Thursday, September 10, 2020

How To Cause Economic Development

My wife and I took a trip to Maine this summer for our annual vacation.  We flew into Portland, ME, rented a car, and drove to Surry, ME.

In Surry, we rented a tiny house on the peninsula through AirBnB. It was really a really cool experience. The space was too small to be comfortable long-term, so I would never want to live in a tiny home, but it was great for a short stay during vacation.

Several of our days in Maine were spent hiking in Acadia National Park on Mount Desert Island. To get there we drove through small towns like Ellsworth and Trenton.

One evening for supper we drove to Belfast, Maine and ate at Darby's which was right next door to the Colonial Theatre.

Maine was beautiful. There were so many trees and we were right by the ocean. Instead of sandy beaches, the coast was mostly giant black rocks. I had a great time there and loved almost everything I saw and experienced. At times, I thought I might like to live in Maine.

Something I couldn't help but notice as we drove around the Atlantic coast of Maine was how poor the small towns and rural areas seemed.

Portland seemed to be like most other cities with nice buildings and public parks. It seemed like a fine place, and if you never left that city, you might not think of Maine as being particularly poor. Almost everywhere else we went, however, it seemed like everyone and everything was very poor.

None of what I am saying about poverty is meant to be judgmental of those people who are experiencing it. I do not believe that an impoverished region is the direct fault of any specific people in the area. It is simply a less than ideal situation which I would hope would improve for the sake of the people who live there.

Most of the homes we saw in rural Maine were run-down trailer homes. Most of the vehicles were old and rusty.

One noteworthy thing I noticed was that most of the homes we saw in rural areas between towns were also businesses. Most of these businesses were antiques shops. People would fill the shed next to their house, or their house's living room, with antiques, then post a large sign by the road advertising the available wares.

They seemed to be mostly antique shops, but there were all kinds of out-of-the-home businesses. There were auto repair services, landscaping services, barbers, art of all kinds (glass, sculpture, paintings), and nearly anything you could think of that could be offered out of a home. It was very interesting to see so many small businesses and entrepreneurs.

At first, that's what I thought it was. I thought it was a very entrepreneurial community that wanted to own businesses instead of be employees. And it could very well be that to some degree. But what I came to realize the more I looked around was that there did not seem to be many businesses where people could get jobs.

Most of these home-based businesses were probably operated entirely by the people who lived in the homes. They likely did not employ others.

If a person in those rural areas wanted to get a job, there seemed to be very few to be had nearby. They would probably have to commute a very long ways to the nearest large town to get a job. And even in most of those towns, the businesses were mostly service businesses which depended on tourists as a customer base.

I did not see many factories or large employers anywhere. When I got curious and looked it up, it seems that Maine is one of the poorest states in the United States.

A large portion of Maine's economy is made up of agriculture, including such things as catching Lobsters, and shipbuilding.

It seemed like there simply was not much opportunity to earn a living by getting a job somewhere.

That got me thinking.

How is an area poor? How can you improve the financial situation in an area? How can you cause economic development?

I was searching the internet for all of these questions hoping to find an extensive article that explained the fundamentals, but I just couldn't find anything that provided enough of an answer.

I saw that Maine depended heavily on tourism to bring money into the area. People would travel there to see Maine, and locals would make money by selling them things or offering them services. But what if there were no tourists? Or even, how does a rich area become rich? Surely all regions cannot depend on tourism. The tourists and their money must come from somewhere originally.

What creates wealth in an economy?

In order for two home-based business people in Maine to trade, someone has to first create value. Why is that locally created value not enough to become a self-sustaining economy?

I searched Google for all kinds of phrases trying to find answers. I didn't know how to phrase my questions, so I just tried everything I could think of.

I searched:

How does an economy get its first money?
How to stimulate a poor region's economy?
Does an economy need manufacturing jobs to feed other jobs?
Types of jobs that create wealth in an economy.
Is there a type of job that is needed before there can be other jobs in an economy?
Could the world work if everyone owned their own business?
Alternative to tourism based economy.
Can a tourist based economy be perpetual?
Jobs that build local wealth.

I was never able to find a satisfactory answer to my questions, but I did learn a lot.

Three Sector Model of the Economy

I learned that there is a model of the economy which sees it as being made up of three sectors. They are the Primary sector which is involve in the extraction of raw materials, the Secondary sector which is manufacturing, and the Tertiary sector which is made up of services.

By the Sector Model of the economy, I could see that wealth in the economy comes from "stuff". In order for stuff to be made, material must be collected from the Earth's natural resources. So in order for there to be any wealth created at all, someone must first go out and cut down a tree or mine for metal or some other method of acquiring raw materials.

Then, someone must turn that raw stuff into processed stuff or products that people would be willing to trade things for. Someone might need a table or a refrigerator or any of an infinite number of manufactured things, and they would be willing to trade money for those things. That money would have been earned through selling their labor or by selling things they owned.

It seems like few people would pay others for raw materials. In that state they are useless to most people. Consumers want to buy finished goods. So businesses looking to manufacture things for the benefit of society and to earn a profit purchase the raw materials created in the Primary sector.

Consumers purchase the things created by manufacturers in the Secondary sector, and also services provided in the Tertiary sector.

Services in the Tertiary sector are useful by providing services that make other people's lives easier, and they help to move money around in the economy, increasing the money's velocity, but an economy cannot be all services. All people could not just trade services. There needs to be real tangible value in the form of physical goods which come from manufacturing.

By thinking this through I have decided that the wealth of an area is created by manufacturers in that area. In order to cause economic development and improvement in a region, there needs to be manufacturing businesses created. Those manufacturers would ideally hire local people, which would then trade their labor for value in the form of money, which they could spend in the local economy.

An economy could be based on manufacturing or else it would rely on tourism or providing services to people in areas where manufacturing exists.

Employment Multipliers

I learned about the concept of employment multipliers. The idea is that some jobs are standalone jobs that exist on their own, so creating one of those jobs would only create one job. Most other types of jobs create other indirect jobs. By having an additional worker in some position, there would be more supplier jobs created to supply that worker with materials, and there might be additional downstream jobs created to further process the work of or assist that worker.

Some of the jobs which create the most additional jobs, or have the highest employment multipliers, are in the manufacturing of durable goods. When things are manufactured, some other people must be hired to extract the necessary raw materials and transport those raw materials. Within the factory, there would be janitorial jobs, management jobs, supervisor jobs, and office support jobs. Down-line, there would be retail jobs and marketing jobs.

Manufacturing jobs create a lot of value and jobs in the economy, so encouraging manufacturing in a region would be one of the most effective ways to boost the local economy.

Some of the jobs which create the fewest additional jobs are in fast food and retail. Those jobs tend to pay very little and they do not encourage additional job growth. Encouraging lots of fast food and retail jobs does very little to boost a local economy. They might help to spread the money already in existence around some more, but they do not do much to create new wealth.

It, again, seems like manufacturing is what is needed to boost a local economy and bring a community out of poverty. Without manufacturing, the best people can do is hope tourists with money visit their area and spend money with their shops.

Tech Jobs

There is a type of job that is similar to manufacturing. People who create software and applications for computers and smartphones are creating goods, but they are goods made of electrons instead of atoms.

In the past, before computers, all manufacturing had to be in the form of physical goods manufacturing. Now that the computer exists and is so widely used, people can generate similar economic impacts as manufacturing through the creation of software. A local economy looking to create value and wealth should equally consider software development companies as manufacturers.

The jobs provided in tech are much cleaner and safer than lots of traditional manufacturing jobs and might result in happier, more satisfied workers. It might make sense to focus more on software than on manufacturing for that reason.

Can Everyone Own A Business?

Another question I looked into was whether it would be possible for everyone to own their own business. Could an economy work where nobody was an employee of someone else, but instead ran their own enterprise?

I found pretty quickly that the common belief is that it would not work. Some businesses and business processes simply require several or many people in order to operate. A single person could not perform every role necessary. To accomplish the outcome would require the skills and efforts of lots of people. This seems true of lots of businesses.

Imagine trying to operate an entire retail store by yourself. You would need to count inventory, order product, stock the shelves, serve customers, act as cashier, clean the store, perform the accounting, and lots of other tiny tasks which are often distributed out to many employees. A single person could accomplish this set of tasks, but the shop would need to be very small in order for one person to manage it all.

The economy where everyone owned their own business would also be impractical because there would be a massive loss of efficiency. Specialization of workers to a particular set of tasks can make them much better at those tasks than if they were meant to perform a broad range of tasks. This principle is used in the assembly line method of production where each worker only does one thing over an over instead of everything required to complete a single output unit.

If everyone operated their own business, they would produce far less output than a business which used multiple employees. Because there would be less output, less total wealth would be created and everything would be scarcer and more expensive. Costs of things we buy can be much lower because companies employ workers to improve efficiency.

Conclusion

While I did not feel totally satisfied in the answers I found, I did learn a lot, and I feel like the answers got me most of the way there.

I think that to boost a local economy, there needs to be an introduction of a manufacturing company or a software development company. Other businesses are fine to start and can create jobs for local residents, but they won't create enough wealth and impact to completely self-sustain the community. 

If there is not a strong base of local manufacturing businesses to create wealth, then a community will be dependent on tourism to bring wealth to them.

I think that much of the poverty I saw in the state of Maine could have been ameliorated by the creation of manufacturing or software companies which would hire people in the communities. Education would also be helpful for preparing people for lucrative jobs, but would ultimately be pointless if there are no jobs to be ready for.

I am very interested to learn more about the causes of wealth and poverty and how to cause economic development, so if you have any ideas or know of any useful resources on the topic, I would love for you to comment on this article to let me know!



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