Paul Krugman

Paper #: 96-04-021

As the example of Silicon Valley makes clear, the economic analysis of location--the geography of the economy--is the subfield of economics to which the typical buzzwords of complexity apply most obviously and dramatically. The spatial economy is, self-evidently, a self-organizing system characterized by path dependence; it is a domain in which the interaction of individual decisions produces unexpected emergent behavior at the aggregate level; its dynamic landscapes are typically rugged, and the evolution of the spatial economy typically involves "punctuated equilibria," in which gradual change in the driving variables leads to occasional discontinuous change in the resulting behavior. And in economic geography, as in many physical sciences, there are puzzling empirical regularities--like the startlingly simple law that describes city sizes--which seem to imply higher-level principles at work. There is a long intellectual tradition in economic geography (or rather several separate but convergent traditions). The last few years have, however, seen a considerable acceleration of work, especially in the development of theoretical models of the emergence of spatial structure. This paper is a brief but I hope suggestive survey of this work, intended to convey a flavor of the exciting ideas being developed without going into technical detail. The paper is in five parts. I begin with two very simple motivating models that illustrate why economic geography so naturally leads to the typical "complexity" themes. Each of the next three parts then describes a particular major line of research. A final part discusses implications and directions for future work.