10/6/19, 7)57 PMComing and going - Free trade
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SPECIAL REPORT: AN OPEN AND SHUT CASE
Free trade
Coming and going
Truth and myth about the e!ects of openness to trade
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Sep 29th 2016
Print edition | Special report
IN MARCH 2000, two months before a crucial vote in America’s Congress on whether to
make normal trading relations with China permanent, Bill Clinton gave a press conference.
In the !rst year of his presidency, 1993, he had made a bold case for the North Atlantic Free
Trade Agreement (NAFTA) with Canada and Mexico, claiming it would create 200,000 jobs
in America. Now, in the !nal year of his second term, he was even more bullish about a
trade pact with China, which would allow that country to join the WTO. It would require
China quickly to cut its average import tari" from 24% to 9%, to abolish import quotas and
licences and to open up some industries to American investment. America, for its part,
would not have to do anything. “This is a hundred-to-nothing deal for America when it
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comes to the economic consequences,” said Mr Clinton.
Sixteen years on the mood is rather di"erent. Job losses in manufacturing states such as
10/6/19, 7)57 PMComing and going - Free trade
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Michigan, Ohio and Pennsylvania have made trade a key issue in America’s presidential
election. Donald Trump has risen to prominence in part by promising to impose steep
tari"s on imports from China and Mexico, claiming America’s trade de!cit with both
countries (see chart) shows it is “losing”. Hillary Clinton is no longer supporting the TPP
trade deal she had earlier favoured. The demise of furniture-makers and textile !rms,
unable to compete with low-cost imports, belies the predictions made by her husband.
Bernie Sanders, Mrs Clinton’s opponent in the Democratic Party primaries, said trade deals
had been “a disaster for American workers”. A YouTube clip earlier this year showing the
graceless manner in which bosses of Carrier, a maker of air-conditioners, told its workfo ...
Measures of Central Tendency: Mean, Median and Mode
10619, 7)57 PMComing and going - Free tradePage 1 of 15h.docx
1. 10/6/19, 7)57 PMComing and going - Free trade
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SPECIAL REPORT: AN OPEN AND SHUT CASE
Free trade
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Truth and myth about the e!ects of openness to trade
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Sep 29th 2016
2. Print edition | Special report
IN MARCH 2000, two months before a crucial vote in
America’s Congress on whether to
make normal trading relations with China permanent, Bill
Clinton gave a press conference.
In the !rst year of his presidency, 1993, he had made a bold case
for the North Atlantic Free
Trade Agreement (NAFTA) with Canada and Mexico, claiming
it would create 200,000 jobs
in America. Now, in the !nal year of his second term, he was
even more bullish about a
trade pact with China, which would allow that country to join
the WTO. It would require
China quickly to cut its average import tari" from 24% to 9%, to
abolish import quotas and
licences and to open up some industries to American
investment. America, for its part,
would not have to do anything. “This is a hundred-to-nothing
deal for America when it
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comes to the economic consequences,” said Mr Clinton.
Sixteen years on the mood is rather di"erent. Job losses in
manufacturing states such as
10/6/19, 7)57 PMComing and going - Free trade
Page 4 of 15https://www.economist.com/special-
report/2016/09/29/coming-and-going
Michigan, Ohio and Pennsylvania have made trade a key issue
in America’s presidential
election. Donald Trump has risen to prominence in part by
promising to impose steep
tari"s on imports from China and Mexico, claiming America’s
trade de!cit with both
countries (see chart) shows it is “losing”. Hillary Clinton is no
longer supporting the TPP
trade deal she had earlier favoured. The demise of furniture-
makers and textile !rms,
unable to compete with low-cost imports, belies the predictions
made by her husband.
Bernie Sanders, Mrs Clinton’s opponent in the Democratic Party
4. primaries, said trade deals
had been “a disaster for American workers”. A YouTube clip
earlier this year showing the
graceless manner in which bosses of Carrier, a maker of air-
conditioners, told its workforce
that it was moving production to Mexico seemed to con!rm
every fear about the exodus of
jobs and the heartlessness of capitalism.
What is behind the change in mood? The years after the NAFTA
agreement came into force,
in 1994, were actually rather good ones for America’s economy,
including manufacturing.
But China’s accession to the WTO caused a big shock. The
country’s size, and the speed at
which it conquered rich-world markets for low-cost
manufacturing, makes it unique. By
2013 it had captured one-!fth of all manufacturing exports
worldwide, compared with a
share of only 2% in 1991.
This coincided with a fresh decline in factory jobs in America.
Between 1999 and 2011
America lost almost 6m manufacturing jobs in net terms. That
may not be as dramatic as it
5. sounds, since America is a large and dynamic place where
around 5m jobs come and go
every month. Still, when David Autor of the Massachusetts
Institute of Technology (MIT),
David Dorn of the University of Zurich and Gordon Hanson of
the University of California,
San Diego, looked into the job losses more closely, they found
something worrying. At least
one-!fth of the drop in factory jobs during that period was the
direct result of competition
from China.
Moreover, the American workers who had lost those jobs
neither found new ones close by
nor searched for work farther a!eld. They either swelled the
ranks of the unemployed or,
more often, left the workforce. That contradicts the widespread
belief that America’s jobs
10/6/19, 7)57 PMComing and going - Free trade
Page 5 of 15https://www.economist.com/special-
report/2016/09/29/coming-and-going
market is #uid and #exible. When men lose a factory job, they
often stay put. Those who
6. managed to !nd new jobs were paid less than before and were
working in industries that
were vulnerable to competition from imports. In subsequent
research, the authors found
that lost factory jobs also had a depressing e"ect on aggregate
demand (and thus non-
manufacturing jobs) in the a"ected areas. In total, up to 2.4m
jobs may have been lost,
directly and indirectly, as a consequence of imports from China.
In other rich countries, regions or industries with heavy
exposure to Chinese imports also
su"ered material losses in factory jobs. A study of Spain’s jobs
market by Vicente Donoso,
of the Complutense University of Madrid, and others found that
provinces with the greatest
exposure to Chinese imports saw the largest falls in the share of
manufacturing
employment between 1999 and 2007, but this was compensated
for by an increase in non-
factory jobs. Research in Norway, though, found that the main
e"ect was to raise
unemployment. João Paulo Pessoa of the London School of
Economics found that British
workers in industries exposed to high levels of import
7. competition from China spent more
time out of work than those in other industries. A wide-ranging
study of the e"ect on
Germany of more trade with China and eastern Europe in the
two decades after 1988
concluded that industries competing with imports su"ered job
losses, but these were
outweighed by job gains in regions focused on export
industries. Those gains were due
almost entirely to trade with eastern Europe, not China.
China’s accession to the WTO was supposed to be a great bonus
for America. So why was its
impact on trade and jobs so unexpectedly large? One reason was
that China got a very
signi!cant advantage out of the pact. A paper by Justin Pierce,
of the Federal Reserve, and
Peter Schott, of Yale School of Management, argues that joining
the WTO removed the risk
for China of a steep increase in America’s tari"s, making it less
perilous for its companies
to invest in new factories. The authors found that industries
where the threat of tari"
increases was most reduced su"ered the greatest job losses in
America. But the lopsided
8. nature of trade between China and the rich world also played a
part. After China joined the
WTO, its current-account surplus widened from an average of
around 2% of GDP in the
1990s to about 5% in the following decade. In other words,
China saved more. That helps
10/6/19, 7)57 PMComing and going - Free trade
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report/2016/09/29/coming-and-going
explain the modest o"setting gains in exports in the regions
a"ected by Chinese imports.
Done workin’
It is important to note that America’s growing inability to
bounce back from losing
manufacturing jobs predates the rise of China as an exporting
power. A report published in
June by the Council of Economic Advisers (CEA) charts the
long-term decline in prime-aged
men in America’s workforce. It shows that in the mid-1960s
almost all men aged between 25
and 54 were either in work or looking for a job, but that in the
past half-century the
9. participation rate for this group has dropped below 90%. In
every recession the rate falls
more sharply, and when the economy picks up again it fails to
make up all the lost ground.
10/6/19, 7)57 PMComing and going - Free trade
Page 7 of 15https://www.economist.com/special-
report/2016/09/29/coming-and-going
But there are big di"erences between the participation rates of
di"erent groups of men. In
1964 male high-school graduates were about as likely to be in
the workforce as college-
educated men, but now only 83% of those with a high-school
degree or less are in the
workforce, against 94% of those who !nished college (see
chart). This mirrors a growing
divergence in wages. In the mid-1960s the pay of less educated
men averaged 80% of
college-educated ones, but by 2014 that proportion had fallen to
60%.
It is unlikely that men are dropping out of work voluntarily.
More than a third of inactive
men live in poverty; less than a quarter have a working spouse.
10. So the most obvious
explanation is a fall in demand for less-skilled men. That in turn
is partly linked to a long-
term decline in manufacturing, whose share of the jobs market
peaked in the days when
almost all prime-age men worked. The CEA study found that
states with a higher-than-
average share of jobs in construction, mining and (to a lesser
degree) manufacturing tend
to have more prime-age men in the workforce. It does not help
that men who lose their jobs
are increasingly rooted in unemployment black spots. The
propensity of people to move in
search of work has dropped sharply since the early 1990s, for
reasons that are not yet fully
understood.
10/6/19, 7)57 PMComing and going - Free trade
Page 8 of 15https://www.economist.com/special-
report/2016/09/29/coming-and-going
A steady drop in the share of prime-age men in the workforce
going back half a century
cannot be pinned on America signing free-trade agreements or
11. China’s emergence as an
exporter of manufactures, both of which happened fairly
recently. Factory jobs peaked in
the 1970s, but manufacturing output has continued to increase.
Indeed, America’s share of
world manufacturing output, on a value-added basis, has been
fairly stable at a bit under a
!fth for the past four decades. Thanks to advances in
technology, fewer workers are needed
to produce the same quantity of goods. But since trade with
lower-cost countries and
technological change have similar e"ects on labour-intensive
production in the rich world,
it is hard to disentangle their e"ects.
Still, some rich countries, such as Germany, Britain and
Canada, have done rather better
than America at keeping prime-age men in work, though others,
including France, Italy and
Spain, have done even worse. That is partly a matter of policy.
Members of the OECD, a club
of mostly rich countries, set aside an average of 0.6% of GDP a
year for “active labour-
market policies”—job centres, retraining schemes and
employment subsidies—to ease the
12. transition to new types of work. America spends just 0.1% of
GDP. By neglecting those
whose jobs have been swallowed by technology or imports,
America’s policymakers have
fuelled some of the anger about freer trade.
Have trade deals really been a disaster for American workers?
Trade with China seems to
have had an unusually large e"ect. Since 1985, America has
signed 15 free-trade agreements
(FTAs) covering 20 countries. Exports to these countries
account for nearly half of all the
goods America sells abroad, even though FTA countries make
up just a tenth of GDP outside
America. In the !ve years after a new trade pact comes into
force, America’s exports to new
FTA partners typically grow around three times as fast as its
overall exports, at least keeping
pace with imports. In 2012, exports to the 20 countries covered
by FTAs grew twice as fast as
the average. In America, exporting !rms pay a wage premium of
between 13% and 18%,
compared with non-exporters. This is hardly a disaster.
13. 10/6/19, 7)57 PMComing and going - Free trade
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report/2016/09/29/coming-and-going
America has run a trade de!cit every year since 1976. On the
other side of the global ledger
are countries that consistently run big trade surpluses. These
days the record is held not by
China but by Germany, which last year had a current-account
surplus of 8% of GDP (see
10/6/19, 7)57 PMComing and going - Free trade
Page 10 of 15https://www.economist.com/special-
report/2016/09/29/coming-and-going
chart). But this does not mean that America is “losing” at trade,
as Mr Trump suggests, and
China and Germany are winning. The purpose of exports is to
pay for imports, either now or
later. A trade surplus is not a virility symbol. In some cases, it
is a sign of a strong national
preference for saving (though other countries might describe it
as a symptom of weak
domestic demand). Countries rarely have balanced trade, where
the value of exports and
14. imports is exactly the same. It might seem plausible that
restricting trade to eliminate
de!cits will create jobs, channelling existing demand towards
goods made at home. But the
reality is more complicated. In most rich countries, particularly
America, the trade de!cit
widens when GDP growth is strong, and shrinks during
recessions. The factors that drive
demand for imports are the same as those that drive overall
demand, and thus jobs. To
balance trade, Americans would have to invest less or save
more. Neither would create jobs.
It would help a sluggish world economy if surplus countries,
like China and Germany, were
to spend more on imports. But for America to aim to balance
trade with any one country
would be pointless. In any case, a !nished product exported
from China to America, say,
will include components made in third countries, and probably
only a small fraction of the
value will have been added in China itself. Four-!fths of all
trade takes place along supply
chains within, or organised by, multinational !rms. Slapping a
tari" on imports of
15. intermediate goods from, say, Mexico would raise the price of
America’s exports, which
would probably be bad for its trade balance. Around 40% of the
value of Mexico’s exports of
!nal goods to America, for instance, was added in America
itself.
Sober advocates of free trade know that over time the gains
from it come from greater
e$ciency, not from more jobs, the number of which is largely
determined by demography
and the strength of aggregate demand. It is easier to spot the
link between freer trade and
factory closures than the more dispersed bene!ts trade brings to
workers across other
industries. Exporting !rms in all countries and across a variety
of industries are more
productive, grow faster and pay higher wages than non-
exporting !rms. But a lot of the
gains from trade come from the direct bene!t of cheaper imports
and their indirect e"ect
on productivity.
10/6/19, 7)57 PMComing and going - Free trade
16. Page 11 of 15https://www.economist.com/special-
report/2016/09/29/coming-and-going
Special report
An open and shut case
An open and shut case
Coming and going
Needed but not wanted
The good, the bad and the ugly
A lapse in concentration
The reset button
The cost of protectionism
A study by Pablo Fajgelbaum of the University of California,
Los Angeles, and Amit
Khandelwal, of Columbia University, suggests that in an
average country, people on high
incomes would lose 28% of their purchasing power if borders
were closed to trade. But the
poorest 10% of consumers would lose 63% of their spending
power, because they buy
relatively more imported goods. The authors !nd a bias of trade
in favour of poorer people
17. in all 40 countries in their study, which included 13 developing
countries. An in-depth
study of European industry by Nicholas Bloom, of Stanford
University, Mirko Draca of
Warwick University and John Van Reenen of the LSE found that
import competition from
China led to a decline in jobs and made life harder for low-tech
!rms in a"ected industries.
But it also forced surviving !rms to become more innovative:
R&D spending, patent
creation and the use of information technology all increased, as
did total factor
productivity.
Taken together, these are large and permanent bene!ts. What is
clear from the studies of Mr
Autor and others is that the one-o" integration of China had
bigger and more lasting e"ects
than expected. Too little attention has been paid in America to
those whose jobs are
displaced by new technology or imports. That has given an
opening to protectionists, who
are peddling a solution that will hurt the poor most. A similar
sort of populism is rearing its
head in Europe in response to migration.
19. to cover, listen to the audio edition or go behind the headlines
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23. SPECIAL REPORT: A SENSE OF PLACE
The geography of start-ups
Something in the air
Why birds of a tech feather !ock together
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10/6/19, 7)55 PMSomething in the air - The geography of start-
ups
Page 2 of 11https://www.economist.com/special-
report/2012/10/27/something-in-the-air
Oct 27th 2012
Print edition | Special report
IN THE LATE 19th century Alfred Marshall, a founding father
of modern economics, asked
why !rms in the same industry were often geographically near
each other. Proximity, he
24. said, created something “in the air”: “…if one man starts a new
idea, it is taken up by others
and combined with suggestions of their own; and thus it
becomes the source of further new
ideas.”
Marshall was thinking about Victorian manufacturing, but the
same is true of the
information-technology companies of the 2010s. Silicon Valley
is home to many of the
industry’s giants, and hopeful founders of young start-ups still
head for northern
California. A certain Mark Zuckerberg left Harvard for Palo
Alto as soon as he got the
chance. Others beat a path to newer hubs, such as Berlin,
London, Moscow, New York or Tel
Aviv.
Economic theory suggests four main reasons why !rms in the
same industry end up in the
same place. First, some may depend on natural resources, such
as a coal!eld or a harbour.
Second, a concentration of !rms creates a pool of specialised
labour that bene!ts both
workers and employers: the former are likely to !nd jobs and the
latter are likely to !nd
25. sta". Third, subsidiary trades spring up to supply specialised
inputs. Fourth, ideas spill
over from one !rm to the next, as Marshall observed. But there
are also forces that
encourage companies to spread out. One is the cost of
transporting their products to widely
dispersed customers. Another is rents, which rise when !rms
cluster together.
You might imagine that the dramatic fall in the cost of
communications and computing
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would have pushed !rms in the information-technology industry
(among others) farther
apart. Natural resources do not matter to them; all they need is a
good internet connection.
26. The ease of online communication should reduce the need for
their people to be close
together in order to work, to deal with customers and suppliers
or to swap ideas. Young
companies really can pick their spot. That would seem to count
against Silicon Valley,
where premises are costly, and against London and New York,
which are not only expensive
but also lack California’s high-tech history. Berlin is cheaper,
but there are plenty of places
all over Europe where costs are lower.
Yet although you can !nd tech companies of all shapes and sizes
almost anywhere, the
smaller ones especially have a fondness for huddling together.
Jed Kolko, Trulia’s chief
economist, puts this down mainly to the continuing attraction of
a deep pool of skilled
labour. “The less an industry needs to be near natural resources,
its suppliers or its
customers,” he says, “the more it’s likely to cluster where its
workers want to live.”
The magnet factor
For the tech industry, workers want to live either where the jobs
already are (eg, Silicon
27. Valley) or in lively cities (London, New York, Berlin and
perhaps San Francisco). At Wooga,
an online-games company in Berlin, the 250 sta" come from 35
countries. Jens Begemann,
the founder and chief executive, says that Australians and
Canadians sign contracts even
before leaving home. Dmitry Repin of Digital October, a co-
working and meeting place for
start-ups in Moscow, says that “for a university kid, studying in
the regions, moving to
Moscow sounds smart.” Even short distances can make a
di"erence. Zimride’s Mr Zimmer
says he moved his young company just 30-odd miles (50km)
from Palo Alto to San
Francisco because that was where most of his then 20
employees lived (he now has 32).
10/6/19, 7)55 PMSomething in the air - The geography of start-
ups
Page 4 of 11https://www.economist.com/special-
report/2012/10/27/something-in-the-air
For programming talent, says Mr Stoppelman at Yelp, nothing
beats Silicon Valley. The
28. Valley is big enough and old enough to have clusters within
clusters, from makers of
semiconductors and network equipment near San Jose to Google
and Facebook farther
north and a host of smaller young internet companies in San
Francisco. Even within the
city, there are divisions between districts: South of Market, or
SOMA, with lots of smaller
start-ups; the Design District, which houses Airbnb and Zynga,
a games company, in bigger
premises; and Mission Bay, the base of Dropbox, a cloud-
storage !rm (see map).
Young companies need more than labour; they also need money
and advice. Anthony
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Goldbloom of Kaggle, which runs online competitions for data
scientists, moved his
company to the SOMA district from Melbourne this year. Mr
Goldbloom (who was once an
intern at The Economist) says that being in a cluster “makes
29. serendipity possible”: he can
have more face-to-face meetings, which are often more
productive than phone calls or e-
mails, and there is a good chance of bumping into someone
interesting, such as a venture
capitalist. The venture funds, indeed, constitute another cluster
within the Valley.
The recycling of people is as important as that of money. Brian
McClendon, who oversees
Google Maps and Google Earth, says he has been working
within a mile of where he is now
for 22 of his 24 years in the Valley: !rst at Silicon Graphics and
later at his own company,
Keyhole Earth. That was sold to Google, which now occupies
Silicon Graphics’s former
home. “The diaspora of Silicon Graphics”, he says, “created
many, many companies
throughout the Valley…as a diaspora we communicate and we
contact and we hire each
other and we steal each other’s people.” Google already has a
diaspora of its own.
“ The cycles of investment, success, failure and regeneration
havemade the Valley what it is
In the Valley people are also close to the latest ideas. “Ideas are
exposed to that little tiny
30. region possibly years ahead of the rest of the world,” reckons
Mr Stoppelman. “You are
always building on the idea that came immediately before. If
you are trying to build the
thing that comes next, early access to information about the
things that are out there helps
you.” That sounds like what Marshall had in mind.
Will other hubs ever catch up? New York, London and Berlin
have two possible advantages.
One is that they are bigger and therefore livelier and more
attractive to young people than
San Francisco, let alone the smaller places on the way to San
Jose. Chad Dickerson, chief
executive of Etsy, an online marketplace for handmade and
“vintage” goods based in
Brooklyn, jokes that in San Francisco “everything closes at ten
o’clock.”
The other is that they have a wider pool of industries and hence
skills on which companies
can draw. To many this variety is invaluable. “It’s not just
engineering talent,” says Dennis
10/6/19, 7)55 PMSomething in the air - The geography of start-
31. ups
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Crowley, boss of Foursquare, which is based in New York.
“You can !nd that all over the
place. We may have a whole bunch of engineers, but we also
have a whole bunch of product
people.”
New York’s programming pool was deepened when Google
started putting engineers into
its o#ce in the city in 2003. Some alumni have since set up or
joined start-ups there.
Matthew Brimer of General Assembly, a co-working and
education !rm, explains that since
the !nancial crisis people have been readier to work in start-ups;
Wall Street has become
less of a draw. People in London start-ups also see the presence
of Google and other big
companies as a boon. Some say the same about the city’s
advertising and !nancial
industries, but others see them as deep-pocketed competitors for
sta".
As for capital, New York and London have their own crop of
venture funds. Much of Europe
32. is serviced from London too, and London and Silicon Valley
funds, as well as local ones, are
active in Israel. Is Europe small enough for investors to feel the
bene!ts of proximity?
Adam Valkin of Accel Partners in London thinks so. “I woke up
in Berlin today and I was in
the o#ce at 9am,” he says. His colleague, Philippe Botteri, adds
that on a bad-tra#c day it
can take him three hours to drive from San Francisco to San
Jose.
Younger hubs are also trying to conjure up Marshall’s
“something in the air”. Alexander
Ljung of SoundCloud, a site for publishing audio !les, was
drawn to Berlin from Stockholm
by the German capital’s “strong intersection of technology and
art” and “creative chaos”. He
sees a “sense of reciprocity” among its start-ups: his Sunday
activity is “trying to advise
people”.
Almost every hub has its co-working spaces, accelerators and
incubators where tiny !rms
of perhaps two or three people work cheek by jowl. The
provider of the space may o"er
33. equity or just a place to work, meet and learn. There are also
regular convivial gatherings,
such as Silicon Drinkabout in London, where troubles can be
shared as well as drowned.
Capital from past successes is being recycled too, through
investors such as Stefan Glaenzer
of Passion Capital in London, Christophe Maire, a Berlin-based
entrepreneur, and Kai-Fu
10/6/19, 7)55 PMSomething in the air - The geography of start-
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report/2012/10/27/something-in-the-air
Special report
A sense of place
Your friendly neighbourhood app
The world in your pocket
Something in the air
New Eindhoven
Open-air computers
Not a cloud in sight
34. The world is what you make it
The new local
Lee, a former Google executive who now runs Innovation
Works in Beijing. Watchers of the
British tech scene are waiting to see what Mike Lynch, the
founder and ex-boss of
Autonomy, will do with the money he made when his software
!rm was bought by Hewlett-
Packard. HP pushed him out in May.
Nothing quite like the Valley
But no other place has seen the cycles of investment, success,
failure and regeneration in
the information-technology industry that have made the Valley
what it is, so no other place
as yet has the Valley’s scale and resilience. Some still question
whether other young
ecosystems would have the strength to survive anything like the
dotcom bust of a decade
ago. They probably would, but until a crash happens, no one
knows.
For cities as big and diverse as London and New York, it may
not matter much. They have
other strengths. And many other cities too may be about to
35. discover an asset they did not
know they had. It is neither people nor money, but something
else in the city air: data.
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Oct 27th 2012
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