a. In the nineteenth century, economist Alfred Marshall wrote about decreasing cost industries, writing in his Principles of Economics (available free online) that “When an industry has thus chosen a locality for itself. . . . the mysteries of the trade become no mysteries; but are as it were in the air.” In Chapter 10, we had a concept for benefits that are not internal to a firm but are “as it were in the air.” What specific concept from Chapter 10 is at work in a business cluster?
b. In the twenty-first century, economist Michael Porter of the Harvard Business School writes about decreasing cost industries as well: He calls them “business clusters.” Porter’s work has been very influential among city and town governments who argue that carefully targeted tax breaks and subsidies can attract investment and create a business cluster in their town that will subsequently reap the benefits of decreasing costs. Is this argument correct? Be careful, it’s tricky!