re ect other factors off-
setting the decentralising potential offered by
IT). Overall, rising dem and for contact and
inform ation may further increase the dem and
for urban agglom eration and cities.
Congestion Effects
From an econom ic perspective, it is conges-
tion costs which play a key role in placing a
837
lim it on the size of cities (Glaeser, 1998).
Housing and com muting costs com monly
represent a trade-off and should therefore be
considered toge ther. T he cost of living in
general and of housing costs in particular rise
with city size, re ecting willingne ss to pay
for the bene ts of urban living. Average
com muting tim es also increase with city size
representing a real cost and this cost in-
creases as the value of tim e rises. The differ-
ence between cities of 100 000 popula tion
and 1 million may be in the order of $1000
annually (Glaeser, 1998, p. 151).
In term s of polluti on, there is little corre-
lation between city size and, for example,
sulphur dioxide and ozone. Particulate levels
do rise with city size. T he cost in econom ic
terms, how ever, is estimated to be small
com pared with com muting costs and falling
with changes in technology, emission con-
trols and declining urban manufacturing.
Those in small tow ns suffer almost the sam e
overall level of pollutio n as those in big
cities (Glaeser, 1998, pp. 151152).
Reported crime and victim studies show
crime rates across a range of offences to be
positively correlated with city size (Glaeser
et al., 1996). T he urban crime effect, it is
argued, seems to re ect the higher returns to
crime in urban areas due for example to
access to potential victim s, a low er likeli-
hood of arrest and a greater concentration of
individ uals in poverty who are more likely to
engage in criminal activities. Again, the in-
creased costs of higher crime rates in urban
areas and assumed willingne ss to pay to
avoid crime can be estim ated. T he urban
effect seem s to be weakening, but the im -
portanc e placed on it to be increasing.
Cities are also characterised by higher
concentrations of poverty . Cities may them -
selves cause poverty through greater segre-
gation in cities, for example, or the nature of
social networks and interactions. Recent mi-
grants to cities, however, tend to be as poor
as long-term residents. T his suggests that the
concentration of the poor in cities is due to
the higher rate of movem ent of the poor into
cities cities attract poor people. Cities it
is argued are particularly attractive to the
838 MA RT IN BODD Y
poor apparently because of transport costs,
the public goods bundle and social net-
works (Glaeser et al., 1997, p. 154). Public
transport, welfare spending and public hous-
ing differentially attract the poor. Cities also
repel the rich, who are willing to pay to
avoid crime and poore r public schools. Over-
all, this may tend to reduce urban popula-
tions. T his, however, seems to be an effect
of older cities rather than newer, grow ing
cities such that there may be a life-cycle
effect. And many cities are not affected in
this way. (It may also re ect structural
change in historical patterns of industry and
employm ent.)
Overall, Glaeser concludes that agglom er-
ation econom ies will continu e to be large;
inform ation spillovers in particular will re-
main im porta nt; and telecommunic ations
may increase rather than eliminate dem and
for face-to-face contact. Considerable costs
remain in urban areas.
The likeliest possibility is that the future
will be bright for the relatively hom oge-
neous and low density agglom erations of
the western United States, which can offer
many of the econom ic advantages of ag-
glom eration while also reducing the costs
of congestion and crime. The poorer, more
heterogeneous, older cities, how ever, will
have more of a struggle. The future may
be one where very specialised agglom era-
tions lled with very particular incom e
groups are the norm (Glaeser et al., 1997,
p. 157).
This in itself may reduce innovat ion by re-
ducing unplann ed contacts betw een diverse
individ uals, coupled with increased segre-
gation along incom e and racial lines.
Arguing from an econom ic perspective, in
policy term s, local governments have fre-
quently exacerbated the problems of cities.
They have tended to favour large, prestige
projects such as subway or freeway systems
where the social surplus generated fails to
cover the cost. Instead, cities need to price
congestion effectively. T hey have favoured
quantity controls (such as zoning or rent
control) rather than taxes and transfers to
handle externalities and redistribu tion which
are more ef cient in the longe r run. L and-use
and buildin g regulations are com monly un-
connected to clear costs and bene ts of exter-
nalities. Finally, they have in som e cases
support ed local redistribution al policies and
high welfare spending; these are inef cient
in terms of redistribution and can distort the
locational choices of both rich and poor
attracting the poor and repelling the rich.
This tendency has declined more recently
re ecting voter preferences. Overall, Glaeser
(1998, p. 157) argues that:
City gove rnm ents should avoid redistribu-
tion, most quantity controls, and white
elephant infrastructure proje cts, such as
subw ays. National governments should
follow a policy of spatial neutrality, nei-
ther arti cially supporting nor taxing cities
disprop ortionately.
Place-based policie s such as enterprise zones
create spatial distortions that lim it the
healthy tendency of the poor to exit declining
areas (p. 157). A city which wishes to
prospe r, should focus on pricing externalities
correctly, protecting property rights and en-
suring hum an capital develops within its
borders (p. 158).
Innovation and Urban A gglom eration
Krugm an s sidelining of know ledge
spillovers has also been challenged by Au-
dretsch (1998) who argues that econom ic
activity based on know ledge has a high
propensity to cluster in order to maxim ise the
production and transm ission of ideas. This,
he maintains, explains the apparent paradox
between increasing localisation of econom ic
activity in an era of increasing globalisation
and highly ef cient com munication. Globali-
sation and the inform ation and com munica-
tions revolution, he argues, have underm ined
the com parative advantage of high-cost
countries in traditional, moderate-technology
industries. T heir com parative advantage is
increasingly based on know ledge and inno-
vation which can suppor t higher wages,
re ecting the grow ing dem and for new prod-
 GE OG RAPH ICA L ECO NO MICS
ucts and services. T his is seen in the rapid
increase in patents and the rising dem and for
skilled workers. Ef ciency in the trans-
mission of know ledge and the innovation
process depends on spatial proxim ity. The
shift in com parative advantage in high-w age
countries thus helps to explain the grow ing
im portance of spatial clustering.
High wages are increasingly incom patible
with inform ation-based econom ic activity,
which can easily be transferred to a lower
cost location. By contrast, the creation of
new ideas based on tacit know ledge can-
not easily be transferred across distance.
Thus, the com parative advantage of the
high-co st countries of North America and
W estern Europe is increasingly based
on know ledge-driven innova tive activity
(Audretsch, 1998, p. 26).
Knowledge spillovers from rms and univer-
sities, it is argued, are essential to innova tive
activity. Such know ledge spillov ers tend to
be spatially restrictive. Thus:
Even as the relevant geogra phic markets
for most goods and services becom e in-
creasingly global, the increased im port-
ance of innovative activity in the leading
developed countries has triggered a re-
surgence in the im portance of local re-
gions as a key source of com parative
advantage (Audretsch, 1998, p. 26).
There are close parallels, here, with work on
know ledge, innovation and the `learning re-
gion in econom ic geography, urban and re-
gional studies which approach the issue from
a more sociological or social econom ics per-
spective. Thus Audretsch argues that:
The resolution to the paradox posed by the
localisation of know ledge spillov ers in an
era where the telecommunications revol-
ution has drastically reduced the cost of
com munication lies in a distinction be-
tween know ledge and inform ation. Infor-
mation such as the price of gold on the
New York Stock E xchange or the value of
the yen in London, can be easily codi ed,
and has a singular meaning and interpret-
839
ation. By contrast, know ledge is vague,
dif cult to codify, and often only serendip-
itously recognised. W hile the marginal
cost of transm itting inform ation across
geographic space has been rendered in-
variant by the telecommunications revol-
ution, the marginal cost of transm itting
know ledge, especially tacit know ledge,
rises with distance (Audretsch, 1998,
p. 21).
He refers to von Hipple s argum ent that
highly context-speci c, uncertain know -
ledge what von Hipple calls `sticky know -
ledge is best transm itted via face-to-face
interaction and through repeated and frequent
contact. Fortune magazine (1993) similarly
observed that business is a social activity,
and you have to be where im porta nt work is
taking place . A survey of top executives had
ranked the Raleigh/Durham area with its
research universities as the best city for
know ledge workers and innovat ive activity:
US businesses, especially those whose
success depends on staying at the top of
new technologies and processes, increas-
ingly want to be where hot new ideas are
percolating. A presence in brain-pow er
centres like Raleigh/D urham pays off in
new products and new ways of doing busi-
ness (Fortune, 1993).
Krugm an, as noted earlier, had cited the in-
visibility of know ledge ow s as making
them im possible to model or measure (and t
only for sociologists). As Audretsch notes,
how ever, there is within the econom ics
literature as well, an emerging body of work
aimed at measuring the extent of know ledge
spillovers and linking them to the geography
of innova tion (Jaffe, 1989; Jaffe et al., 1993;
Feldm an, 1994; Audretsch and Feldm an,
1996). Jaffe et al. (1993) had found that
patent citations occur more frequently within
the state in which they were patented than
outside. The propensity of innova tive activity
to cluster geographically is also greater in
industries such as biotechnology where new
know ledge plays a more im portant part
particularly tacit know ledge (Audretsch and
840 MA RT IN BODD Y
Feldm an, 1996; Audretsch and Stephan,
1996; Prevenzer, 1997). Using city-level data
for the US, Audretsch argues that a close
relationship can be seen betw een the avail-
ability of know ledge resources in a city and
its innovat ive performance (Audretsch,
1998, p. 23). He goes on to suggest that
know ledge spillovers, particularly from uni-
versities, are a particularly im portant input to
innova tion by small rms, com pared with
larger rms where the process is typically
more internalised. Spillovers, and clustering,
are also likely to be more marked in the early
stages of an industry life-cycle when inno-
vation is more active (Audretsch and Feld-
man, 1996). Spatial agglom erations may also
however, be subject to `technological lock-
in as industries mature, im peding the gener-
ation and transm ission of new know ledge
and restricting innova tion an additional
form of `congestion disbene t .
This work has successfully identi ed the
role of know ledge spillovers and spatial clus-
tering from an econom ic perspective and has
shifted attention in looking at innovation
from the rm to the urban area or geograph-
ical region. As Audretsch notes, however,
there is little consensus as to exactly how and
why this occurs and the im pact if any of the
way in which econom ic activity is organised
in space. He refers to sociological studies
for example, Saxenian s work on Silicon
Valley which focus on the processes of
com munication between individ uals, the role
of networks and of culture. Such work, he
acknowledges, suggest the lim itations in-
herent in attem pts to model the `know ledge
production function . He notes as well the
econom ist s avoidance of cultural differences
as explaining grow th or technological devel-
opm ent. There are links, however, as he also
notes, with the work of Glaeser et al. referred
to earlier, on the im pacts of specialisation
versus diversity and com petition versus local
monopoly . Forthcoming work by Feldm an
and Audretsch (referred to in Audretsch,
1998, p. 26) suggests that diversity across
com plem entary activities sharing a com mon
science base is m ore conduc ive to innovation
than specialisation and that local com petition
for new ideas prom otes innova tion more than
local monopoly . A key conclusion from this
and Glaeser et al. s work is that innovative
activity requires more than simply factor en-
dow ment in the form of know ledge inputs:
T he underlying econom ic and institutional
structure matters, as do the microeconom ic
linka ges across agents and rms (Aud-
retsch, 1998, p. 26).
This com es much closer to work from a
sociological, geogra phical or urban and re-
gional studie s perspective than Krugm an s
sidelining of know ledge externalities and
their study.
T he increasing im portance of know ledge
and innova tion to com parative advantage has
also been re ected in policy terms. Deregula-
tion and privatisation have been ac-
com panied by less emphasis on com petition
policy (anti-trust and monopoly measures).
Policy has increasingly focused on enabling
the creation and com mercialisation of know l-
edge including R&D, venture capital and
start-up suppor t. At the same tim e, as central
government s role has reduced, Audretsch
suggests, policy initiatives have increasingly
shifted to the state, regional or more local
levels, including suppor t for localised tech-
nology development and innovat ive clusters
(Sternberg, 1996) or, as Audretsch puts it,
the recreation of Silicon Valley.
W hile the gulf between much of this work
from an econom ic perspective and other
work on know ledge and innova tion within
the social sciences is less than with Krug-
man s work, there are nevertheless lim ita-
tions. As the above reference illustra tes, the
im age of the know ledge-based industrial
cluster often appears to be the iconic and, as
Saxenian s own work indicates, essentially
atypical examples of high technology in Sili-
con Valley or Route 128. To cite these as
corroborating evidence for the generalised
role of localised, know ledge-based spillov ers
and innovation in econom ic growth is far
from convincing. Furthermore, while the
work of Audretsch, Glaeser et al. and others
argues strongly for the practical role of lo-
calised know ledge transfer and innova tion,
 GE OG RAPH ICA L ECO NO MICS
they ignore a range of othe r empirical work
which nds little evidence for such localised
effects (for example, Sim mie, 1997). In part,
this stems from their methodology. T hey
start by assuming know ledge spillov ers on
conceptual ground s. T hey then look for em-
pirical evidence to corroborate this. E mpiri-
cal evidence, however, is frequently based on
correlation between supposedly relevant vari-
ables such as innova tion in the form of
patents cited and city size, rm size or local
industrial structure. The resulting correla-
tions may be consistent with or contradict
posited in uences on know ledge transfer and
innova tion. They could equally well re ect
processes other than know ledge externalities
and the supposed im pacts of these in terms of
innova tion and, in turn, econom ic grow th.
The com plexity of the possible causal rela-
tions is such that it resists unpacking simply
by establishing statistical correlations be-
tw een a small num ber of supposedly key
variables. Greater cross-fertilisation between
econom ic approaches and the rest of social
science might prove productive in this
respect.
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