Jobs, Cluster Theory, Innovation and How We Create The Silicon Valley Of The Future
Enrico Moretti’s book The New Geography of Jobs is particularly timely as it seeks to answer some of the tougher policy questions that are fuelling the current political discontent in western society. What makes his contribution even more significant is his offering of a real blueprint to reverse some of the problems that we all observe.
The consensus view behind both Donald Trump and Brexit’s political success in 2016, has been that a large chunk of society has been left behind after the forces of globalisation and technology have rendered certain vocations and entire industries redundant. Moretti begins his book by summarising the economic forces that created this sense of economic marginalisation. They are the well understood facts of competitive advantage; as the US could no longer compete against other countries on their cost of production, so large parts of the US manufacturing sector moved abroad. What Moretti recognised though was how the effect was not just industrial but regional. Cities like Detroit, Cleveland and Flint sank into economic depression as they suffered from de-industrialisation.
Moretti recognised that while some regions suffered from the US decline in manufacturing, others have thrived as a result of the growth in jobs linked to innovation industries. These jobs are related to human capital, not physical capital. They rely on a good education ideas, ingenuity, and creativity. What has compounded the regional dynamic of the US economic shift has been that these innovation jobs thrive in clusters, their growth and success has a geographic element. New York City, Boston, Washington DC, San Francisco, and Seattle are all areas with exponential growth in output related to innovation jobs. He also established that once these clusters have formed, it is almost impossible to move them. It is this divergence in fortune between the innovation hubs and de-industrialised towns that Moretti seeks to analyse and understand.
First and foremost, he states that innovation jobs are hugely important to any economy because they are job multipliers themselves; “Every time a company generates jobs in the innovation sector, it also indirectly creates additional jobs in the non-traded sector in the same city. Attracting a new scientist, software engineer, or mathematician to a city increases the demand for local services. This in turn means more jobs for cabdrivers, housekeepers, carpenters, nannies, hairstylists, doctors, lawyers, dog walkers and therapists… an innovation job is more than a job”. In a political age where job repatriation is top of the agenda, and there is the belief that rebuilding blue collar manufacturing is the route to middle income job across across the US, this is an important point to make. High skilled industries in the innovation sector, directly and indirectly create jobs across the service industry at all points of the income scale.
Moretti’s contribution becomes more significant when he outlines the prevailing conditions for these (innovation) clusters to thrive. They require a well educated workforce and the initial presence of education institutions with strong research and development (R+D) facilities. Interestingly, the role of an education institution as a provider of qualifications is diminished by Moretti. He notes that many of the most productive workers inside innovation clusters were educated outside in different towns/cities. The founders of Google began life at the University of Michigan, Mark Zuckerberg studied at Harvard before moving Facebook to California, and Bill Gates was also at Harvard before setting Microsoft up in New Mexico. R+D is the real value added for innovation clusters. For what it is worth, Google was conceptualised at Stanford University with a research programme. The second necessary condition for a cluster to form, is the presence of a support ecosystem. Specifically within that ecosystem there needs to be financial services (venture capital, private equity and banks) as well as legal services to help young innovative companies scale up. The glue that ensures these factors help contribute to the creation of a innovation cluster is the existence of knowledge spillover effects. Moretti believes that only when you have smart, innovative and creative people working together in close proximity to each other do you get exponential productivity growth and the creation of an innovation cluster. By sharing ideas, generating new ideas, competing with and motivating each other, individuals who work in innovative industries are able to thrive. “As an academic, I am not too surprised by this. Although I communicate daily with distant colleagues by phone and email, my best ideas often occur when I least expect them — over lunch with colleagues or at the water cooler. The reason is simple. Phone and email are great ways to transmit information and keep a research project going once the key creative ideas are in place, but they are not the best way to come up with those ideas. New ideas arise in mysterious and unpredictable ways from free and unstructured interactions.”
Moretti ends with some ideas on how policy can be designed to support innovation clusters. After all, it is every politicians dream to create a Silicon Valley in their constituency. Sadly, Moretti makes it clear that no one policy formula helps create and sustain an innovation cluster. There are are raft of policy initiatives that can be leant on to support the emergence of cluster however:
- Attract employers through tax friendly initiatives and support for R+D (through local universities if necessary) — Moretti points out that subsidies for companies often end up costing more that they generate in either tax revenue or output growth. A low tax rate and R+D incentives is more likely to be the best way of attracting employers into any area.
- Attract employees through social infrastructure and improving local quality of life — Young innovative types are likely to be attracted to areas with strong cultural and social heritage; nightlife, music and arts scene, sports and access to good restaurants and bars. Social infrastructure is also important; transport links, housing, and schools for children.
- Fundamentally Moretti calls on local policy makers to identify where a town or city has a competitive advantage. Italy, he says, has many of the attributes that young innovative types want (great culture, weather, and education institutions)… however tech start-ups don’t moe to Italy to scale-up, mostly because Italy does not have a competitive advantage over the US when it comes to tech start-up companies.
- Public expenditure on local social problems — Moretti partially advocates ‘Big Push’ policies which involve targeted public spending on social problems that hope to inject the local area with some enthusiasm and economic activity. He points to examples of success and failure of big push policies, but concludes that when done correctly (e.g when public spending is focussed on solving public problems and public money is a catalyst for private investment) then policy can have a real impact in fostering real economic and productivity growth.
For policy makers in the UK who want to boost UK-wide productivity growth, arrest the economic decline in de-industrialised regions, and support the growth of high value tech industries, the lessons in Moretti’s book are worth heeding.
