The rise of natural economic forms: clusters and the new age invisible hand

In economic theory markets clear through the simple demand and supply balancing mechanism and the boundaries of the firm are configured through evaluation of transaction costs (Coase, Williamson). There are vertical organizations and one-off, arms-length transactions. Economic agents are rational and maximize profits. Social externalities are dealt at governmental level and contradict business objectives. Concepts such as trust, reputation, network position, motivation, institutional backdrop and natural inclinations to maintain the status quo are foreign- that is, foreign in the black-and-white economic textbook. In the real world these are natural phenomena and should be accepted as such.

In economics, legal boundaries define the size and possibilities of the firm. They serve as a safety net to moderate risk emanating from uncertainty. Laws and legal institutions have emerged in history to deal with situations that extend beyond the reach of the economic agent/organization- assuming there are no transaction costs they resolve externalities promptly and efficiently. Those of us, however, that are acquainted with some knowledge of how international litigation systems operate are also aware of how inefficient they are, such that the winner takes all (in the UK, in US legal systems are more competitive) and a substantial piece of the pie is lost to the legal service provider.

On the other hand, in the real, everyday economics, we witness some interesting forms of organizational communities to appear which are not a part of the classical economic taxonomy. One of these are clusters or critical masses in one place, typically in a particular geographical region, operating in a specific field, thriving with the help of complementary institutions (Porter, 1998). While Michael Porter stresses the importance of clusters in regional economics, to me clusters seem like such a natural way of organizing economic activities that they are apparent in many shapes and forms, across boundaries and even at virtual market places, even though, by definition, clusters should comprise of physical inter-organizational relationships.

In order to understand and accept my way of defining clusters- all-encompassing communities across industries and market places, one can take note of a behavioral theory from ecology: whether members of an ecosystem are self-sufficient or cooperate depends on the context they find themselves in; when food is abundant and weather conditions are good members relax and operate individually, in the reverse situation, or food is scarce and the environmental conditions are adverse the members of the ecosystem cluster together and develop a survival strategy!

Having this image in mind we can draw the conclusion that clusters are a natural phenomena emerging as by-products of the socio-environmental context in a given industry/market. When uncertainties are high due to higher competition, a weak legal environment or rapid technological advances clusters are a dominant organizational form and relationships are tight, long-term and motivated to excel, checks and balances are in place, shared specialized knowledge gives birth to innovation. Automatically such relationships create positive spillovers for the overall economy and society!

Clusters also exist at the Internet market place- these in turn are virtual relationships, but no less important than the physical ones. More and more we witness communities with a distinct identity grouping together in order to survive the immense competitive pressure of the Internet market place

One industry that particularly conforms in this way is the blogging industry. Blogging sites are members of a specific blogging platform (wordpress, blogger, tumblr, etc.), which are clusters in themselves. In order to thrive, these blogging businesses (operated mainly by one individual) cooperate with other members of the community so as to compete. This behavior sounds paradoxical but in effect is very natural- you cannot compete unless you have an audience, share ideas and resources with other members and gain a significant network position within the community.

Is it easy you to see how cluster forms are more common than we normally acknowledge? Do not fall into the economic bias trap from traditional theories!

Sound, basic, education is advantageous only when we bridge knowledge with reality. A primary requirement is intuitive perception- a capability organizations should acquire given that they are webs of people and our ideas.

Creating Shared Value
Clusters and the New Economics of Competition


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