Originally posted on NewDeal20.org
We often hear that a globalized economy is the best kind of economy. But could a world economy based on a set of strong regional systems, each one centered around a thriving manufacturing sector, serve us better in the long run? I argued in the first post of this series that economies are ecosystems, and that manufacturing is a necessary part of an economic ecosystem. In my second post, I proposed that manufacturing underlies economic growth, and machinery can allow us to have ecologically sustainable growth. Now I want to pursue how the innovation that underlies beneficial manufacturing growth is dependent on the close proximity of the various “niches” of the economic ecosystem, and what this means to our perception of how the global economy functions best.
Despite the rhetoric of globalization, the wealthiest economies have historically been regionally based. By “region,” I mean a geographically contiguous area, separated from others by a barrier. The premiere example of this is the United States. Europe is another natural region, which has now integrated itself formally, although it was always integrated in fact. Japan, China, and India are also always considered separate economies. In fact, the regions that have the least cohesion are the poorest, such as Africa. While Africa is a natural economic region, it has been “integrated” into the world economy at great expense because its various pieces have become resource-generating appendages of wealthy, regional economies, instead of remaining parts of a manufacturing-centered, integrated African economy. The same could be said for the Middle East; Latin America is somewhere in between and is part of the global “lower middle class” as a result. The post-Soviet set of countries of central Eurasia are poorer than their oppressive predecessor partly because they are not as integrated as they used to be.
What are the advantages of operating in a contiguous geographic area? After all, according to neoclassical economic theory, an exchange is an exchange is an exchange, whether it is between a customer and a local store or WalMart and a supplier in China. The problem is that an economy is composed of both exchange and production; you have to have something produced before you can exchange it. And like an ecosystem, production relies on many sub-networks of production and exchange that require a physically close set of interactions, particularly when it comes to innovation.
Innovation can be seen as the product of three main sets of “human capital” — scientists, engineers, and skilled production workers. Scientists create a “stock of knowledge,” to use Simon Kuznets’ phrase. This stock of knowledge is used by engineers, who design the machinery and processes that are used in the factories and construction sites and other sites of production. Skilled production workers then use these factories and other production centers to create the wealth that societies survive on.
Just as it would make no sense in a natural ecosystem such as a forest to have the trees in one place, the deer that eat the leaves in another place, and the bears that eat the deer in yet a third place, so it makes no sense to have the scientists, engineers, and skilled production workers spread out all over the globe, with little or no interaction. It is one of the great ironies of modern economic life that the industry that is perhaps doing the most to disperse these groups, the financial industry, is so geographically concentrated that it can simply be referred to by a single street, “Wall Street.” The financial industry concentrates itself for the same reason whole regions work best in a geographically bounded area: the main players can talk to each other, observe first-hand the processes that underlie their industry, and very quickly change practices as the larger environment, or ecosystem, puts pressure on the industry to change.
Engineering and research centers are now moving from the United States to China, just as factories have moved. These moves increase innovative capacity when researchers and engineers can interact with and witness first-hand the operation of machinery and factories, talk to other engineers and skilled production workers, and take advantage of the serendipity and unexpected encounters that also make cities the centers of innovation, as Jane Jacobs emphasized in her books. It isn’t just within one industry that these interactions are beneficial, but also when several industries interact within a city region, as, say, publishing, fashion, and (now only some) manufacturing have in the history of New York City.
So couldn’t each city region then replicate the entire set of industries? City regions aren’t large enough to provide everything they need; trade is critical to production. In the US, for instance, different city regions have specialized in different industries. I mentioned New York City, but Cincinnati was known for machine tools, Pittsburgh for steel, of course Detroit for cars, and we have had Silicon Valley, an outgrowth of the San Francisco economy, as the premiere example of a center of innovation. The idea is to have a large enough area to encompass all of the various niches of an economic ecosystem, and also one that is small enough to encourage a rich network of interactions.
In order for this weaving together of city regions to occur, the government has to create a transportation network. The Interstate Highway System served this purpose after World War II, as the railroad system did before (and as I have argued, probably will again sometime in the future). A communications network is also necessary, again generally either run by governments or supported by them.
Governments have historically also protected their territories economically and militarily in order to allow these regional production networks to grow to the point where they can compete globally. When governments bind together areas in this way, the regional economy becomes strong enough that global trade is actually increased. You need a world class production system before you can trade manufactured products, and governments have historically been a crucial builder of those regional economies — as I shall argue in my next post. On the other hand, when a country like the United States allows its manufacturing base to be exported, it will open up yawning trade deficits, and eventually, slide into poverty. The choice is ours.