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It was Ben Bernanke who pointed out that economics isn't really all that much good at predicting the next recession (and the long-standing joke is that economists have predicted 11 out of the past three), but it is pretty good at working out why the world is the way it is.
Which brings us to the cutting edge of modern economic research and an explanation of why the tech bit of the tech industry is so hugely concentrated in Silicon Valley, and also why the nerds get paid so damn much.
Our starting point is, as always when looking at the structure of firms and industries, Ronald Coase and his paper Theory of the Firm ( http://lib.cufe.edu.cn/upload_files/other/4_20140516101548_13%20Coase.pdf ). Essentially, he asked why do we have firms? The answer being that sometimes it is more efficient to do so than to have a network of contractors dealing with each other.
Critical mass there is obviously akin to clustering. But they are taking it a stage further, in that they're not arguing that it's just more convenient or efficient, as in clustering, but that there's got to be some minimum amount for it all to work at all.
No economist is going to go around shouting that his model solves everything: economists have a name for people that do that and it's “non-economists”.
A model explains only those aspects of reality that the model was set up to explore. So the mapping of any one model over reality is never going to be one to one.
We do think that this model, where knowledge is a combination of good and also where the asset is really the knowledge holders themselves, explains some aspects of why the top end of the tech business is so concentrated in Silicon Valley and also why people get paid so blindingly much.
But nobody is arrogant enough to suggest that it explains all behaviour in the industry, nor that it even explains all about the clustering and the incomes. Only that it shines a light on some of it.
http://www.theregister.co.uk/2015/04/19/so_why_is_tech_all_in_silicon_valley/
[Related]: http://antidismal.blogspot.cz/2015/04/modelling-science-as-contribution-good-2.html
(Score: 1) by khallow on Tuesday April 21 2015, @01:24PM
A liquidity trap may be defined as a situation in which conventional monetary policies have become impotent, because nominal interest rates are at or near zero: injecting monetary base into the economy has no effect, because base and bonds are viewed by the private sector as perfect substitutes. By this definition, a liquidity trap could occur in a flexible price, full-employment economy; and although any reasonable model of the United States in the 1930s or Japan in the 1990s must invoke some form of price stickiness, one can think of the unemploy- ment and output slump that occurs under such circumstances as what happens when an economy is trying to have deflation-a deflationary tendency that monetary expansion is powerless to prevent
And he states that liquidity traps are a "credibility problem" (here the idea that everyone realizes the policy in question can't continue long enough to make a difference) for the monetary policy maker without discussing why they are. The key problem here is that the liquidity trap happens in the first place because the control problem, a typical monetary goal of increasing short term economic output by dropping the interest rate on loans, valued in the currency of the economy, is deeply flawed (and creates the "credibility problem" situation when the trick is pushed far enough to result in loss of control). While long term economic output is not necessarily all that great a measure either, it at least has the virtue of introducing a degree of long term planning into this problem and requires a far simpler and less active control system than the neo-Keynesian approach. Now, to forestall the accusation that I'm arguing a straw man, note that in the section, "The Hicksian Liquidity Trap", Krugman attempts to increase demand for a good via interest rate setting to match current productive capacity (which can't be done, if reaching that point on the model requires negative interest rates). That's optimizing for short term output rather than long term output.
A key thing ignored in this model is whether it's even a good idea to use that excess production capacity in the first place! After all, if you instead don't do that, then the resources put into that production capacity can then be redirected in the future to other production of other goods. A higher interest rate and a somewhat longer recession would encourage that transition.