The Winter Olympics were fun to watch — and they also illustrated some fundamental economic issues.
The big medal winners were relatively small countries: Norway, Austria, Switzerland, the Netherlands and Sweden. The much larger United States, China and Japan all got fewer medals in absolute terms. In relative terms, it was even starker: On a per capita basis, Norway got 105 times as many medals as our country, Switzerland 25 times and the Netherlands 16 times. Why?
It turns out that this question can be answered using economic examples.
For a century, nearly all of the U.S. textile industry was within 50 miles of Providence, R.I. Why? Machine tools and firearms overwhelming came from the Connecticut River valley for 150 years. Most carpet production long came from around Dalton Ga. Semiconductors and ensuing technology centered on Palo Alto, Calif. And Minneapolis-St Paul has had a highly disproportionate share of medical-technology innovation, starting with pacemakers and heart valves, but now much more broadly. Why?
In some cases, a natural resource endowment is key, especially at first. Water-powered textile mills sprang up along New England’s geologic “fall line,” where rivers passed from uplands to the coastal plain. The falls and rapids allowed for easy water power development.
This is similar to the notion of Norway and Switzerland having lots of snowy mountains for skiers and bobsledders to train; or that Norway, Sweden and Finland having long winters during which, for centuries, skis and skates afforded the best way to get around by foot.
But natural phenomena is only one part of the answer. Skating on canals may be part of Holland’s national myths, but it never was common in most areas or in most years. Switzerland has mountains, but 15 of its 20 largest cities are at lower elevations than Brookings, S.D., and the large majority of its inhabitants live below 3,000 feet above sea level. The Norwegians are highly urbanized today. And why did skating never get so established in areas of northern Germany, or in Denmark, where the climate and topography are similar to the Netherlands?
The answer is that where there is a pattern of something getting established, perhaps by historical accident, then that pattern takes on a life of its own. Expertise is developed and concentrated. Examples are set, role models created, supporting services established.
We see this in Olympic training and in medical device innovation clusters.
In 1600s Europe, when the Little Ice Age corresponded with the development of machine tools, Dutch canals were well established and iron-runner skates, rather than wood or bone, became cheap. People did skate from village to village nearly every winter. Even as it became a less common in succeeding periods, the technology was there. People knew you would do it and doing so was admired. It was part of the national cultural ethos.
Yes, the Springfield Armory was established by the U.S. military in Massachusetts in the late 1700s partly because of natural water power, but partly for purely political reasons. The southerners got one at Harper’s Ferry in what is now West Virginia. Why Springfield pioneered manufacturing and management techniques in a way that never happened in Harper’s Ferry is not clear.
But once the Armory became the wonder of world manufacturing, technology and know-how transferred to private businesses. Skilled workmen trained at the Armory were in high demand by other manufacturers. And the metal and wood shaping machinery developed in the Armory soon found uses in producing things other than gunstocks or actions.
The same seems to have been true in New England textiles. The process of what economists call “learning by doing” becomes multiplied from factory to factory and company to company. Fairchild, an aircraft manufacturer that made the famous Flying Boxcar, transformed itself into a semiconductor company and from that Intel and myriad other computer hardware and software enterprise sprung.
Work at the University of Minnesota led to a pacemaker, which led to the economic cluster that became Medtronic, St. Jude Medical, Guidant and others. Though mergers and acquisitions have changed the names of these companies, the cluster still exists and continues to foster new startups. Similarly, Stanford University and Hewlett Packard in California led directly to the innovation cluster that is now Silicon Valley. Some of the spark is scientific knowledge. Some is experience in getting funding, finding a good patent attorney, marketing to investors and consumers. But it is usually a case of success begetting success by proximity.
These patterns are not unique to our nation. Brazil has Sao Paulo, China has Shanghai and India has Bangalore. Nor is a cluster eternal. The English Midlands and Scotland’s Clydeside were technological leaders for nearly two centuries. But they are blighted now. The Ruhr in Germany was the center of metallurgy and chemicals for its time, but its glories have faded. The U.S. rust belt is gone. A Philadelphia suburb is no longer is the hub of locomotive manufacturing. Chicago no longer packs meat.
Initial accomplishments don’t give an edge in perpetuity. By 1900, the textile industry was moving closer to cotton production and cheaper labor in the Piedmont Carolinas. Other places now manufacture pacemakers and heart valves. Microsoft and Amazon.com are part of a separate tech cluster around Puget Sound that is now lapping over into Boise, Idaho.
Nobelist Paul Krugman has worked on this “agglomeration” phenomenon of an industry springing up in some specific location; likewise Thomas Holmes, an economist at the University of Minnesota and Minneapolis Fed, has done much work on these issues. They remain central to human prosperity.
Economists tend to ignore intangibles like culture or even attitudes. However, Napoleon said that “In war, morale is to all other factors as three is to one.” That is true in technology development and transfer and possibly also Olympic sports. Striking out into the complete unknown is daunting. But once an example is set, others can say, ”Hey, I could do that too.”
The problem is distilling this down to something that can be replicated. When I was a regional economist at the Minneapolis Fed, I would get interviewed by business reporters from places like St. Louis or Pittsburgh or Cincinnati who were writing stories about how their cities could succeed the way Minneapolis-St. Paul did. You can go through Minnesota’s willingness to invest in education and infrastructure, the role of the U, the foresightedness of people like Gov. Elmer Anderson. But at some point it comes down to, “I really don’t know.”
Yet even if we cannot explain something fully does not mean we should stop examining it. Like underdog countries excelling at winter sports, we are on a long run economically here in Minnesota and don’t want that to end. We don’t know everything but we do know some things. Centuries of low taxes have not done all that much for Alabama and Mississippi. A great university and good infrastructure have helped us. Innovators and entrepreneurs want to live in locations that have rich cultural and recreational amenities. But there is more to learn.