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Poor Cities and Poorer Economics

Tags Free MarketsGlobal EconomyProtectionism and Free Trade

The newest cover story in The Economist deplores the situation of cities in developed countries that are left behind in terms of economic development by the digitized, globalized economy. One such is Scranton, Pennsylvania, where, since 2007, the local government has spent over $6bn on corporate subsidies in an effort to encourage redevelopment and boost local infrastructure. Such places and their disengaged, disgruntled workers are also fueling the rise in anti-globalization rhetoric which has propelled several new faces into the political arena in the US, France, and Britain, and produced unexpected election results. 

The Economist suggests three new avenues for reviving these economically laggard cities, all of which involve heavy-handed government policies: (1) spreading know-how to better help local firms, (2) help colleges train local firms in mastering new technologies, and (3) using tax incentives and subsidies to encourage local investment.

But the premise on which these suggestions are based is entirely flawed: it is not sweeping globalization that has kept these cities behind, but government policies. 

Globalization did indeed remove once thriving industries from these areas and relocate them to better-performing regions. These changes are inevitable in the economy: comparative advantage shifts as consumer preferences shift, quickly and significantly; entire regions may see capital and labor move from a local booming industry to other areas, other industries, or even abroad. This is an inevitable law of economics, and in the nature of the market. 

But there is another law inherent in the market, and in the network of specialization that binds economic communities together: that no individual or region is left without a comparative advantage. Specialization is beneficial because and only if resources are allocated based on relative productivity, and free trade is allowed to take place as a result. 

Thus, other industries are sure to flourish where once coal mining reigned, if only the market is allowed to reallocate resources to the most efficient and productive production processes. Transitional periods may be difficult, and the movement of both capital and labor costly—both financially and personally. But if the change is one toward more efficient production, everyone will be better off: prices will tend to drop and real wages to increase. 

However, this cannot occur if governments divert these resources into corporate subsidies, restrict free trade, and promote their own brand of ‘managed globalization’; if monetary policies destroy the means and incentives to save for future investments; or if new government policies waste these resources on spreading know-how or interfering even more in education. To be sure, tax breaks are always welcome, but if they are geared solely towards dying industries, and the new industries which may revive these laggard areas are more heavily taxed as a result, redevelopment may never take hold. Government policies, however well-intentioned, can never reverse, but only stall an already difficult and inevitable change. 

The anti-globalization “box” thus contains two different types of arguments: one against economic change in general, which is entirely futile, and the other against difficult economic transitions, which are often brought about and prolonged in the first place by government spending and regulations. As long as both arguments survive, so will the anti-globalization rhetoric and the opportunities to capitalize on it in the political sphere.  

It is poor economics that still keeps these regions poor. And it is not in the interest of politics to promote sound economic ideas. Only the market can make economies and economics richer.


Contact Carmen Elena Dorobăț

Dr. Carmen Elena Dorobăț is a Fellow of the Mises Institute and Senior Lecturer (Associate Professor) at Manchester Metropolitan Business School in the United Kingdom. 

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