Why is the spatial distribution of innovation and growth so unequal, and what are the implications for development? A society’s prospects for economic and political development depend on its ability to resolve collective-action problems (CAPs)—problems that arise when self-interested behavior creates problems for larger groups. Pollution and crime are examples. The locational distribution of innovation and production creates many such problems.
The standard theory of comparative advantage predicts some concentration of production and population. For example, many cities should be located at good ports. Yet, the extreme spatial inequity of innovation and growth, between and within societies, requires fuller explanation.
Economic and social theory of spatial location (agglomeration theory) combined with the concept of production externalities, presents an opening for analysis. Four basic propositions follow: First, skill complementarities in production encourage matching: high with high-skilled, and low with low. Top financiers locate in New York or London. Second, because non-rival knowledge generates increasing returns, areas with established knowledge innovate and grow more rapidly than others. These two propositions imply that stark locational inequities can emerge as economic equilibria. Third, group-based inclinations towards social imitation— conformity effects that follow from reciprocity and complementary social norms—generate unequal social incentives for individual investment in education, reinforcing the inequities from the prior two assertions. Fourth, monetary externalities of production generate complementarities that, again, reinforce these tendencies.
The ensuing agglomerations occur at national, regional, local, and sectoral levels. The simultaneous presence of innovation centers and poverty traps follows. Consider Silicon Valley or downtown Shanghai as opposed to rural Kentucky, sections of Liverpool, or rural Thailand. Stark inequities thus emerge from basic production processes—unless policy successfully intervenes. Unequal access to knowledge, wealth, and resources generates subsequent inequities with respect to basic capacities, opportunities, the distribution of income and wealth, and the ability to influence political decision-making. Myriad social conflicts and other collective-action problems follow. These CAPs and the presence or absence of resolution shape a society’s political and economic development.
William Ferguson is the Gertrude B. Austin Professor of Economics at Grinnell College, where he has been teaching since August 1989. His recent book, Collective Action and Exchange: A Game Theoretic Approach to Contemporary Political Economy (Stanford University Press, 2013) presents his basic approach to political economy, starting with microfoundations. He is currently writing the manuscript for his second book, Collective Action, Inequality, and Development: A Political Economy Approach, which expands on the final chapter of his 2013 book.