The importance of understanding distance and scale

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By Steven Bond-Smith

The economic geography of Hawaii is rather unique in the world. The economy is relatively small compared to other US states. But it is relatively large and advanced compared to many other Pacific economies. The state is extraordinarily isolated geographically, as is well known and appreciated. But it is also extraordinarily connected with up to 200 flights per day to the mainland and international locations. The metropolitan area of Honolulu is relatively large, even by US standards, with around a million people and a dense urban core. But the population in some parts of the state, and even in parts of the metro area, is very dispersed. Correctly interpreting the roles of scale, density, isolation, and connectedness for Hawaii’s economy are vitally important.

Economic theories often ignore the role of scale and distance almost entirely. This leads to generalizable descriptions that can apply to any economy. As a result, policy-makers are offered one-size-fits-all economic policies that supposedly work everywhere. Unfortunately, when such explanations are applied to places where scale and distance really matter, it has generated misleading conclusions and inappropriate policies.

I’ve recently published a journal article (ungated), out now in an advanced copy, exploring the unintended consequences of various assumptions used in standard economics.

Specifically, spatial economists have been making an unintentional mistake in spatial economic growth models for decades. Their assumptions typically imply that only big connected locations are suitable for innovation. It is generally accepted amongst urban economists that cities are the incubators of innovation. It allows economists to explain why Silicon Valley, New York or Boston are hubs of economic activity and innovation, and Hawaii is not. Yet, for the most part, these conclusions are the unintentional result of poor assumptions about the scale or size of an economy. As a result, many of these models offer no understanding of the mechanisms that generate the clustering of innovative activity in those places.

I document how economists and geographers have made these mistakes by misusing standard economic theories and I promote suitable alternatives. It’s a quirky piece of theory, but the implications are enormous. It means people have been thinking about growth and agglomeration all wrong, especially in small and peripheral places.

As a result, models unintentionally implied that larger places unintentionally have faster productivity growth than smaller places and are more attractive locations for inventors who then face a dispersion force of idea congestion—EXCEPT that none of this is micro-founded—it is all an unintentional result.

Spatial economists need to use a scale-neutral model of growth—a solution that expands variety and quality with larger populations—so by default smaller places generate productivity growth at the same rate as larger places. This alternative allows the specific detailed modelling of mechanisms that increase or decrease innovation in particular settings. Spatial economists can add micro-foundations to explain regional differences. This is crucially important for small, isolated or peripheral economies where distance and scale really matter.

It means that scale isn’t the only thing that matters for innovation. Clustering, related variety etc, are often related to scale—but they don’t have to be. Recognizing this allows spatial economists to build better models. We can borrow lots of ideas from economic geographers to make our models much more nuanced, localized, and explain local phenomena with the usual mathematical rigor of economic theory.

As a result, policy-makers in places like Hawaii can identify the mechanisms that work best in this state, and on different islands, given the scale, isolation, and density of Hawaii’s various economies. For example, clusters of related innovative businesses benefit from each other’s knowledge, even if they are located in a small and isolated economy. Rather than applying generalized policy practices from the mainland, policy-makers can develop tailored local policies that take advantage of and enhance Hawaii’s unique qualities.

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