Gordon L. Clark

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Gordon L. Clark Richard Freeman

• Oxford University and
• Harvard University

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1. Introduction

• Being interested in urban and regional prospects
• For reasons of equity and social justice (broadly
  conceived)
• As well as for the intrinsic academic questions
  regarding community development in liberal market
  economies
• And, in particular how are we to conceptualize
  the local and the global?

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2. Rockefeller-Ford Project

• Assumed the existence of capital market
  imperfections in US cities (vis M. Porter etc)
• Including geographical gaps in the map of
  capital investment
• As well as neglected rate of return niches or
  opportunities in cities
• Subject to the usual caveats information (price
  and quality) and scale (level of investment).

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3. Intellectual Base-line

• We recognise the persistence of significant
  local problems (of social welfare etc.)
• Being partly about poor employment options and
  future prospects
• Partly about dis-investment, industrial
  restructuring, and long-term development
• Being simultaneously about local and global
  capital market dynamics.

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4. New Economic Geography

• One way to start is with solving the problem is
  with the NEG, referencing Glaeser Krugman, Scott
  and Storper, etc.
• Assuming increasing returns to scale/agglomeration
  economies
• As well as path dependence and clusters of
  innovation providing an inherited history and
  geography
• Which in combination provides a rationalé for a
  differentiated economic landscape.

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5. Virtues and Vices of NEG

• Breaks with neoclassical assumptions regarding
  long-term income convergence and equilibrium
• Provides a story about the past, present, and
  future of communities
• Although reliant upon contestable assumptions
  (including the empirical plausibility of
  increasing returns)
• Perhaps only relevant to clusters of innovation
  what about the rest of the US, the world, etc?.

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6. Parallel Worlds Geography of Trade

• Tangential to NEG, increasing evidence of trade
  fragmentationoutsourcing and offshoring
• Though found in Krugman, new insights being
  generated eg. vertical disintegration of the
  corporation
• Recognising changing realities inexpensive
  logistics and decreasing threshold economies of
  scale
• At the limit implies a truly (fragmented)
  global economy.

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7. Parallel Worlds Geography of Finance

• Tangential to the efficient markets hypothesis,
  increasing evidence of local capital market
  imperfections (eg. Coval and Moskowitz)
• Gathering momentum of research, often empirical
  in impulse rather than proving the EMH
• Based upon assumptions of market imperfection
  especially information asymmetries and herd
  behaviour
• At the limit implies a highly fragmented system
  of global capital markets.

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8. Our Project (this paper)

• Seeks to reconcile the new realities of
  (fragmented) trade and finance
• Working from the NEG to a rather different kind
  of intellectual synthesis allowing for the
  co-existence of the local and global
• Where we can be realistic about the opportunities
  and limits of local pension fund investing
• Without having to necessarily invoke the
  government to underwrite urban and regional
  development.

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9. Four Basic Assumptions

• Information asymmetries are characteristic of
  market economies (trade, finance, exchange etc.)
• Resolving asymmetries through search etc depends
  upon the expected risk-adjusted rate of return
• Where the co-existence of heterogeneous
  expectations is a prerequisite for trade and
  exchange
• And, in any event, complete information would
  drive down (to zero?) the rate of return on
  investment and transacting.

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10. Time and Space

• Relevant market information is not randomly or
  uniformly distributed over space and time
• Agglomeration economies encourage more
  cost-effective and intensive information
  management and the search for added value
• Customs and conventions vary over space and time
  as do national institutions à la La Porta et al.
  (1998)
• The production of information is, itself, an
  industry with markets and intermediaries
  (promoting very different solutions, local and
  global).

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11. To Illustrate

• In The Wealth of Nations, Adam Smith (Book IV, Ch
  II, p.30-31) poses a problem relevant to today
• How is trade to be governed given the lack of
  adequate information re. distant partners
  motives?
• Using a simple examplean Amsterdam-based
  merchant trading fruit and wine from Lisbon with
  corn from Koningsberg
• And a set of simple assumptions regarding
  information, the costs of trade, and SR v LR.

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12. Adam Smiths Solution

• He suggests we switch a portion of the
  Lisbon-Koningsberg trade through Amsterdam (even
  if expensive)
• Use the Amsterdam location as a site of
  information collection re. quality and quantity
  of commodities, the true market expectations etc.
• Use the knowledge to impose discipline on the
  distant partners including the threat of
  cancellation
• Subject to, of course, the rate of return--some
  trade may be so competitive that the Amsterdam
  solution is not possible (and trade not
  desirablestaying at home becomes the best
  option).

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13. Modern Finance I

• This solution resonates with the recent
  research on the geography of finance (eg. Coval
  and Moskowitsz)
• Assuming a differentiated landscape of market
  information, the value of search intensity, and
  risk-adjusted rates of return
• Where Amsterdam is not only a trading site but
  also a dominant financial centre with
  intermediaries
• With a pivotal role in the system of European
  trade is owed to the concentration of investment
  capital (a role now held by London).

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14. Modern Finance II

• Notice, two logical implications that follow from
  this case-study home bias and risk management
• As Smith remarked, home bias is an inevitable
  result when information asymmetries reinforce
  site-specific solutions
• Equally, Smiths solution is, in the modern
  idiom, all about enterprise-wide risk management
• Portfolio diversification, underpinned by secured
  loans, could accomplish the same resultand
  generate a growing market in extensive fragmented
  trade.

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15. Modern Trade

• Of course, 21st century trade is far more
  complexits really Krugmans trade theory
  combined with fragmentation
• But, there remain important implications from the
  Smith modeleg. even today, trade is highly
  sensitive to information asymmetries (vis the map
  of trade)
• Could argue that fragmentation is made possible
  by advanced internal risk management devices plus
  financial intermediation
• In fact, could argue that there is a recursive
  relationship between trade and finance.

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16. Conclusions

• First, NEG can be reconciled with the geography
  of finance if the problem with trade is
  reconceptualized
• Second, any attempt at reconciliation must focus
  upon the tension between the local and the
  global
• Third, there is a vital distinction to be made
  between intensive and extensive networks of
  finance and trade
• Fourth, community development prospects should be
  understood in terms squarely in the middle of
  these dualisms.

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17. Bibliography

• Clark, G.L. and D. Wójcik (2007) The Geography of
  Finance. Oxford Oxford University Press
• Coval, J.D. and T.J. Moskowitz (2001) The
  geography of investment informed trading and
  asset prices. Journal of Political Economy
  109811-41
• Grossman, S. and J. Stiglitz (1980) On the
  impossibility of informationally efficient
  markets. American Economic Review 70393-408
• Jones, R.W. and H. Kierzkowski (2004)
  International fragmentation and the new economic
  geography. HEI Working Paper 11/2004. Geneva
  Graduate Institute of International Studies.