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New Economic Geography

Printed From: History Community ~ All Empires
Category: Scholarly Pursuits
Forum Name: Philosophy and Theology
Forum Description: Topics relating to philosophy
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Printed Date: 16-Jan-2021 at 23:14
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Topic: New Economic Geography
Posted By: Maharbbal
Subject: New Economic Geography
Date Posted: 03-Nov-2006 at 17:04
Flyingzone asked me what New Economic Geography (NEG) was. Well I have to write two essays tonoght so I won't be long yet here is the main idea:

For the last 25 years or so, Anglo-American Economics and singularly Economic History are dominated by Douglass North's theory called New Institutionalist Economics (NIE) which is mainly a reaction against Neo-Classical Economics (NCE).

I know it sounds very much like a academic feud but consequences are huge as it influences for instance the World Bank decisions...

So NIE criticized NCE because it was: a) considering the market as perfect and fluid and was getting deeper and deeper into maths without practice; b) because it was ignoring the fact that economics exist in time, that is my decision in t may influence my decision (over a similar problem in a similar situation) in t+1 which can influence my decision in t+3, c) human can't be perfectly rational as NCE's homo economicus is supposed to be, he has a limited rationality and has to find ways to overcome this limitation.

One of the main questions was innovation. In a market, the level of innovation is sub-optimal (ie not maximum) and basically NCE's system didn't allow to understand events like the Industrial Revolution when suddenly innovations come from every where. North and the NIE say: the answer is INSTITUTIONS. Something has to disturb the market to create a rent (monopole) to give a strong incentive for innovation. This something is patents which gives to the inventor a temporary monopoly over his invention creating a win-win sytuation society's happy because it has a new product, inventor's happy because he has a lot of money.

But of course this can only work if the state enforces efficiently the inventors property rights over its invention. You can think of many other institutions meant to create rents (which can be a good thing eg patents, or a bad thing eg mafia).

So economic historian and economist have been looking for institutions for the last 25 years and North even got himself the Nobel Prize. But as any paradigm it creates as many problems as it solve. And quickly some have asked the killing question: why efficient institutions arise here and not there?

Here comes NEG. Their ideas are all but new but they put it in the global framework of the NIE (which itself is all but new see Marx). NIE says history matters (theory of the path dependency), NEG says space matters as well.

Their big thing is about agglomerations (I'll take the common example of US industrial catch up in the period 1860-1913:
Situation 1: large space hence expensive to travel (transport costs) hence production close to consumer.
Situation 2: Canal of Panama, trains, steam boats, lower transport cost, industries aggregate in a few cities as scale economies make transport affordable.
Situation 3: Industries aggregate and hence the production cost decrease (if I produce cars, my neighbour produces cars we can provide enough demand to have a engine subcontractor right next door.
Situation 4: as companies benefits rises, wages increase, bringing immigration which in turn increases demand, etc virtuous circle.
Situation 5: quickly it become so much cheaper to produce in certain places (NY, Chicago, Detroy...) that nobody else can start producing elsewhere (Florida unable to have it own industry).
Situation 6: plane, new boats... transport costs decrease again. Aggregation is costly (high wages, pollution, congestion, opportunity costs of being far from the consumer) so producing far away (China, Europe) becomes more competitive.

That's all feel free to ask more questions.

I am a free donkey!

Posted By: flyingzone
Date Posted: 04-Nov-2006 at 20:52
Maharbbal, thanks for the great post. I just wish more AE forumers were more interested in theoretical issues than, say, the endless debates on the ethnic origins of the Turks and the Mongols (no offence to all the Turkish and Mongolian forumers here).
Maharbbal, may I ask you what is the difference between NEG and "traditional" "geographical" economists. It seems to me that both New Economic Geographers and geographical economists are interested in more or less the same issues: industrial districts, special economic zones, regional localization, spatial agglomeration, etc. Are they different in terms of epistemology and methodology? By the way, are the economists REALLY conversing with the geographers when it comes to theory-development or are they pretty much doing their own "economic" stuff? Another skepticism that I have about this "new economic geography" is that does it really deal with cities and regions as living communities with real historical, social, and cultural identities (something that most economists are notorious in ignoring), the way that geographers do?

Posted By: Maharbbal
Date Posted: 05-Nov-2006 at 10:06
So many questions, I am not sure I'm able to answer them all.

You're right the NEG is not very different from the old one but it is not only repackaging as they also include institutionalism in their thoughts.

I think geograph and economists do interact. The only thing is that when they do they become 'development experts'.

I'm not quite sur I understand your last question. I'm not too familiar with geography anyway. But I'd say they often do through sociology. But one of the main problem there is the very economic technique. That is statistical regression which can only take into consideration a limited number of factors.

I am a free donkey!

Posted By: Peter III
Date Posted: 09-Nov-2006 at 18:50
Here is a very informative paper explaining the NEG. I have yet to read through all of it though.

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