Global Culture

Last week the Nobel Foundation awarded the Nobel Prize in Economic Sciences to Paul Krugman for his analysis of trade patterns and location of economic activity. A good summary of his work can be found in the post About the work in The New York Times. In his own words the New Trade Theory explains patterns of trade:

…the broad pattern of what countries produce is determined by things like resources and climate, but there’s a lot of additional specialization due to economies of scale, and there’s much more trade, especially between similar countries, than you would expect from a purely resource-based theory.

And on the impact of mobility of labor and capital:

Think of Henry Ford and his Model T. He could have established many factories, spread across the country, to be close to his customers. Instead, however, he found that it was worth incurring extra shipping costs to achieve the economies of scale of one big factory in Michigan.
And once you’re concentrating production in a limited number of locations, which locations will you choose? Locations where there’s a large market – which will be locations where lots of other producers have also chosen to concentrate their production.

While the ideas appear to be common sense there are complex mathematical models that explain how the world of trade works and do it more accurately than previous models.

There are a number of interesting elements from these theories that have consequences to the various discussions going on in this blog:

• In a world increasingly complex, there are many finished goods that can only be produced in very few places, but those locations are often decided by historical accidents more than anything else and their location is of no consequence to the overall market. Such specialization will require top qualified knowledge workers to be highly movable, an effect that is well known in the consulting business and that emphasizes the need to understand their role as global citizens.
• Which location is best for producing a given good? Possibly near a large market. Where are large markets? Most likely where other producers have settled in the past. There is a trend to cluster production of specific industries in large urban areas only because they have momentum. This momentum started by accident but will be a cumulative process.
• As access to information becomes easier, it is to be expected that specialists will develop around the globe in specific techniques but the hubs in which they can excel will cluster in specific regions of the world, creating an incentive to migrate.

While these theories have been around for close to 20 years it is perhaps poetic that the Nobel prize goes to a “new” theory when the economy is in clear need of new ideas. One can only hope that policy is implemented around full understanding of how the world really works and not obsolete models.