Gordon L. Clark & Richard Freeman*

1. Gordon L. Clark & Richard Freeman* Oxford University and *Harvard University

2. 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?

3. 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).

4. 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.

5. 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.

6. 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?.

7. 6. Parallel Worlds – Geography of Trade • Tangential to NEG, increasing evidence of trade fragmentation—outsourcing 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.

8. 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.

9. 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.

10. 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.

11. 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).

12. 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 example—an 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.

13. 12. Adam Smith’s 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 desirable—staying at home becomes the best option).

14. 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).

15. 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, Smith’s ‘solution’ is, in the modern idiom, all about enterprise-wide risk management • Portfolio diversification, underpinned by secured loans, could accomplish the same result—and generate a growing market in extensive fragmented trade.

16. 15. Modern Trade • Of course, 21st century trade is far more complex—its really Krugman’s trade theory combined with fragmentation • But, there remain important implications from the Smith model—eg. 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.

17. 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.

18. 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 109:811-41 • Grossman, S. and J. Stiglitz (1980) On the impossibility of informationally efficient markets. American Economic Review 70:393-408 • 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.