Geography, Technology, and the Extent of Markets: A Method with an Application to the Wealth of Nations

Abstract: People make decisions based on the extent of their market, but analyses of the resulting phenomena are performed on latitude-longitude grid cells. This generates threats to identification because market extents vary over space and time, but grid cells are of uniform size and are fixed in time. We develop a method to measure market extents as contiguous, technology-conditioned cost surfaces, such that they vary based on features of the Earth’s surface and a state of technology. We develop two novel methods to analyze the resulting spatial data. We demonstrate the utility of these new methods of measurement and analysis by testing the predictions of Adam Smith’s theory that economic development is bounded by the extent of the market, and the extent of the market is bounded by features of the Earth’s surface. The results indicate that our methods have applications beyond The Wealth of Nations.