Economists and space for research

In St. Petersburg, the third international conference ‘Industrial Organization and Spatial Economics’, organized by the HSE’s ‘International Laboratory for the Theory of Markets and Spatial Economics’ has come to an end. The participants talked about how to study competition, the similarities and differences of regional economies, and whether it is possible to create a robot-economist.

How the market is linked to space

At the St. Petersburg conference, there were more than twenty papers on topics related to the concept of "space" (as it is understood in economics terms) – given by researchers from Russian universities and research centres, as well as from universities in the USA, Canada, UK, France, Germany, and Japan.

What does the term ‘space’ mean in modern economic science? As a concept it has two meanings. The first - a geographical one. Economists have for several centuries been interested in the reasons for the uneven distribution of economic activity across countries and regions. Why, for example, are some activities concentrated in metropolitan areas, while others are equally well developed in both small and large towns? This is one of the main problems that the field of "new economic geography" is dealing with; this new scientific field has emerged following an article published in the  ‘Journal of Political Economy’ in 1991 by the Nobel laureate Paul Krugman. In his paper Krugman developed a theoretical approach to the study of economic factors and conditions that lead to the emergence of regional structures, such as "industrial core and agrarian periphery".

Secondly,  ‘space’  in  economic terms can also mean the area of consumers’ individual tastes. This interpretation of the word is based on the famous paper by Harold Hotelling ‘Stability and Competition’, published in 1929. In order to grasp what is meant by this, an example is given of an imaginary city where there are many grocery stores, each selling its own range of products. The living conditions in all parts of the city are absolutely identical, as are the prices in all the shops. If you were to ask a resident of the city in which area he or she would prefer to live, one would expect the answer to be: next to a shop that sells his or her "favourite" products. However, if different shops were to set different prices, and transport costs were not too high, then the answer might be different.

From theory to practice

The study of market theory structures and spatial economy is the key to understanding the processes of international trade, migration and the spatial distribution of businesses, and also clarifies the economic mechanisms of urban and regional development. Of course, theory alone is not enough to be of practical use to federal and regional authorities, and city governments. This requires, at the very least, more detailed work with the data. However,  a deep appreciation of the theory is what permits the data to be interpreted correctly and enables us to see the correlation between certain indicators.

A typical example of such a "symbiosis" of theory and empirical analysis can be found in a city’s modern economy. Here is a simple question: Why does the level of productivity of firms operating in major cities tend to be higher than the national average? There are at least two plausible explanations: firstly,  economies of agglomeration (in a large city, you can install more business networks and make production quicker and more efficient); secondly, the condition of "survival of the fittest" (in big cities the level of competition is much higher, so only the most efficient businesses from the periphery will take on the risk of setting up in a "metropolis"). But how do you know which of these two effects is dominant in a particular country ( or region)? This question is important in order to assess the impact of regional economic policy. To answer it, both effects need to be measured. For their correct measurement precise statistical methods have been developed, based to a large extent on theoretical models of the new economic geography.

Results of data collected in the Russian regions

The conference presented several empirical studies. In her paper ‘Spatial Interaction of Russian Cities: an Empirical Study’, Vera Ivanova, a researcher from the International Laboratory for Market Theory and Spatial Economics (TMSE), tested the

hypothesis that sooner or later there is a levelling out of salaries for those in the cities and those in the regions of the Russian Federation. After analysing the  data from 1,500 cities, it was found that over the past 15 years this trend of salary alignment was seen (taking into account the difference in inflation in different regions, regional variations, local budgets and other characteristics). At the same time, the data show a clear spatial effect: the closer the cities are to each other, the smaller the difference in the comparable wages of these cities.

In another empirical study, ‘Transition and path-dependence in knowledge-intensive industry location: a case of the Russian

professional services’, carried out by scientific researcher Denis Ivanov from the HSE’s International Centre for the Study of
Institutions and Development, a link was found between the concentration of workers in the field of research and development
back in the early 1990s and the opening of new businesses in the research-oriented technology industries ( such as
architecture, engineering, IT) at the present time. Despite the fact that new businesses were not directly linked to the type of
work carried out in research institutes twenty years ago, in the cities where there were more trained staff from these
institutions, there was a larger concentration of high-tech firms setting up. In this way, the negative effect of the infamous "brain
drain" on the economy may be seen to be exaggerated.

Economists joking, or when will a robot scientist win the Nobel Prize?

The conference ended with a  very unusual paper by Professor Masahisa Fujita from  Kyoto University, written by him in collaboration with Professor Marcus Berlian from Washington University in St. Louis.  Scientists did wonder, on first hearing the paper, whether the question of  the possibility of  inventing a robot economist was a joke.

The work of Professor Fujita and Berlian is an example of a serious economic study presented in a comic fiction "package". It is dedicated to the study of the structure of scientific knowledge about economics. In other words, the authors construct a kind of ‘meta-model’ - a formal mathematical model of the behaviour of an economics researcher, demonstrating which elements are part of the process of constructing economic theories and how these elements are related to each other. Hence the title of the work (‘The Fine Microstructure of Knowledge Creation Dynamics: Inventing a Robot Economist?’), alluding to the fact that the further development of this area of ​​research could (at least in principle) lead to the complete algorithmization of research activities in the field of  economics. Therefore, it is possible to  create an economist using artificial intelligence.

Fortunately for economists of the flesh and blood type, the concern about changing their  profession seems a long way off. One of the findings of Fujita and Berlian is that we are still far away from creating a robot-economist.

Vladimir Vahitov, Sergei Kichko, Philip Uschev reporting for the HSE News Service