Regional Dynamics

Studies in Adjustment Theory

Gordon L. Clark, Meric S. Gertler, John E. M. Whiteman

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351594646
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Originally published in 1986. This book is concerned with how regional economies adapt and respond to changing circumstances, and especially with the spatial system and processes of restructuring. Throughout the book there is a methodological commitment to adjustment theory - a unique analytical framework for the study of the dynamics of advanced capitalist economies. Instead of homogenising space in the manner of neoclassical economic theory, the authors focus on adjustment processes that produce and reproduce spatial differentiation.

The most important facets of regional economic structure are covered – employment, wages, prices, migration, and capital investment – in terms of their own dimensions and their connections with the larger theoretical framework. Each part of the book develops one particular dimension of regional adjustment, and each has an overview and summary. Within each part, there is a sequence of related studies focussing on the empirical aspects, theoretical logic, and distributive consequences of regional adjustment.

PART I

A theory of regional adjustment

PART I A theory of regional adjustment

In the first part of the book we introduce our central theoretical and empirical concepts emphasizing our notion of “adjustment theory.” This theory of regional economic structure is both conceptualized and empirically investigated, and serves as a first way of articulating the geographical and temporal structure of the economy. More substantively, we are concerned to model the strategic organization of production and the uncertainties which this process generates. Essentially, we seek an explanation of how economic uncertainty is absorbed by the spatial organization of production and show the implications of such organization for the structure and dynamics of regional economies. The empirical context of our work is the transformation of the US regional economic system since about 1950.

In Chapter 1, we demonstrate the necessity for adjustment theory. We show how, within the strict neoclassical paradigm of the regional economy, theory and evidence are at odds with one another. Dramatic changes in regional economic fortunes which characterized the study period are shown to have confounded accepted theories of regional growth and change, including neoclassical growth theories, more dynamic theories of circular and cumulative causation, and the so-called catastrophe theories of regional reversal. In a systematic critique of neoclassical economic theory as applied to regions, we show how certain key aspects of the adjustment problem persistently plague any equilibrium theory of regional growth. We show how the speed of adjustment, the durability of investments, the income effects on households, and speculation due to the existence of money remain as conceptual stumbling blocks for the neoclassical theorist. We also note that general equilibrium theory contains a major internal inconsistency of argument in that it essentially assumes real prices to be fixed once and for all.

We then articulate our own version of adjustment theory. In doing so we are anxious to avoid the idealizing devices of neoclassical theory which attempt to recharacterize the passage of time and the nature of economic uncertainty. Instead, we seek a more realistic vision of how the strategies and actions of individual workers, firms, and investors combine to produce the aggregate landscape and vice versa. Our goal is to show how the actual means and institutions of economic adjustment, the strategies and decisions concerning economic fluctuation and change are very important in determining the long-run economic fortunes of different regions.

Given this view of economic adjustment, certain aspects of economic organization are crucial, even though conventional neoclassical theorists would otherwise tend to find them irrelevant. Conceptually, it becomes very important to describe the “local” situations in which economic adjustment actually takes place. The “scene” (structure) and interests (variables) of adjustment decisions must be articulated. This means that, on the one hand, we must be more specific in our depiction of the local institutional context (institutions per se, as something other than mere conduits of discrete exchange, are largely eschewed by a neoclassical analysis). This institutional picture must portray the strategic relations and interests of the parties involved. On the other hand, we also must be more specific in our empirical analysis of economic variables, instead of automatically clumping them together according to a preconceived view of economic growth. For example, it is often assumed that as investment produces output, output produces employment. But the empirical version of this theoretical chain of logic turns out to be much more complex than neoclassical growth theory would have us believe.

Finally, an interest in economic adjustment (as opposed to equilibrium) focuses our attention not on a historically conceived cross-sectional analyses, but on time-series analyses of data, where we can see more clearly the historical traces of particular adjustment decisions, events and responses.

From this first outline of the adjustment problem in conceptual terms (Ch. 1), we then provide a theoretical account of economic structure and adjustment in regional economies in Chapter 2. The central thesis is that the invested structure of firms and industries exists to manage a distribution of economic uncertainty between labor and capital, a distribution of uncertainty which is inevitably generated for investment capital by the nature of the productive process. This means that the economic landscape itself can be depicted as a landscape of uncertainty. The goal of our second chapter is to provide a theory of economic locations which is derived out of an understanding of local production arrangements and the way they distribute economic uncertainty.

Our argument proceeds in two parts. First, we present a characterization of the economic landscape from an aggregate point of view, showing how the arrangement of uncertainty has dramatically changed with the equally dramatic shifts in the nature of industrial organization. Secondly, a counterpart argument is advanced showing how industries and firms secure and manage their labor supply with respect to economic fluctuations and uncertainties. We then combine the two aspects of our theory (macro and micro respectively) within the single structural notion of the spatial division of labor. The spatial division of labor, it is argued, exists to structure the social and spatial distribution of economic uncertainty.

In Chapter 3 we develop a preliminary empirical evaluation of our adjustment theory of regional economies. Here, an adjustment model of regional production is presented. A crucial feature of this model is that it distinguishes between decisions concerning production quantities and decisions concerning employment. (Most neoclassical models use the latter as a proxy for the former.) The distinction is important because from the strategic perspective of the firm, the two variables can be manipulated within a series of short-run decisions concerning production, sales and receipts, and employment (levels and costs). The crucial variable for the firm is the flow of funds, since most production is financed by retained earnings. The pattern of money flows, with all its inherent fluctuations, forces the firm into a zero-sum distribution of economic uncertainty between labor, on the one hand, and capital and its product (inventory) on the other. The firm, in our theory, is constantly engaged in calculations about how much to produce and how to finance that production. The firm, in our theory, is anxious that its capital should not be forced to bear the costs of its own unemployment. In this way the long-run, aggregate profiles of regional employment, and indeed the time path of technological change in the firm, are seen as nothing but the continual accumulation of short-run production decisions.

A simple mathematical formulation of this model of regional production is then tested for two industries, textiles and electronics, across the various states and regions of the USA. We find that changes in output can be explained by changes in the ratio of disposable profits to labor costs. We also find that the performance of our model varies with the rate of regional capital growth, but more especially with the geography of unionization and “right-to-work” laws which dramatically alter the power of the firm to affect the distribution of economic uncertainty between labor and capital.

1 The adjustment problem

Introduction

In this book we are concerned to describe and explain the economic dynamics of the US regional system for the post World War II period. Thus, we are concerned with the patterns of regional change over time. To date, studies of the dynamics of contemporary regional economic systems have sprung from two distinct, but irreconcilable, traditions. On the one hand, there exists a set of propositions, derived from neoclassical economic theory, which aims to understand how the regional economic system behaves in the context of assumptions which promote spatial equilibrium. On the other hand, there is a body of empirical evidence whose categories and concepts seek to record how the regional system, and individuals and spatial units in it, actually behave in practice. In the first instance, equilibrium models aim at establishing the ideal conditions for stability – typically regional full-employment equilibrium – while in the second instance, the practice of regional analysis presumes disequilibrium (see Richardson 1973).

Regional economic theory is similarly affected by the internal strife within the neoclassical paradigm, particularly since it is this body of economic theory which has dominated the field (see Borts & Stein 1964). Few would disagree that dynamic economic theory is in drastic disarray. One has only to note recent analyses of this issue in macroeconomic theory by Hahn (1970, 1984), Leontief (1981), Fisher (1983) and Radner (1982) to recognize that even its practitioners agree with this proposition. The ideal propositions of pure theory are not easily reconciled with the stubborn facts (or regularities) of the real world. But, in regional analysis, there are a couple of other problems of an epistemological nature which have further limited progress. Foremost among these problems is the practice of adopting theories and conceptions from other disciplines in an uncritical manner (adopting without adapting). A second problem, closely related to the first, is the habit of developing theory for regional economic systems by making analogies with the characteristics and behavior of physical systems. Thus, while many theorists have proposed “new” or modified theories of regional dynamics, most have used physically based analogies to drive their models. The most recent of such models of regional dynamics is the phenomenon of catastrophe theory, or the theory of “structural stability and morphogenesis,” as developed by Thom (1975) and further elaborated by Zeeman (1977). A much-publicized development within mathematics, it has recently been applied to the analysis of regional economic change (see, for example, Casetti 1981a, b, Thrall & Erol 1983) as well as other areas in geography (Wilson 1981).

We begin our discussion of regional dynamics by analyzing the relevance and theoretical appropriateness of the catastrophe approach to understanding the processes of regional change. In doing so, our intent is to offer a point of departure from contemporary debates in regional economic theory, as well as a critique of a specific theory. We then turn to an analysis and critique of neoclassical equilibrium theory in general as a means of identifying the adjustment problem which forms the basis of our book. Our critique aims at how abstract economies of pure theory are supposed to move from one condition to another over time and space. This chapter serves as our introduction to the problem of regional economic analysis, and our own perspective in particular.

A binary theory of regional change

In order to embark upon a useful analysis of catastrophe theory (hereafter CT) as applied to regional economics it is necessary first to sketch its fundamentals. For this purpose we shall focus on the model proposed by Casetti (1981a), presenting and analyzing in turn its key attributes. This model was originally proposed by Casetti as a way of understanding what was perceived by many to be a sudden reversal of the relative economic performance and fortunes of regions in the United States during the mid to late 1970s. As Casetti noted, these events appeared to be at odds with stock-in-trade theories of regional change – notably the cumulative causation and growth pole theories, “since these theories imply that the more developed areas will grow comparatively more, and will induce growth in the territories around them” (p. 572). His attraction to CT as an heuristic device for better explaining recent events stems apparently from its emphasis on the dynamics of discontinuous systems.

Casetti began by limiting his analysis to those situations in which capital formation within a region (and the jobs thereby created) is responsible for inducing subsequent immigration of population to regions undergoing net capital accumulation, and outmigration from regions experiencing net decline in capital stocks. Then, assuming perfectly mobile capital (an assumption which is implicit rather than explicit in Casetti’s exposition), he constructed a model of net regional capital formation which depended primarily on differences between the marginal productivity of a region’s capital base a...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Preface
• Acknowledgements
• List of figures
• List of tables
• Part I: A theory of regional adjustment
• Part II: Local Employment Profiles and Labor Demand
• Part III: Regional wages and prices
• Part IV: Interregional labor migration
• Part V: Regional capital dynamics
• Bibliography
• Index