The Economic Geography of the Internet Age

Will the Internet redefine the "core" and the "periphery," creating a new geography, with neighborhoods connected not with streams and roads but with wires and microwave transmissions? An analogy to previous transportation and communications improvements is frequently made today: the transportation revolution of the 20th century permitted the deagglomeration of much physical production, and the Internet will now permit the deagglomeration of the intellectual and immaterial activities of the economy. But this analogy is faulty, and its historical reasoning inaccurate. In this paper, we first point out that at the end of the 20th Century most exchanges of physical goods take place within geographically defined neighborhoods. Previous rounds of infrastructure improvement always had a double effect, permitting decentralization of certain activities while actually reinforcing the attraction of cities for others. This is because all technologies of economic transactions increase the complexity and timeliness of interactions, making possible new forms of variety and differentiation of outputs. This is then reflected in more complex intermediate divisions of labor, or overall roundaboutness of the economy. Many of the transactions required by such an economy are dependent on what we call "handshake" interactions, not mere "conversational" interactions, which are the kind made feasible at a distance by the Internet. Hence, the Internet , all the while permitting the further locational deconcentration of certain routinized activities will also participate in reinforcing the need for urban concentration as the principal means to carry out "handshaking" in the complex, variety-based parts of the economy whose development it will encourage.