Business, Community & Government

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.

Students give MasterClass an average rating of 4.7 out of 5 stars

Topics include: Localization Is a Self-Reinforcing Process • Economic Geography Should Inform Development • Utica Isn't Coming Back


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...

About the Instructor

For Nobel Prize-winner Paul Krugman, economics is not a set of answers—it’s a way of understanding the world. In his economics MasterClass, Paul teaches you the principles that shape political and social issues, including access to health care, the tax debate, globalization, and political polarization. Heighten your ability to read between the lines and decipher the underlying economics at play.

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Paul Krugman

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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