On the World
Great Industries Form Global Chain
NEVATHIR
February 5, 2017
Global chain minimizes total cost for great industries and thus is the correct economic geography for many oligopolies. Krugman used transportation cost minimization to explain industrial clusters and cities. However, transportation cost minimization is merely a fragment of total cost minimization and thus Krugman's economic geography is merely a limited case derived from our more realistic theory when transportation cost dominates. Clearly transportation cost doesn't always dominate and total cost minimization forms a wide variety of economic-geographic patterns, among which global chain is both spectacular and favorable for many oligopolies.
Internet software industry is a clear example where transportation cost doesn't make most of the difference. However, before dwelling on these completely modern innovations, it's beneficial to examine traditional industries to prove that patterns not covered by Krugman's economic geography aren't revolutionary, but a integral part of capitalism's transformations.
Total cost minimization is not to be understood as minimizing total business expenditure, but given productivity, quality, or profit constraints, businesses and consumers may choose the least-costly suppliers to complete transactions. Take a look at Amazon. It's often the case that Amazon's low-cost book deals undercut many traditional bookstores. As a consequence, book industries were greatly transformed upon Amazon's rise, whose history won't be elaborated here. Modern people buy books from bookstores nearby as well as global chains behind Amazon and its Kindle.
Tourism, journalism, and media don't form industrial clusters for obvious reasons. It's a blessing for otherwise Vatican might not survive capitalism.
A major revolution of our time is the birth of Internet software industry. Due to outsourcing or high demand for productive programmers, industrial clusters simply don't work at all. Google is a global monopoly, too big to fail not even Goldman Sachs will ever achieve. Mankind must save Google from physical failures or suffer diminishing intelligence. Financial crisis is benevolent in comparison.
Housing is friendlier. City blocks aren't as attractive as suburb areas for many home buyers, because transportation cost is less important than housing costs and quality space. Tree lovers don't have to make a hard choice between Amazon rainforest and Hong Kong.
Return to cities. Industrial manufacture and transportation affect city formation as Krugman suggested. Other factors aren't negligible. For ancients, religious centers and political centers both formed long before industrial revolution. For moderns, it's not manufacture but finance that moves people from all over the world to New York. Financial transactions can be easily completed on the Internet. Why does Wall Street still exist? Is it due to information and coordination more than transportation?
All in all, compared with international trade, we may say we understand economic geography very little and accurate quantification is very far from practical. There is a good reason to undertake extensive research on economic geography, however: What's the next Google?