 Hi, Professor George Friedman, Department of Economics, University of Massachusetts, Amherst. And we're here today to talk about industrial districts and economies of agglomeration. Oh, boy, that's one of those things where if you go home, your parents ask you what you've been studying, tell them economies of agglomeration, that'll shut them up. And this starts with the empirical regularity. And empirical regularity, then, you know, on the face of it seems odd. Why do businesses cluster? Why do so many of the businesses doing the same things locate in the same place? Often in very, very expensive places. Do you know what it costs to rent space on Wall Street and Broad? Why are all these financial services businesses there? Why don't they move to Jersey where it's cheaper? And you get cheaper workers because if you're going to be in Wall Street and Broad, you have to pay people something so that they'll be willing to take the train to that area and be really crowded. The video industry in the United States, movies, television, porn, Southern California, some of the most expensive real estate in the country occupied by businesses that you think could locate wherever they want. Why are they all there? It's not like, you know, a Las Vegas hotel that has to be in Las Vegas. You could have the headquarters for your film company in New York and Vancouver and wherever you want, but they're all down in Southern California. You can go on down the list, high tech, Bangalore, India, Haifa, Israel, clustered, why? This is an old question. Alfred Marshall, the great English economist of the late 19th, early 20th centuries, argued there are three reasons. Labor market pooling. You want to go where the workers are and skilled workers like to be where there are a lot of businesses. Why are pooling? You want to go where you can get inputs easily, you know, which includes workers. And third, knowledge spill overs. The idea that if you locate where other people doing the same type of work are, ideas are in the air and you'll pick up better technologies and new ways of doing things. Now the first two don't really make all that much sense. You know, they may be true of small businesses to some extent, but, you know, the workers, you know, it's nice to be where there are a lot of workers that you're interested in, but it also means there's more competition for those workers because there are other businesses there. This supplies, it's even worse because, you know, a lot of that stuff, shipping's pretty cheap. You get it on UPS, shows up the next day, no problem. The knowledge spill overs may be the most important. You want to be where the ideas are being generated so you can pick them up. But note, this is the one that Marshall really has nothing to say about. It's the most important reason for clustering in industrial districts, but it's the reason that he can't explain because a capitalist firm doesn't want knowledge spill overs. You want to keep your knowledge, the knowledge you generate. You generate these ideas, you produce these concepts, you want to keep them to yourself. To the extent that you have an effective capitalist economy, you don't have knowledge spill overs. The existence of clusters in industrial districts built around knowledge spill overs is a contradiction for capitalism. Think about it, the largest high-tech company in the United States in 1995, Microsoft. People are worried Microsoft's going to take over the world. What did Microsoft do? It picked up and it left Silicon Valley and it went to Washington state because it wanted to keep its ideas to itself. It didn't want the knowledge spill overs. In down in Silicon Valley, your workers leave work, they go to a bar and they tell everybody what they're doing. Microsoft didn't want that. Its workers go to a bar, only Microsoft people are there. What's happened to Microsoft in the last 15 years? How many new ideas has it come up with? How many successful products? The Xbox? Period. I mean, have they come up with anything else? I mean, yeah, I mean, Windows 7 is better, you know, it's like it's almost as good as, actually, you know, I use Microsoft stuff and I think they have gotten better in a very incremental way and actually I think Windows 7, whatever, looks to me to be about as good as a Mac. You can hit me over the head afterwards. But Microsoft isolated up in Washington has been a failure. Google, Apple, they stay in Silicon Valley. They get the knowledge spill overs. Acting in a non-capitalist, cooperative way, firms that benefit, firms that stay in these industrial districts, firms that take part in industrial districts, are actually acting a little bit like worker co-ops. Worker co-ops, because they're small, they depend on a network of other firms and people. They depend on suppliers. They depend on firms to buy their product. They work together, cooperation is built into the DNA of a worker co-op, so they go and they talk to their suppliers about what is it that they need, what is it that you need. They try to work with other cooperatives. They try to create an industrial district because they need to because they're small. Capitalist firms like Microsoft think they can do it all on their own. In fact, they can't, which is kind of interesting. The only way capitalist firms can continue to be successful is by picking up some of the cooperative habits and ways of doing things that are characteristic of worker cooperatives. By empowering their workers, by letting their workers talk about their ideas, by sharing ideas in a cooperative fashion, by being open-minded, capitalist firms can be more successful. But this requires that they stop acting so much like capitalists and start acting like cooperatives. So maybe next time we'll come up with some other paradoxes of the world. Until then, thank you and have a nice day. Bye-bye.