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Document are the kind of person who balks at silly assumptions made for analytical convenience, you will not be encouraged by the picture I am about to paint. But we do now have a set of modeling tricks that allow us at least to present illustrative examples of economies subject to increasing returns. Page 60 You've already seen an example of these tricks in the first lecture, where I showed how Murphy et al. used a simple model of symmetric, limit-pricing monopolists to cut through the confusions of the Big Push story. Not everyone is happy with this kind of analytical sleight of hand: I have heard that at least one Nobel laureate reacted to their paper with an angry dismissal, saying "it can't be that simple." To my taste, however, Murphy et al. provided exactly what we needed: a simple, clear illustration that all at once makes what Rosenstein-Rodan was saying completely comprehensible. For the problems of spatial economics, that particular trick won't do, for reasons not worth describing let's just say that I have tried quite hard to do it, and I am pretty sure there isn't any way. But there are other tricks. The one that I have found most useful is the formalization of monopolistic competition suggested in 1977 by Dixit and Stiglitz a completely unrealistic model, but one that I (and many other theorists in international trade, growth, and other fields) have found fabulously useful for constructing clarifying examples. Over the last few years I have been gradually constructing a model of a spatial economy that relies on the Dixit-Stiglitz approach to monopolistic competition to "sterilize" the problem of imperfect competition. I do not claim that this approach is the only way to do spatial economics, or even that it is a wholly satisfactory model. What I do claim is that the model demonstrates the feasibility of telling the kind of file:///D|/Export2/www.netlibrary.com/nlreader/nlreader.dll@bookid=409&filename=page_60.html [4/18/2007 10:30:24 AM]
Document Page 61 stories that are needed to do meaningful economic geography in a way that mainstream economists can live with. The formal model is given in the appendix. All that we need to talk about now are a few general aspects of the approach. I imagine an economy with a number of separate locations. (It is possible to deal with a continuum of locations as well; indeed, there are some very interesting ways of looking at agglomeration in a continuous spatial economy, but I won't go into them here.) There are two sectors: agriculture, which is geographically immobile, and manufacturing, which is mobile over time. The geographic reallocation of manufacturing is, however, not instantaneous; it turns out to be important to introduce at least a rudimentary story about dynamics. Manufacturing consists of many firms producing differentiated products; increasing returns ensure that not all potential goods are produced, and thus that each plant produces a unique good (thereby justifying the Weber assumption that each good is produced at a single location). The monopolistic competition assumption neatly, if implausibly, disposes of problems like strategic behavior. All that firms need to do is choose an optimal location, taking into account the spatial distribution of demand and the transportation costs they must pay. The way I've described it, the model doesn't sound like much. Actually, it is remarkably hard to come up with a formal structure that simultaneously includes increasing returns and the resulting imperfect competition, transportation costs, and factor mobility and that you can still work with. But anyway, I have such a structure. What does it tell me? The most important thing I learned is that all of my first four traditions in spatial analysis Germanic geometry file:///D|/Export2/www.netlibrary.com/nlreader/nlreader.dll@bookid=409&filename=page_61.html [4/18/2007 10:30:24 AM]
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Document Preface Page vii This book
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Page 37 and 38: Document 2 Geography Lost and Found
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