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Gordon L. Clark & Richard Freeman*. Oxford University and *Harvard University. 1. Introduction. Being interested in urban and regional prospects For reasons of equity and social justice (broadly conceived)

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gordon l clark richard freeman

Gordon L. Clark & Richard Freeman*

Oxford University and

*Harvard University

1 introduction
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?
2 rockefeller ford project
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).
3 intellectual base line
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.
4 new economic geography
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.
5 virtues and vices of neg
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?.
6 parallel worlds geography of trade
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.
7 parallel worlds geography of finance
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.
8 our project this paper
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.
9 four basic assumptions
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.
10 time and space
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).
11 to illustrate
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.
12 adam smith s solution
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).
13 modern finance i
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).
14 modern finance ii
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.
15 modern trade
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.
16 conclusions
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.
17 bibliography
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.