Obama and Krugman's Cluster F**k

Progressives have been doing a lot of talking about "clusters" lately. For example, in his recent press conference, President Obama said:

[W]hen you’re president, as opposed to the head of a private equity firm, then your job is not simply to maximize profits. Your job is to figure out how everyone in the country has a fair shot. Your job is to think about those workers who get laid off and how are we paying for their retraining? Your job is to think about how those communities can start creating new clusters so they can attract new businesses. Your job as president is to think about how do we set up an equitable tax system so that everybody is paying their fair share that allows us then to invest in science and technology and infrastructure, all of which will help us grow. And so, if your main argument for how to grow the economy is, ‘I knew how to make a lot of money for investors,' then you’re missing what this job is about.

Paul Krugman, too, in a column earlier this year rhapsodized about clusters:

[A] great job creator ... is one thing that [Steve] Jobs definitely wasn’t. ... Why does Apple manufacture abroad, and especially in China? ... [China] derives big advantages from the fact that so much of the supply chain is already there. ... This is familiar territory to students of economic geography: the advantages of industrial clusters — in which producers, specialized suppliers, and workers huddle together to their mutual benefit — have been a running theme since the 19th century. ... The point is that successful companies — or, at any rate, companies that make a large contribution to a nation’s economy — don’t exist in isolation. Prosperity depends on the synergy between companies, on the cluster, not the individual entrepreneur. ... The case for [the automobile company] bailout — which [Republican Indiana Governor Mitch] Daniels has denounced as “crony capitalism” — rested crucially on the notion that the survival of any one firm in the industry depended on the survival of the broader industry “ecology” created by the cluster of producers and suppliers in America’s industrial heartland. If G.M. and Chrysler had been allowed to go under, they would probably have taken much of the supply chain with them — and Ford would have gone the same way. Fortunately, the Obama administration didn’t let that happen.

All this talk goes back to the work that Krugman and Michael Porter did in the early 1970's on business clusters. According to one definition:

[A] business cluster is a geographic concentration of interconnected businesses, suppliers, and associated institutions in a particular field. Clusters are considered to increase the productivity with which companies can compete, nationally and globally.

That is, at some point in time and for various reasons, a particular industry reaches critical mass in a particular geographical locale. The critical mass of this industry facilitates and stimulates the interaction of individual local businesses in that industry with each other and fosters the development and growth of new local businesses in that industry. New workers and businesses are attracted from the outside and move to the cluster. This is a classic feedback loop. Hayek described this kind of spontaneous emergent self-organization in the late 40's.

The fallacy that Messrs Obama and Krugman are subject to in their analysis of clusters is when they argue that the cluster can be promoted, engineered into existence, as it were, or prevented from disintegrating, by centralized government industrial policy. The example of Silicon Valley shows the fallacy of this reasoning. There was no concerted government program after WWII to transform the sleepy farming community of San Jose into the high-tech capital it has become today. Instead, the development took place haphazardly, in a way not unlike the evolution of a biological ecosystem, where new business mutations and combinations sprang up and were tested in the crucible of local and international competition.

The idea that intelligent bureaucrats in a central government have enough knowledge at precisely the right time to be able to create such business clusters through industrial engineering is what Hayek labeled "The Fatal Conceit." According to Hayek, the driving force creating order is not centralized government, but rather the spontaneous, dispersed, self-organizing operation of a multitude of independent agents communicating information through the pricing mechanisms of markets and operating with detailed information about their particular lines of business, information that is available to them alone, and not to some omniscient overseer.

It is simply vanity for Messrs Obama and Krugman to believe they possess the kind of varied, real-time, dispersed knowledge that is possessed and acted upon in real-time by the thousands of workers of Silicon Valley. It is also simply vanity for them to believe that preventing failed American automobile companies from going bankrupt and being reorganized and restructured by market forces was a good thing. This was simply a postponement of the kind of creative destruction that Schumpeter found to be so fertile. It is precisely this kind of creative destruction that constantly tests and tempers high-tech companies in Silicon Valley and makes the Valley's economy so much more resilient than the economy of Detroit.

Mr Obama and the Democrats would have us believe that they know best and can best plan about everything: about our health care, about banks and financial institutions, about automobile companies, about energy. This is the fatal conceit of the Progressives. America and states like California will continue to struggle and stumble until the ossified, all-centralizing, constricting Keynesian ideology of these Progressives is swept away.

As a closing aside, if Progressives were genuinely concerned about preserving clusters and communities, they wouldn't pass dictatorial mandates ordering religious institutions to provide contraceptives and abortifacients in their insurance plans against their consciences, mandates that serve only to undermine age-old Catholic institutions and communities across America.