I/O continued: The concentration of specialized industries in particular localities

Book 4, Chapter 10

§1. Most early trade was of high-value goods that were light enough to transport to willing buyers. Specialization began with these goods (and resources).

§2. Local specialization occurred when local resources (e.g., metals) were rare, when “demand” appeared (e.g., the royal court), or for a variety of reasons that may date back into forgotten history.

§3. Industry tends to persist, in clusters, once it gets going. That’s because skills and ideas transmit “in the air,” and capital can be used intensively. As local institutions grow and develop, industry gains even more productivity. Imbalances occur if the industry only employs one type of worker in the population (e.g., men in mines), so there’s an incentive to add complementary industries (e.g., textiles to employ women and children) so families can prosper. One-industry towns are thus bad for families, and — because they are not-diversified — vulnerable to downturns. Since trading adds value, they pay higher rents in city centers, while industrial areas occupy cheaper land outside of centers. For more on industrial evolution, read my review of The Economies of Cities (1969) by Jane Jacob.

§4. Cheaper communication, transportation and trade (via lower tariffs) increase trade and specialization, but also migration of skilled workers, which fosters industrial diversification elsewhere. These two trends are good for consumers, competition and innovation.

Recall that “globalization” was very strong before WWI and into the 1920s. In the Depression, it was reversed (making the depression worse), and the Cold War and communism slowed globalization until the 1990s put it back into high gear. With Trump, Brexit, and Covid, globalization has gone into reverse, which harms consumers and workers while benefitting businesses with stronger market power (due to less competition).

“Farmers” in the middle ages also made cloth, tools, buildings, etc., so they were not always “growing food.” Industrialization brought machines and power to agriculture, increasing productivity per worker, but the industrial workers who provide these machines are not counted as the workforce “growing food.” Data on workers or economic activity can therefore be misleading.

Workers do not leave farms to go to factories but into services. The share of workers in factories around 1900 was the same as in 1850 but their output has grown enormously. The growth in service jobs (education, housekeepers, bureaucracy, et al.) occurs because these areas are not amenable to automation. (What a contemporary comment! Read more on the Balassa–Samuelson effect.)

//end chapter 10

This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics away from institutional induction and towards mathematical deduction.

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

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