Sunday, December 11, 2005

From an Idea of Adam Smith's?

Star-Telegraph Staff Writer, O. K. Carter (11 December) contributes an article, ‘Taking a Hard Look at the Economy’ by Market Street, an economics consultancy, for Arlington Council, Forth Worth, Texas, USA, about local economic prospects. Broadly, the consultants applied ‘cluster theory’ to the types of business sectors the town wishes to attract.

Consider this extract:

“Cluster theory, incidentally, holds that economic development in some areas tends to proliferate because of a kind of synergy of interconnected groups within a related industry. Think of this as sort of being like the proliferation of auto dealerships and supporting endeavors along Interstate 20. A proliferation of like businesses attracts a big customer base as well as lots of skilled workers. The close proximity also creates a competitive mechanism in which best practices are learned, new technologies or strategies evolve and from which customers or clients receive a benefit. It's pure Adam Smith stuff made more technical, proof once again that Smith was considerably smarter than your average economist.”

My first reaction was to scan from memory whether Smith ever outlined a crude version of cluster theory and decide that it was implausible that he did (I can well believe that a modern economics graduate would make anything simple ‘more technical’). However, on thinking about it I could see it was a plausible assessment by Staff Writer Carter.

What was a Smithian 18th-century market but a ‘cluster’ creating ‘synergies’ for the sellers who congregated in a single location at set times of the week and for the buyers who visited the location knowing they could search for what they wanted with an economy of effort compared to travelling all round the neighbourhood to individual stalls.

Edinburgh in the 18th century had designated areas for markets in specific items (their names survive today in street names such as Haymarket, Flesh Market Close, Lawn Market, and Grassmarket, with others, such as Horse Market known from old prints showing scenes from their market days. If you wanted to sell a horse, work with horses, or buy one, you knew where and on which specific days to go to achieve your goals.

Bringing suppliers into close proximity brought competition (or the possibility of competition) and congregating large numbers of potential customers also brought competition. Smith appreciated both points, though he was well aware of the practices that edged towards monopolies in the behaviours of traders gathering in the same place for ‘diversion’ and of town councils which organised the managed the markets.

Modern cluster theory is an extension of these early observations of Adam Smith (and, of course, others). At some point – measured by their ‘Location Quotients’ – the congregation of particular businesses adds to their economic strengths in employment, R&D, information flows, emulation of best practices, finer divisions of labour and continued expansion. Where this creates comparative advantages for localities in specific business sectors there are net inward flows of revenue into the locality, adding to local economic growth and development.

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