Geographical economics takes a long-overdue look at the possible casual role location plays in the growth of productive capacity and wealth. More traditional economic theory has largely considered location irrelevant. Essentially, different regions enjoyed different natural endowments purely by accident, and regional economic growth was caused entirely by external market forces. But such dismissive explanations glossed over the ever-growing realities of spatial concentration and economic specialization, prompting some economists to ask if the two were casually related. Economic growth in effect may well be an endogenous process after all. The challenge lies in not contradicting or undermining the basic tenets of modern economic theory while making the argument. Success here was deemed worthy of the considerable effort required since it would reapply existing concepts to the role of place in economic activity left languishing for want of a broader theory.
Keywords Agglomeration; APEC; ASEAN; Central Place Theory; Disequilibrium; Exogenous Growth Theory (GATT); Heckscher-Ohlin Theory; Increasing Returns to Scale; Location Theory; MERCOSUR; NAFTA; New Growth Theory; Return to Scale; Shift-Share Analysis; Theory of Competitive Advantage
Economics: Geographical Economics
Globalization has caused neighboring countries to band together in super-regional trading blocs (most notably APEC, ASEAN, the EU, NAFTA and MERCOSUR) much more than it has turned the world into one gigantic trading bloc. The EU’s economic integration is common knowledge. However, not many know that ASEAN member countries have agreed to form their own economic bloc—the ASEAN AEC—set to become effective in 2015. This integration is especially notable given the financial crisis in Europe that began in late 2009 (Volz, 2013). Location matters in economic activity far more than once thought. Such is the premise underlying geographical economics, which has shown that economic theory previously treated location as an externality, a coincidental by-product of more fundamental economic forces. Growth occurred from exogenous causes. This conceptual bias dominated economic thought with few exceptions the last four centuries. In the final quarter of the twentieth century, a few economists began posing a radical question: Why were some goods and services being produced in some places more than in others? “Where,” they contended, belongs besides “when, what and why” as a central line of inquiry. If everything existed everywhere, the material world would lack any and all distinctiveness. Yet differences abound in kind, time, and distance. Why then was location ignored by economic theorists for centuries? Well, it seems place did not matter because, in the long run, all economic growth was either a function of the rate of savings or the rate of technological progress. The former provides capital, the latter more efficient modes of production. Both, significantly, are still considered by neoclassical economists to be near universal constants rather than the outgrowth of regional economic activity. Markets essentially were assumed to act the same wherever they were located.
History of Economic Markets
One has to go as far back as 17th century mercantilism to find an economic theory where the idea of place held any importance. The object during this time was to amass gold bullion by maintaining a surplus of exports over imports. Place mattered, then, but only as the demarcation line separating domestic and foreign markets. A particular locale was only important insofar as it proved a profitable foreign market to sell domestically produced items. Aside from cheap natural resources, imports from these very same markets, meanwhile, were kept to a minimum through the imposition of stringent tariffs. This “trade protectionism” also did much to promote a more self-sufficient domestic economy, a key political objective then as now.
18th century laissez-faire economics, on the other hand, viewed markets as forums of “perfect” competition made up of numerous suppliers where individual buyers and sellers are free to enter or leave at will. Its first great theorist, Adam Smith, did state that locales differ in climate, availability of natural resources, and access to waterways. Crucially, though, such differences had to be accidental in nature and irrelevant to the actual workings of the marketplace. For, if it can shape the behavior of individual markets differently, they would no longer be structurally alike. And that would mean in turn that competition was not perfect after all. But the entire theory of free-market capitalism rests on the assumption that it is perfect. Nineteenth century Marxist theory likewise pitted capitalist against worker irrespective of place. Class struggle was inevitable everywhere given how the exploitive nature of the ownership of production inexorably forces virtually everyone to live at or below a subsistence wage.
When 20th century Keynesian economics came along, the focus of economic theory shifted to the relationship between aggregate demand and unemployment at the national level but, like earlier theories, posited that free market economies at this scale all functioned alike. Its counterpart, neoclassic theory, was built on more traditional notions about the ways price, output, and income were determined in the interplay of supply and demand in markets. Such notions gave rise to general equilibrium theory, which contends that a change in one item's price affects the prices of all other items, potentially upsetting the market equilibrium between the supply and demand of all goods and services everywhere. So, theoretically, at least, it is necessary to trace what the “knock-on effect” of every single price change will be on millions and millions of products worldwide—so daunting a prospect that theorists eventually began to assume that all other prices remained unchanged to isolate the effect on one item's price change on just one other item's price.
Endogenous Growth Theory
It is thus perhaps no coincidence that the one exception to this rule—the endogenous growth theory of the 1980s—tipped the scales in favor of including place as a factor of production. And this change happened only because such a theory considers economic growth to be driven primarily by internal factors like human capital that vary from one locale to another. Rather belatedly, then, the idea of place gained enough of a theoretical legitimacy to revisit the early work in location theory, which states that economic activities tend to spatially congregate of their own accord for explicit reasons. The clustering of productive capacity so readily apparent around the globe, across a continent, within the borders of a nation-state, inside a provincial region, and among different urban districts and rural areas counties alike, might be modeled and explained.
And though scale itself does not play a determining role, distance does. This was the conclusion drawn in 1826 by Johann Von Thunen, who observed how crop production levels and distance to a central market were inversely related. The farther that farms were from population centers, the less intensive their cultivation. Conversely, the closer they were, the more intensive their cultivation. Von Thunen postulated that as this distance lengthened, transportation costs increased, which in effect depressed the farmers’ locational rents and their profit from growing and selling surplus crops. Industrialization had yet to transform the economic landscape Von Thunen depicted; his identification of the pivotal role played by transportation costs nevertheless applies to plants and farms alike.
The Agglomeration Principle
People congregate in large numbers in a relatively small mass of land to take advantage of lower overall costs of transportation. Travel to and from work, local marketplaces, religious institutions, and recreational outlets are cheaper, giving individuals spare income to spend on other goods and services. What is good for households is also good in a wider sense for firms and markets. Denser concentrations of customers generate greater demand for a wider variety of goods and services. High volume creates internal economies of scale that bring production costs down at the firm level. Critically, too, the broader the scope of products in demand, the more the incentive for firms to specialize their production processes. Over time, functional linkages between firms and shared infrastructure across industries in proximity also occasion external economies of scale. Agglomeration (as it is called) also facilitates collaboration and knowledge-sharing between firms and...
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