Business, Politics & Society

Economic Geography

Paul Krugman

Lesson time 7:31 min

Through the example of Silicon Valley, Paul illustrates how economics can even control the geographic movement of people.

Paul Krugman
Teaches Economics and Society
Nobel Prize-winning economist Paul Krugman teaches you the economic theories that drive history, policy, and help explain the world around you.
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We actually know what Silicon Valley-- what it's-- what the inherent advantage of Silicon Valley is. It's a great place to grow apricots. Turns out that before Silicon Valley became Silicon Valley, it was America's apricot capital. All right, that doesn't matter anymore. But why all of this tech stuff in Silicon Valley. And there's some process going on there that is-- is not captured by certainly by anything like . New trade theory said that there are often incentives to locate the production of a particular good in just one place or maybe a couple places around the world. What are going to be the factors that-- that helped to drive that? Well, one thing is you're probably going to want to locate, if you can, the production of stuff close to the biggest market. Even if there's a smaller market someplace else, put the factory, the office close to where a lot of your customers are, and you'll reduce the cost of transporting stuff because most of it just has to be shipped short distances. This can be a circular process. If there's a market that's somewhat bigger and companies start locating their factories close to that market, workers will move in, purchasing power will move in, the market will get even bigger, which will further reinforce the incentive to concentrate. So you get these circular cumulative processes that lead to the concentration of economic activity in particular locations. We're asking about the people who are feeling aggrieved in America right now-- the people who voted for Trump-- probably these forces of economic geography are a bigger factor than globalization. What we've been seeing in America for the past 20, 25 years is that these particularly knowledge intensive centers of economic activity are in a positive feedback loop where the more people who are there, the more highly educated workers, the more high tech firms are in a location, the more attractive those locations become so that you have explosive growth in incomes in Silicon Valley, but also in Manhattan, and also in a number of centers around the country, but also substantial parts of the country left behind. [MUSIC PLAYING] Technology seems to want us to be mostly a country of big metropolitan areas, big clumps of people with 5 million, 10 million people, which can provide the kinds of amenities that high skilled workers want. Then you ask the question, are we doing it right. And in a lot of ways, we are not, so we're-- we're making a lot of-- of avoidable mistakes in the way we're letting that process unravel. So in a place like New York, but even more place like San Francisco, here's a place where I become a little bit more of a free market guy because we actually have too much restriction on the construction of new housing. Lots of people want to live here. Got to make it possible to build the housing, and that is, for the most part, going to mean going up. And that's even more going to be true in a place like San Fra...

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A fellow student

I'm thinking, perhaps the answer is, in that moment of decline of one industry, there is a rise of another. Within the physical space of, let's take a car factory, start to downscale production in line with demand and upscale the developing demand. Although the skill transition may not be a fit for all employees, there may be transferable skills that could save a percentage of the community. It seems an utter waste of space, job loss. Perhaps, as governments lose in tax, they could incentivise companies to adapt their business model and stay in business. This approach may have reduced the skills shortage we now have in the emerging tech, fintech and science sectors.

Graeme R.

Excellent! The cities, towns, and villages along the Erie Canal in New York, and through much of the upper Midwest began their inevitable decline in the early twentieth century. By the turn of the twenty first, Kodak and Xerox were shadows of their former selves, and the process was complete.


Economic geography reflects the fact that people move where they can make more money, thus money is the main factor 4 where people live their lives n what they do 4 a living. Then technology or imports appear, n industrial clusters n the communities built around them loss their reason 4 existence... Do u c the pattern in the economic system? Trade, taxes, moral hazard, information assymetry, lobbys, static comparative advantages, lack desease prevention, r only effects, the root of the economic system malfunction is... I'll post it as a question in the "office hours" section soon 2 c what u all, specially Paul thinks about

A fellow student

Perhaps we should consider more and better mass transit systems to solve some of these problems. Some people are always talking about improving our "infrastructure". Maybe this is their opportunity.

A fellow student

There are exceptions of course. Granilse, British Columbia was a mining town devastated by the mine closure. It made a huge comeback by exploiting it's natural beauty and becoming more of a retirement community and tourist destination. Lower property prices also had a lot to do with it as some of the mill towns in the region became very pricey when things were booming. Powell River, British Columbia is benefiting from huge price increases in the Greater Vancouver Area. One group targeted for relocation to Powell River is "telecommuters". Perhaps there will be a shift away from the pricey metros to accessible rural locations with huge recreational development like Powell River. Thumbs up on your lectures

A fellow student

So, this is not class on economics but on political propaganda. Thumbs down.

charles S.

The effects of the centralisation of industry, technology, wealth and educated workers has clear effects here in Europe too - the mass of voting for Brexit (ie against the UK government) was in regions that had seen big industrial decline. Here in France, the worries of the gilets jaunes /yellow vests are clearly centred on the feeling of being left-behind, the dying rural communities versus the growing cities. As industries die - and as agriculture requires fewer workers - it is far from clear that these communities will find a role in the future.

Michael R.

A great book on modern economic geography, that is easy and fun to read, while still using a lot economic thinking and data to back up its main points, is The New Economic Geography of Jobs, by Enrico Moretti. Here's the link at Amazon: This also happens to be one of five books that former President Obama recently read and recommended.

Robert G.

I find that where the railways go is where the economy grows. Workers move into town settle in then soon someone else shows up and opens a garage, then a doctor opens a clinic, a grocery store moves in on and on and on....


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