Agglomeration externalities are the hot thing in policy these days. For believers they’re one of the things that economists have missed by excluding geography in the past. To sceptics they’re just another excuse for the Government to justify picking winners and organising the country. I recently came across a couple of VoxEU articles that might point the way to a reasonably middle ground. First, Nicholas Crafts explains the success of Lancashire as the textiles manufacturer for the world:
successful agglomerations have productivity advantages that not only can allow relatively high-wage centres to thrive, but are also hard to replicate elsewhere. This suggests that an important role for policy is to facilitate, or at least not to obstruct, the growth of these agglomerations.
the most promising route to good European jobs in the globalised economy of the 21st century is to provide an environment in which strong cities can flourish.
The question is whether that requires the Government to simply step out of the way and provide the necessary public goods, or whether it is a call for active policy. An article by CEPR researchers hints at an answer.
The existence of gains from agglomeration does not mean that clusters should be subsidised. There are too many good things in the world to subsidise them all.
Firms take into account most of those benefits in their location choice. Costly public interventions aimed at increasing the size of clusters is not a policy that is supported by the French evidence. Whether cluster policies can, for a given size of clusters, improve collaboration, the exchange of information and knowledge externalities between firms remains to be tested.
Typically for economists there is something for everyone there. It’s not a topic I know much about so feel free to post up some links to good papers in the comments.