Is Silicon Valley a model or an anomaly?

By Noah Smith

A scene from the HBO television series "Silicon Valley" about young programmers trying to launch a startup in the tech capital of the world. Photo / AP
A scene from the HBO television series "Silicon Valley" about young programmers trying to launch a startup in the tech capital of the world. Photo / AP

Why does Silicon Valley exist? Why do software engineers go there to get a job, even though rents are high? Why do entrepreneurs go there to start companies, even though wages there are high? Why do so many big technologies and products come out of that one tiny region of the world?

These are the kind of questions that urban economists ask when they study so-called industrial clusters. But unfortunately, the quest for the secret of how to create the next Silicon Valley has so far met with frustration. We still don't really know whether companies go where the talent goes, or talent goes where the companies are, or both.

We don't know if government can bring clusters to life by building infrastructure, or by luring big firms to the area, or by encouraging firms to form relationships, or by creating a cool youth culture.

Marc Andreessen, best known for inventing the first successful Web browser, has a new idea: Deregulate. If there are rules holding back progress, a region can get ahead by being the first place to kill those rules:

"[W]e don't want 50 Silicon Valleys; we want 50 different variations of Silicon Valley, all unique from each other and all focusing on different domains.

"Imagine a Bitcoin Valley...where some country fully legalises cryptocurrencies for all financial functions. Or a Drone Valley, where a particular region removes all legal barriers to flying unmanned aerial vehicles locally.

"A Driverless Car Valley in a city that allows experimentation with different autonomous car designs, redesigned roadways and safety laws. A Stem Cell Valley. And so on...

"[T]he focus is more on driving regulatory competition between city, state and national governments...Think of it as a sort of "global arbitrage" around permissionless innovation - the freedom to create new technologies without having to ask the powers that be for their blessing."

I hope some cities try this idea, because I'd like to see what happens! But I'm kind of pessimistic about it, for two reasons.


A Google Earth map of Silicon Valley in California and the locations of many tech firms based there. Photo / Wikimedia-Samykolon

It's possible that other cities will deregulate fast enough to boost Drone Valley's startups to greatness, but slow enough that Drone Valley becomes a durable industrial cluster.

But it seems like a tough needle to thread.

Second, I doubt that single-industry clusters are even a good idea in most cases. Silicon Valley isn't really a single-industry cluster, because tech is so diverse. Drone Valley would be vulnerable to downturns in the drone market, just like Detroit is exposed to downturns in the auto market, or Las Vegas in the gambling-tourism market. Detroit is the best example we have of a single-industry cluster, and I don't think many cities want to go down that path.

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Still, deregulation is cheap, so I think some city will try to be Drone Valley, and we'll get to see if Andreessen's idea works. But there's something else on my mind. The fact that the technology industry - and especially a visionary like Andreessen - is increasingly focused on deregulation is a bad sign.

In the 1990s and early 2000s, we had a massive technology boom - productivity accelerated, and our lives changed in big ways. That boom happened without the need for a lot of deregulation - computers were these cute little boxes we stuck in our house, and the Internet didn't really alter the physical landscape.

But that happy situation was a historical anomaly. In the past, big technological change required big changes in regulation and law and the shape of society. Those changes brought costs. Think of how cars required expensive roads and safety laws, and made our cities noisier, more polluted, and less walkable.


A Parrot smartphone-controlled drone. Will there ever be such a thing as Drone Valley? Photo / AP

Tech's focus on deregulation is a sign that the free lunch of the computer boom may be coming to an end. In fact, that unhappy hypothesis is borne out by the numbers. John Fernald, an expert on measuring productivity at the Federal Reserve Bank of San Francisco, recently found that productivity in the IT sector, and in sectors that use a lot of IT, has slowed down a lot since the early 2000s (well before the financial crisis).

If the free lunch is ending, hard choices are ahead. Deregulation will boost progress, but it will come with costs. Drone Valley is going to have to be careful to make sure that drones aren't carrying bombs. How will it do that? And if you change clothes in Drone Valley, make sure to shut your curtains...at least, if you're the modest type.

Noah Smith is an assistant professor of finance at Stony Brook University and a freelance writer for a number of finance and business publications. He maintains a personal blog, called Noahpinion.

- Bloomberg

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