2. THEORETICAL BACKGROUND

2.1 Regional Development and Innovation

Ever since the establishment of industrial society, economies have been faced with the problem of industrial renewal. Economists have attempted to deal with this problem amid increased competition and changes in consumer demand. Renewal can refer to innovation and development within established industries, the attraction of new industries through such measures as direct foreign investment, the formation of new indigenous firms, or a combination of all three strategies. The success of a particular strategy is usually measured by the economic indicators of low unemployment and high levels of gross domestic product (GDP). Given the fact that this set of materials discusses industrial production within specific locations, there is an obvious spatial element that we need to address in our measuring of the success of various strategies.

While the problem of industrial renewal can be traced back to the establishment of industrialization ¹ the scale and pace of renewal has grown over the last two decades in what can be described as "mature" economies. The need for industrial renewal is tied specifically to the decline of traditional manufacturing and extraction industries within these "mature" economies. ² This section will deal with problems associated with industrial renewal within mature economies over the last two decades, focusing on governance structures, namely industrial districts, networks and partnerships.

The changing nature of innovation within industrial production can be cited as the principal cause of the accelerated need for policies to tackle the problems associated with industrial renewal. This changing nature has affected "mature" economies in two ways. First, the "Fordist" techniques of production and "Taylorist" methods of scientific management have been replaced with new production methods such as flexible specialization. ³ This has led to firms and industries which have not adapted to these new methods of production becoming uncompetitive. Not all industries and firms are developing on the lines of flexible specialization or variants of flexible specialization such as just-in-time. However, firms in the more dynamic sectors of the economy are developing on these lines. Second, the increasing internationalization of business organization has led to the growth of mass production methods in low-cost countries or low-cost regions. Typically, the mass production low-cost firms that locate their branch plants in "mature" economies are attracted, through incentives, to regions that have suffered from industrial decline of traditional manufacturing and extraction industries.

The development of new methods of production such as flexible specialization has coincided with a growth in the small medium enterprise (SME) sector in the "mature" economies. According to Stanworth and Gray (1991) between 1979 and 1986 the total number of business enterprises rose from 1.791 million to 2.471 million in the United Kingdom. "Of the 1986 total number of enterprises, only 12,000 had 200 or more employees and only 4,000 had 500 or more. The share of enterprises with fewer than 500 employees increased from 57.3 to 71.3 per cent of total private sector employment between 1979 and 1986" (Stanworth and Gray, 1991, 6).

This growth in importance of the SME sector can be attributed to a number of factors such as a reaction to a downturn in the economy, with people whose jobs have been made redundant turning to self-employment as a means of earning a living. According to Pyke and Sengenberger (1992, 9) "A surge of small businesses, and a loss of employment in large firms, occurred during the Great Depression in the 1930s. It recurred in the 1970s and 1980s following the recession after the oil shocks. Yet, when the national economies expanded again more strongly during the 1980s, the trend to small firm employment continued, suggesting that small firm expansion is more than a transitory, cyclical phenomenon." Pyke and Sengenberger are unconvinced by the usual arguments cited for the growth in the SME sector, such as sectoral shift, avoiding "red tape" and cost reductions. They argue that the growth in SMEs has occurred across sectors and ask why the avoidance of red tape and cost reductions has only become important in the last two decades. According to their argument the main reason for the growth of SMEs in "mature" economies is changes in the organization of production.

This material analyses the impact of these new types of methods of organizing production, namely industrial districts, networks and partnerships. Although SMEs are not the only units of production within these new methods of production, recent policy initiatives in mature economies have placed an increased emphasis on SMEs that reflects their growing importance. Industrial districts, networks and partnerships are regarded as new methods of production, but it has to be remembered that some of these methods of production have a long history. Industrial districts were noted by Marshall in Principles of Economics in 1890. They have recently been "rediscovered" in many regions of mature economies. Industrial districts can now be analyzed as "new" types of industrial productive systems, because they transcend the neo-classical notion of the firm. One finds an increased awareness being placed on institutional capacity, governance and institutional change in regional development. Within the existing literature Becattini (1990, 38) provides a useful definition of industrial districts... "a socio-territorial entity which is characterized by the active presence of both a community of people and a population of firms in one naturally and historically bounded area. In the district, unlike in other environments, such as manufacturing towns, community and firms tend to merge. The fact that the dominant activity is an industrial one differentiates the industrial district from a generic ‘economic region’." Becattini argues that the surplus generated from production within a district necessitates the development of trade which "excludes the possibility of accidental placing of the products of the district on the external market, and requires instead the development of a permanent network of links between the district and its suppliers and clients" (Becattini 1990, 38).⁴ What Becattini clearly identifies is the importance of socio-political factors, the links between suppliers and clients, and the impact of the community in enhancing the performance of firms within industrial districts. In essence the governance structure of the type of productive system is of crucial importance. The importance of the governance structure necessities an economic analysis that transcends the strict neo-classical economic approach for the identification of the economic gains accruing to businesses organized in specific types of organizational structures.

Within the existing literature three broad approaches have been adopted to analyze these "new" forms of industrial productive systems. First, there is the transactions costs approach, a neo-classical framework developed by Williamson through Coase. The second approach focuses on "embeddedness." The "embeddedness" school is critical of the neo-classicists, believing that they fail to capture the essential dynamism of the districts. Harrison (1992) introduces the idea succinctly: "Whatever their purported stability, the ‘'historical and cultural vestiges’ that contribute to the ‘localized "thickening"’ invite references to another whole intellectual stream that has fed the writing on the industrial districts. This is the idea of 'embeddedness', and it is quite different from the modes of theorizing to be found in conventional regional economics - or to any other branch of standard (neoclassical) economic theory, for that matter." The third broad approach begins from an empirical policy perspective and typically involves the citation of case studies and identification of key characteristics of production organized through differing governance structures. From there it proceeds backwards to establish some insights into a theoretical perspective whereby policy initiatives could be forthcoming. This third approach relegates any economic analysis to a minor role, citing the political and social aspects of the individual case studies. These three approaches are broadly defined, and many researchers would argue that they represent "false" boundaries.

These three broad approaches to analyzing new productive systems further reflect the importance of the concept to academics and policymakers from a wide variety of backgrounds.

• The spatial aspect and emphasis on agglomeration economies has attracted interest from regional economist.

• The development of trust and cooperative relations evident in many of the industrial districts has caught the attention of political scientists

• The specific nature of the industrial process has similarly been analyzed by researchers and commentators involved in the debates over flexible specialization and post-Fordism

• The apparent "success" of the regions containing and developing industrial districts has, for obvious reasons, attracted the attention from policymakers from the European Union down

All three of these approaches to understanding new types of productive systems owe a debt to Marshall. From this common starting point, however, the three approaches quickly diverge, stressing different aspects of Marshall. The "neo-classical" approach stresses the acceptable face of Marshall found in his static equilibrium analysis in Principles of Economics. The standard critical appraisal of Marshall, too, employs a selective reading of Marshall. Harrison, for example, neglects recent developments within the discipline of economics that may lend themselves to better analysis of new productive systems, most pertinently game theory and evolutionary economics. Harrison is correct to identify the problems of a neo-classical approach along the lines of traditional analysis of industrial economics, following Coase, Williamson et al. Their approach, however, risks "throwing the baby out with the bathwater" by ignoring important sections of Marshall, as does much of the existing literature. Researchers using the empirical policy approach emphasizes the socio-economic side of Marshall's work. Because of this, they often fail to identify the role of custom, habit and the achievement of cooperation and trust within industrial districts as outlined by Marshall. Though their work stresses these points as being crucial to the success of current industrial districts, it generally fails to identify them in the original Marshallian analysis. This is somewhat surprising, given the credit that much of the literature gives to Marshall for outlining these points. Shove, for example, states that Marshall "recognized more fully than Mill and much more fully than Ricardo the influence of social customs and institutions on economic behaviour; and he tried to weave it into the fabric of his system." (1942, 308). A reading of Marshall can identify him as an institutionalist/evolutionary economist; recent developments within regional economics are better understood from this perspective. Understanding the gains from organizing production within spatially specific regions either through a partnership, network or industrial district structure requires an institutional/evolutionary economic approach.

The idea of encouraging cooperation between firms as a policy instrument is not new; it has underpinned Japanese industrial policy for the last four decades. Within the European Union, the earliest formulations of an industrial policy, for example the ESPRIT program, made cooperation between firms a major objective. However, the difference between these types of cooperative ventures and what is being discussed in these learning materials is the spatial aspect of promoting industrial development within specific regions. Elements of a strategy leading to the promotion of a more spatially specific industrial policy is observable within the European Union’s White Paper Growth, Competitiveness, Employment (CEC 1994) "The proliferation within the Community of ‘clusters’ that combine industrial, technological and geographical advantages may hold one of the keys to job creation. This requires the active involvement of all the actors concerned, something which can be greatly facilitated by structural measures taken at Community and national level" (79). This promotion of "clusters" is only one of several measures identified by the European Union. By promoting this type of policy the European Union is falling into line with many member states in two ways; first, by recognizing that SMEs are the potential main source of new employment, and, second, by recognizing that one way to encourage SMEs to develop and prosper is by the promotion of them through cooperation in spatially specific areas. Industrial districts composed of SMEs have been identified in Southern Germany, Italy, Spain, Denmark, and France among other European Union states. But successful policy requires a real understanding of the economic advantages of organizing production in spatially specific industrial districts. The ideas at the heart of clustering and networking are developed in sections 5, 6, 7 and 8 of this set of learning materials.

2.2 Marshall and Marshallian Industrial Districts

2.2.1 The Origins of the Industrial District

In part 2.2 we explore the debt that contemporary analysis of governance structures such as networking, partnership and industrial districts owe to Marshall. We move beyond the standard approach to Marshall by looking at notions such as trust and cooperation, which are rarely credited to Marshall. From there, we develop the notion that Marshall needs to be observed beyond the neo-classical framework with which he is usually associated. In particular we explore the possibility that Marshall can be observed as an institutionalist/evolutionary economist. If this is the case then a further debt to Marshall should be acknowledged. Recent work on "knowledge based" economies discusses the establishment of the institutional framework to develop such an economy in an evolutionary way.

Much of the contemporary research on industrial districts notes a link with Marshall, but the richness of these districts in Marshall’s original writings is often ignored. A fuller interpretation can be found in Loasby (1986), (1990), O’Brien (1990), Jensen (1990), Foster (1993) Hodgson (1993) among others who discuss an institutional reading of Marshall. The reason for such a reading has already been outlined, namely that Marshall is observed as being nothing but "the father" of neo-classical economics. To fully appreciate the significance of Marshall in relation to the original analysis of industrial districts, we initially outline his analysis of them. We then identify what we believe to be a significant contribution made by Marshall in his analysis but missed by contemporary researchers: the notion of "constructive cooperation" ⁵. Extrapolating from this notion, we then argue to argue that there is more to Marshall than a narrow, neo-classicist, equilibrium interpretation would suggest and that an evolutionary reading is required to fully appreciate the significance of Marshall’s industrial analysis.

2.2.2 Industrial Districts and Marshall

Marshall’s ‘discovery’ of industrial districts arose primarily out of his empirical studies of the steel and textile industries, principally in the United Kingdom. Building on Adam Smith’s recognition of the benefits of specialization, ⁶ Marshall established that within these industries, the greater the opportunities that existed to split up the production process, the greater the chances were that specialist firms would develop. In discussing the nature of production in Principles of Economics (1916), ⁷ Marshall saw the benefits of production accruing to the individual large firm as being differentiated between internal economies of scale and those arising to the industry as a whole, or external economies: "We may divide the economies arising from an increase in the scale of production of any kind of goods, into two classes -firstly, those dependent on the general development of the industry; and, secondly, those dependent on the resources of the individual houses of business engaged in it, on their organization and the efficiency of their management. We may call the former external economies, and the latter internal economies" (266).⁸

Which of these two economies Marshall perceived as more important varied from industry to industry. Because of this Marshall's works sometimes stress the importance of internal economies, and other times they stress external economies. In Industry and Trade (1932), for example, he says that "with the growth of capital, the development of machinery, and the improvement of the means of communication, the importance of internal economies has increased steadily and fast" (167).⁹ In Principles of Economics, though, he argues that "external economies are constantly growing in importance [relative] to internal in all matters of Trade-knowledge" (284)¹⁰This apparent contradiction can be attributed partly to the growth of joint stock companies taking place at the time Marshall was writing and partly to the empiricist methodology he adopted. O'Brien, in discussing the relationship between small firms and joint stock businesses in Marshall, argues that Marshall, realizing the enormous advantages that internal economies brought to joint stock companies, believed that "the path of economic development offered few long-term portents favourable to the small firm (1990, 75). Hints of Marshall’s empiricist methodology can be observed within the subtext of Industry and Trade. Marshall himself defined the work as "A study of industrial technique and business organization" and O'Brien argues that it is precisely that, a study of different types of firm organization and production.¹²

Loasby (1990) argues that the problem in discerning which industries accrue greater advantages from internal economies and which from external economies is compounded by "Marshall’s discussion of localisation (which) cuts across his distinction between the organisation of businesses in the same trade and the organisation of various trades relatively to one another, being concerned sometimes with relations between similar firms and sometimes with firms whose activities are complementary" (112). Loasby argues that "localisation," along with specialization (which means the production process ¹³can be broken up into smaller stages, thereby allowing small specialized firms to fulfill a part of the total production process) are ways in which small firms can accrue external economies of scale and thus overcome the disadvantages which arise due to their size. Though Loasby’s point is well taken, there is no doubting Marshall’s belief that the achievement of external economies "can often be secured by the concentration of many small businesses of a similar character in particular localities: or as is commonly said, by the localisation of industry" (Marshall 1916, 26). In effect this localization of industry can be an alternative to larger size for the individual enterprise (Loasby 1990, 111). This point is reinforced by Marshall’s view of the organization within particular industries: "For instance, he says, "in cotton spinning, and calico weaving, a comparatively small factory will hold its own and give constant employment to the best known machines for every process: so that a larger factory is only several parallel smaller factories under one roof; and indeed some cotton spinners, when enlarging their works, think it best to add a weaving department" (Marshall 1916, 281)¹⁴. The various economies of scale arising from the different methods of industrial organization within Marshallian industrial districts have been highlighted elsewhere (Oughton and Whittam, 1997).

To Marshall, specialization "in large measure dispensed with the necessity of any complex arrangements in each individual business, since the external economies, which even a small business thus obtained, were generally far more important to it than those which the largest business in the world could obtain by its own efforts..." (Marshall 1932, 600). It was the coupling, then, of localization and specialization that gave rise to the notion of industrial districts. To Marshall, industrial districts are not exclusively the preserve of small firms; indeed, he comments: "The largest industries, and especially those that need massive plant, are located increasingly in industrial districts... (1932, 284). But small firms, by providing inputs and specialist finishing, can also accrue external economies from being located in industrial districts, as the first of the two quotes makes clear.

In addition to external economies arising out of production, Marshall identifies benefits arising out of agglomerations, such as skilled labor, capital and infrastructure. In his observation of one industrial district, he noted that "the trading functions of the city developed. Warehouses for the products of the district took the place of factories: shops for the accommodation of the district were enlarged; and banks and mercantile houses of all kinds became prominent" (1932, 285). A further benefit coming from the location of industry in a particular district is what Marshall describes as an "industrial atmosphere." In Principles of Economics he describes how such an atmosphere develops: "When an industry has thus chosen a locality for itself, it is likely to stay there long: so great are the advantages which people following the same skilled trade get from neighborhood to one another. The mysteries of the trade become no mysteries; but are as it were in the air, and children learn many of them unconsciously" (1916, 271). The establishment of an industrial atmosphere thus takes on the appearance of a public good, with skills being constantly developed and interchanged. The interaction that leads to children achieving skills leads in turn to the exchange of ideas, which results in innovation within the district. Marshall continues: "if one man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it becomes a source of further ideas" (1916, 271). The "industrial atmosphere" leads to a long-term commitment of an industry to a particular district. Marshall identified this trait in his description of industrial atmospheres in Sheffield and Solingen. The two areas, he said, "yield gratis to the manufacturers of cutlery great advantages, that are not easily to be had elsewhere: and an atmosphere cannot be moved" (1932, 284). Once industrial districts become established they are relatively stable productive systems. Marshall concluded that "an established centre of specialised skill, unless dominated by a guild or trade-union of an exceptionally obstructive character, is generally in a position to turn to account quickly any new departure affecting its work; and if the change comes gradually, there is no particular time at which strong incitement is offered to open up the industry elsewhere" (1932, 287).

But industrial systems are also dynamic systems, the dynamism being created by the constant interaction of the actors involved. Marshall argues that merchants not only purchase goods but also "discuss with the manufacturer himself any suggestions which may occur to them for modifications in detail, to suit their individual judgments, or to meet the special tastes or requirements of localities with which they are connected" (1932, 286).

Much of what has been stated in this paper so far merely establishes Marshall’s analysis of industrial production. Our comments regarding industrial districts are typically cited by researchers of contemporary industrial districts in arguing that they are Marshallian. Some researchers, have, however, argued that contemporary industrial districts differ from industrial districts as identified by Marshall in the degree of cooperation, trust and networking relationships that they exhibit. We argue instead that much of the current research fails to note that Marshall himself identified the significance of cooperation within his analysis of industrial districts.

2.2.3 Marshall and Constructive Cooperation

The continual interaction of buyers, sellers and producers resulted in more than an industrial atmosphere, Marshall coined the term "constructive cooperation" to identify one of the factors which gave industrial districts a competitive edge. In examining Britain’s strengths in comparison to Germany and the United States he argued "that the strong individuality of the British race may find its highest development under the guidance of the spirit of constructive cooperation" (1932, 577). This cooperation enables even "moderate sized" businesses to compete with much larger competitors "provided these qualities are united with a frank willingness to learn from others; and to cooperate genially with others in matters in which unfettered association has large opportunities" (1932, 584). The economies which accrue to medium sized businesses, enabling them to compete with larger competitors, arise out of the evolution of new organizations which are directly the result of the development of constructive cooperation, which arose out of the constant interaction within the industrial districts.

According to Marshall this constructive cooperation was counter to the negative aspects of cartelisation, which resulted in the price fixing identified in many branches of German industry. In Britain It was not deliberate policy that gave rise to constructive cooperation, rather the organization of production gave rise to it automatically: "Britain was indeed the chief home of the automatic cooperation of many industries; as it was also of reasoned analysis of the ‘natural’ tendency to such division and organisation of labour as is needed to make it collectively efficient" (1932, 600). Marshall cites the textile industry as being typical of this natural development: "The high automatic organisation of these industries, is in great measure due to the fact that their plant is made in their own districts, with constant intercommunication of ideas between machine makers and machine users" (1932, 603).

This constructive cooperation led to the establishment of new institutions to further the potential advantages which could arise out of cooperation. Marshall cites such examples as "The British Pottery Manufacturers’ Association," which had among its purposes "To deal with the quality, supply, purchase, and control of raw materials and stores, where desirable, in the interests of the members; to deal with all questions relative to cost and conditions of transport; to consider means of facilitating the extension of export trade; to bring about closer cooperation with the technical arts, and designs sections of the pottery schools; to promote general propaganda, and to undertake advertising in connection with the industry; to consider the best means of encouraging and utilizing improvements, inventions, and patents for the general good and advancement of the industry; to deal with all matters connected with more economical production, including costing; to watch national and local legislation affecting the industry ...Experts are to be appointed, and assistance given to members in overcoming the technical difficulties which constantly arise in so complex an industry; and the Federation has power to purchase, work, and exploit any patents, secret processes, or other improvements in the general interests of the members" ("Trade Supplement to the London Times, December 1918, quoted in Marshall 1932, 604).

Other similar organizations cited by Marshall include The Bradford Dyers’ Association and the ‘Fine Cotton Spinners’ and Doublers’ Association, which also employed skilled personnel "for dealing with every part of a cotton spinning mill, who are too expensive to be employed by a single firm; but are in effect available for all" (Marshall 1932, 606). The services being provided by these three associations are extremely similar to those being provided by the "Industry Specific Service Centres" of the Third Italy over half a century later and which have been identified has being of crucial importance to the success of the industrial districts in the regions making up the Third Italy. Although we focus on the Third Italy in section 6 it would be pertinent to briefly highlight some of the cooperation occurring in these contemporary industrial districts there.

Quasi private-public service centers, such as the Regional Board for Economic Development (ERVET) supervise the development and upgrading of the region of Emilia-Romagna as a whole by such measures as infrastructural improvements and the provision of training and research facilities. Furthermore, an examination of the services provided by an organization such as CESMA, which is a service center for farm machinery organized by ERVET, reveals the following: research, technological consultancy, products quality assurance, quality systems processes and certification. (ERVET 1990). Further support services can be obtained from individual industrial sector centers, specific to their own industry, to assist with such activities as exporting, technical developments and provision of access to computer aided design (CAD) systems, for example. Associations such as the Confederation of Artisans (CNA) typically provide accountancy services for member firms. These democratically elected and accountable bodies enable participating firms to achieve external economies of scale. Elsewhere we have identified the different types of external economies accruing within the industrial districts of Emilia-Romagna (Oughton and Whittam 1996).

There is a spatial dimension to the organizations cited by Marshall that gives them a further similarity with the "Real Service Centres" found in the Third Italy. Although Marshall believed there was a lot more to be done, he identified "constructive cooperation" existing in the promotion of exports through organizations such as chambers of commerce: "there remain great gaps in the work to be done: and accordingly the ‘Federation of British Industries’ has set itself to promote the formation of representative Associations for particular industries; ‘to collect them their leading members into a central federation for dealing with matters of common interest to all industries, and for mutual support’: to allot to each industry or trade a duly proportionate ‘voice in the discussion and decision of questions of promotion and development of British trade’" (Marshall 1932, 612).

This overview of the establishment of industrial districts in Marshall leads us to an examination of the existing literature on contemporary industrial districts and to identify its limited interpretation of Marshall. Although all researchers in the field of what can loosely be called industrial districts recognize the establishment of cooperation and trust as being essential for the success of these districts, it is argued by some that cooperation and trust signify a difference between these districts and the industrial districts identified by Marshall. Harrison (1992) for example, while providing a comprehensive account of the literature on Marshallian analyses of industrial districts argues that the districts of Emilia-Romagna are more than "old wine in new bottles". In particular, he uses Becattini’s phrase "localized thickening" (Becattini 1989, 132) to explain how the "new" theories of industrial districts differ from "neo-classical economic theories of externality and agglomeration (which) seem to miss important -perhaps the most important- elements of the construct" (Harrison, 1992, 475). Thus Harrison argues that standard neo-classical economics is not sufficient to deal with the concepts of industrial districts. A reading of Marshall does in fact lend itself to an analysis of industrial districts using "new" as well as "old" theories. Such a reading is possible because there are what Jensen (1990) refers to as "institutional signposts" within Marshall, particularly, in Marshall's analysis of industrial production within industrial districts outlined in Principles of Economics and perhaps more pertinently in Industry and Trade.

What Harrison does not make clear is how the "localised thickening" differs from the "constructive cooperation" between key players that Marshall identified as occurring within industrial districts he observed. We have already noted the similarity in services provided by differing organizations, notably the British Pottery Manufacturers' Association and the "Real Service Centres" of the Third Italy. "Constructive cooperation" requires the establishment of trust. The constant interaction of the actors within Marshall’s industrial districts, leading to innovation and the sharing of skilled personnel and machinery, must rely on the development of trusting relationships and the "localized thickening" of community relations identified as being of crucial importance in contemporary industrial districts.

In a similar vein Wilkinson and You (1992), while noting Marshall’s reservations regarding various types of organizations (7, n.10), fail to comment on Marshall’s emphasis on the benefits of constructive cooperation which may exist "without any apparent drift to use it as a means of maintaining prices at higher levels" (Marshall 1932, 604). They do note the different emphasis placed by contemporary analyses on concepts such as trust and cooperation. We would argue, though, that the difference between contemporary analyses and those of Marshall is in the emphasis they place in trust and cooperation rather than in whether they see trust and cooperation as valid principles. Similarly, Becattini (1990), in exploring "The Marshallian industrial districts as a socio-economic notion" notes the establishment of a common value system, within the industrial districts of the Third Italy, but argues that it is necessary to use disciplines rather than economics to fully understand the nature of this phenomena. Becattini fails to draw on evidence that Marshall readily identified the role and function of a common value system and the beneficial impact this can have on the production process and the facilitating of exchange. In discussing industrial districts within Marshall, Zeitlin (1992) similarly fails to discuss the nature of constructive cooperation found within Marshall. He refers to the usual establishment of an "industrial atmosphere" as being one of the features typically found within the industrial districts identified by Marshall. The "thickening process" of rich networking relationships, typical of industrial districts, which we have argued exist within Marshall, is only noted, according to Zeitlin, by contemporary researchers of industrial districts. A possible reason for this oversight within the existing literature could be that researchers observe Marshall merely has a neo-classical economist.

In part 2.2 of the learning materials we have observed the production process as outlined by Marshall, with specific references being made to his industrial districts and the limited interpretation of Marshall by contemporary researchers. Regarding the development of industrial production as observed by Marshall, we have highlighted the link between greater specialization and the development of the organism as a whole, that is the synergy effects of industrial organization, summarized by Marshall in the following quote: "This central unity is set forth in the general rule, to which there are not very many exceptions, that the development of the organism, whether social or physical, involves an increasing subdivision of functions between its separate parts on the one hand, and on the other a more intimate connection between them" (1916, 241). It is to a more detailed examination of this link which we now turn to highlight the function of trust and cooperation within Marshall which leads to an institutional/evolutionary reading of Marshall, which, if adopted, would prevent the misinterpretation of Marshall by current researchers in the area of industrial districts.

2.2.4 Marshall and Institutional/Evolutionary Economics

Part 2.2.3 examines Marshall’s analysis of industrial production places Marshall within the existing evolutionary economics literature, indicating that there is more to Marshall than a static equilibrium reading of Principles of Economics could imply. In particular, Foster (1993), provides a convincing argument of "time irreversibility" which leads to an evolutionary approach to be observed within Marshall. This approach is reinforced by Hodgson (1993) and Jensen (1990), whose identification of "institutional signposts" within Marshall has been mentioned. In terms of industrial production specifically, Loasby (1990), suggests that the emphasis placed on organization by Marshall leads to a consideration that organization "might be identified as a distinct factor of production" (Loasby, 1990, 111). It is precisely the organization within industrial districts both in the original Marshallian sense, and the contemporary usage of the term, which gives these regions a competitive edge, and makes them of interest to contemporary researchers and policymakers.

Organization is the general rule which underpins Marshall’s analysis of the entire production process. Cooperation in the sharing of knowledge (which leads to increased innovation) and the development of an industrial atmosphere (which results in the establishment of new organizations that facilitate production and trade, namely constructive cooperation) both derive from this general rule. Implicit in Marshall is an evolutionary approach to industrial organization; this approach, we would argue, underlies the whole of Marshall’s economic analysis. It is by adopting an evolutionary reading that links between Marshall’s original industrial districts and contemporary industrial districts can best be understood. The intimate connection is the development of trust and cooperation that we have identified within Marshall’s original industrial districts.

The trust underlying constructive cooperation develops through relationships that evolve through interaction within markets, as the following citation makes clear: "Everyone buys, and nearly every producer sells, to some extent in a ‘general’ market, in which he is on about the same footing with others around him. But nearly everyone has also some ‘particular’ markets; that is, some people or groups of people with whom he is in somewhat close touch: mutual knowledge and trust lead him to approach them, and them to approach him, in preference to strangers" (Marshall 1932, 182). It is through everyday market relationships that situations of trust are established. Industrial districts consist of particular markets where producers and consumers cease to be strangers. Within the industrial district systems of production this trust evolves into an institution transcending strict market relations, that of constructive cooperation. This new institution paves the way for the evolution of new organizations such as the British Pottery Manufacturers' Association.

This identification within Marshall’s industrial districts of evolving social institutions leads to a reading of Marshall which takes account of the role of tradition, custom, habit and legal restraint. In other words, we are arguing that there is more to Marshall than a narrow neo-classical reading will permit. The establishment of the social institutions facilitates the development of economic relations which enable SMEs to exploit external economies of scale and to reap an economic advantage from being organized in close-knit, geographically specific economic units.

In analyzing trust in industrial districts for facilitating exchange, Dei Ottati (1994) distinguishes between cooperation and trust as collective and as personal capital. We would argue that the quotes we have provided above indicate that within the strict Marshallian industrial district trust and cooperation are observed to be both personal and collective. They are personal in that individual traders and producers engage in discourse to improve innovation, collective in that the establishment of an industrial atmosphere results in the achievement of "public goods." For trust and cooperation to succeed requires an effective enforcement mechanism, whether formal or informal. Within any organization such as The Bradford Dyers’ Association, members who broke the rules could be excluded. Similarly, in specific communities where there is a particular set of informal rules and norms, that is, institutions, actors who do not comply can be shunned. However, it would be beneficial not to have to rely on enforcement mechanisms to safeguard the cooperative outcome. Within Marshall we can observe the potential of trusting relationships evolving out of cooperation. Initially this cooperation develops through the market mechanism, "the general market" but in "particular markets", in our case the productive systems of industrial districts, "mutual knowledge and trust" evolve. The establishment of cooperative behavior and trusting relationships develops into beneficial outcomes in terms of product innovation, the sharing of knowledge, information, productive capital and personnel to such an extent that Marshall can describe the achievement of an "industrial atmosphere" and the establishment of "constructive cooperation." The informality of these phrases suggest cooperation and trust being achieved without resort to formal enforcement mechanisms.

The achievement of a productive system based on cooperation and trust undoubtedly leads to economic efficiency and "is an important lubricant of a social system." (Arrow, 1974, 23). In this role of lubricant of the social system Arrow discusses how lack of trust can lead to inefficient outcomes. "Collective undertakings of any kind, not merely governmental, become difficult or impossible not only because A may betray B but because even if A wants to trust B he knows that B is unlikely to trust him" (26). The achievement of an "industrial atmosphere" and "constructive cooperation" can overcome these inferior outcomes. Furthermore, Hirschmann makes the point that trust, cooperation, collective action and the like, are different than other goods and services in that the more they are used the greater they become, although there is a limit to goodwill: "they atrophy when not adequately practiced and appealed to by the ruling socioeconomic regime, yet will once again make themselves scarce when preached and relied on to excess" (1984, 94). So within Marshall’s industrial districts we would argue that through individual action the actors developed an atmosphere in which cooperation and trust developed to such an extent that they became the norms of behavior. The establishment of such a culture led to the achievement of public goods and the creation of dynamic efficient economic systems. These systems led to the formalization of the institutions into organizations to facilitate the evolution of the industrial districts. This interpretation of industrial production found within Marshall, we would argue, requires reading Marshall in the light of an institutional/evolutionary framework. We have argued that reading Marshall merely as a neo-classical economist can lead the reader to miss many important concepts that have only recently been observed by researchers in contemporary industrial districts.

ENDNOTES

1. In the case of the UK economy Hobsbawn identifies the beginnings of decline of industry "between the middle of the century and the 1890s" (Hobsbawn 1968).
2. Principally, the economies of Western Europe, the United States and Japan
3. See for example the 1988 UK White Paper on Competitiveness
4. A discussion of this White Paper is found in section 8 of these learning materials. Reference to institutional/evolutionary approaches to regional governance structures can be found in section 3.
5. An exception to this is Bellandi in Goodman et al. (1989) who discusses constructive cooperation in relation to Business Associations, which is where Marshall makes first reference to the concept. Our point is that the organization of a Business Association formalizes the institution of constructive cooperation.
6. See for example A. Smith (1976) vol. 1, p. 13-24.
7. All references to the Principles of Economics will be to the 7th edition 1916.
8. Principles p. 266
9. Industry and Trade p. 167
10. Principles p. 284
11. O'Brien (1990, 75)
12. "One year passed much like another. In vacations, either at home or abroad, we spent some time in towns, seeing factories and workshops...One year we would go to the pottery district with its problems of localisation of industry and changing fashions...Another year it would be the light metal trades." (M.P. Marshall, 1947, 42-3) quoted in O'Brien 1990 p. 65.
13. Loasby (1990, 112)
14. Principles p. 281
15. Principles p. 266
16. Loasby (1990, 111)
17. Principles p. 281
18. Marshall 'Industry and Trade" the 1932 of the Third edition of Industry and Trade will be used throughout this paper, p. 600
19. Marshall (1932 284)
20. Marshall (1932, 285)
21. Principles p. 271
22. Principles p. 271
23. Marshall (1932, 284)
24. Marshall (1932, 287
25. Marshall (1932, 286
26. Typically see Harrison (1992)
27. Marshall (1932, 577)
28. Marshall (1932, 584)
29. We have in fact argued this in another paper, Oughton and Whittam (forthcoming) where we argue that this type of external economy can be identified as cooperative economies of scale.
30. Marshall (1932, 600)
31. Marshall (1932, 603)
32. From the 'Trade Supplement' to 'The Times' Dec. 1918 quoted in Marshall (1932 p. 604)
33. Marshall (1932, 606)
34. For example see
35. Marshall (1932, 612)
36. Harrison B. (1992) Industrial Districts: Old Wine in New Bottles? Regional Studies, 26, 5, 469-483
37. Becattini (1989, 132)
38. Wilkinson and You (1992 footnote 10. p. 7)
39. Marshall (1932, 604)
40. Becattini (1990)
41. Zeitlin in F. Pyke and W. Sengenberger (1992)
42. Principles p. 241
43. Marshall (1932, 182)
44. Reference Gambetta on the relationship between trust and cooperation
45. Arrow (1974, 26)
46. Hirschmann (1984, 94)

back to last section

next section

Web Book Home