Economic Geography

Geographical economics: accomplishments and deficits
The core model
Krugman’s Geography and Trade, published in 1991, rang a tocsin in the ears 
of geographers, with its twofold proclamation that the project of economic geogra-
phy was now at last beginning, and that economic geographers (of the variety
found in geography departments) had hitherto been more or less sleeping at 
the wheel.
The new geographical economics did not, as we might expect, reach back to
regional science, but appeared quite unexpectedly from another quarter: the new
growth and trade theories that had been taking shape in economics over the previ-
ous decade or so (Meardon 2000; Thisse 1997). The core model is built up
around the idea of monopolistic competition as originally propounded by
Chamberlin (1933) and subsequently formalized by Dixit and Stiglitz (1977).
The model also has some points of resemblance to an older tradition of hetero-
dox economics focused on increasing returns and cumulative causation, as 
represented by Hirschman (1958), Myrdal (1959), and Kaldor (1970). Strictly
speaking, Krugman’s model, and the surge of research activities that it has
sparked off, are not neoclassical, for it firmly eschews any notion of constant
returns to scale and perfect competition. That said, the model retains a strong
kinship with mainstream economics by reason of its commitment to methodolog-
ical individualism, full information, utility-maximizing individuals and profit-
maximizing firms, and an exclusive focus on socially disembedded relationships
of exchange (Dymski 1996).
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Allen J. Scott

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The model itself is an ingenious if convoluted piece of algebra. Imagine a
set of regions
1
with production represented by immobile farmers and mobile
manufacturing workers and firms. Manufacturing firms engage in product differ-
entiation (monopolistic competition) with increasing returns to scale, or better
yet, unexhausted economies of scale. Thus, each firm produces a unique or
quasi-unique variety in its given product class. Consumers in all regions (both
farmers and manufacturing workers) purchase some portion of every firm’s
output. Wages are determined endogenously. Market prices always reflect the
transport costs incurred in product shipment. Consumers in regions with many
producers will therefore pay less than those less favorably situated. Any individ-
ual’s ‘utility’ is a function of both nominal wages and price levels. Mobile manu-
facturing workers will migrate from (peripheral) regions with lower utility to
(core) regions with higher utility. Nominal wages in any region whose manufac-
turing labor force is increasing in this way will tend to fall (though correspon-
ding utilities will increase because of the decreasing cost of final goods). More
and more manufacturing firms will therefore be attracted to the region, which
will in turn induce further in-migration of labor. The net result will be a path-
dependent process of spatial development leading to a stable core-periphery
pattern. Eventually an equilibrium of production, wages, prices, and demand will
be attained, and the final result will exhibit market-driven pecuniary externalities
(i.e. overall real price reductions) derived from intra-firm increasing returns
under conditions of Chamberlinian competition. In a later formulation of the
core model, Krugman and Venables (1995) showed that core-periphery contrasts
will tend to be relatively subdued (or even to disappear entirely) in situations
where transport costs are uniformly very high or very low, whereas core-periphery
contrasts will be maximized where transport costs are contained within some
intermediate range of values.
Depending on the distribution of immobile workers, transport costs, elastici-
ties of demand and substitution, and other basic parameters, the model is capable
of generating widely varying locational outcomes. Numerous modifications and
extensions of the basic model have been proposed since its first formulation. For
example, Krugman and Venables (1995, 1996) and Venables (1996) introduce
inter-industrial linkages into the model. Abdel-Rahman and Fujita (1990) have
suggested that the production functions of downstream industries are sensitive to
the variety of available upstream inputs. In this case, agglomeration and pecuniary
externalities are brought about by the productivity effects of input variety. In
another variation of the model, Baldwin (1999) has shown how demand-linked
circular causality can induce agglomeration, even in the absence of labor mobility.
2