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Economic development for an area consists of increasing economic activity, improving employment prospects and increasing the standard of living. There is no consensus among economists on how these goals are accomplished, but the goal of economic development strategy should be creation of economic incentives and the reduction of economic disincentives.
Frequently, community leaders attempt to achieve economic development without a coherent grasp of what it is they are trying to accomplish. This is a serious mistake. Actions taken by officials can have positive or negative results. Frequently, local economic development strategy results in ad hoc attempts to entice firms to locate in communities through special incentives, such as property tax abatements. While short-term gains are sometimes apparent using this approach, areas utilizing such measures frequently do not make long-term progress in increasing economic activity or improving employment prospects.
One can view economic development theory as part of "location theory," a subset of urban economics. Location theory examines why firms and other economic agents locate in specific geographic areas. The basic assumption is that firms maximize profits, and in order to do so, minimize the cost of any given level of output. Individuals maximize their utility, and in doing so, minimize costs associated with residing in an area. The simplest models assume that all costs of production other than transportation costs are equal every-where. Other costs are not always equal everywhere, but such models are important because they show that firms will choose to locate where total production costs are minimized for any given level of output. [5]
Land, labor and capital are the primary factors of production. Variations in cost affect the mix of factors in the production process. For example, if the cost of labor increases relative to the cost of land and capital, those two factors will be substituted for labor. More labor will be utilized if the price of labor falls relative to the cost of land and capital. Economic development activities undertaken by communities can be seen to increase or decrease the cost of utilizing these factors.
Government actions can influence economic development in a positive manner to the extent that they lower the cost of any production factor. Communities can influence the industry they attract through positive actions that reduce production costs. Positive actions create economic incentives.
When community leaders take positive action to reduce production costs they create an economic incentive. Production costs for manufacturers in the community will decline relative to competing areas and the likelihood of related industries locating there will increase. Other industries will be encouraged to locate in the community if reduced production costs are an important economic factor.
Conversely, government actions can influence economic development in a negative manner to the extent that they increase the cost of any production factor. Communities can influence the type of industry they attract through negative actions that increase production factors. Negative actions create economic disincentives.
When community leaders take negative actions to increase production costs they create an economic disincentive. Production costs for manufacturers will increase relative to competing communities and the likelihood of related industries locating there will decrease. Other industries will be discouraged from locating in the community if increased production costs are an important economic factor.
An example of an economic disincentive was action taken by public officials in Woodhaven, where an indoor public golf dome was built in 1988.
Woodhaven officials describe the golf dome, more than 100 feet high and illuminated at night, as a positive contribution to the community. Overlooked, however, is the private outdoor golf range less than one mile away on West Road in Brownstown Township, which now faces competition from a taxpayer-subsidized, public enterprise.
It is crucial for Downriver leaders to understand that actions generally not thought to be part of economic development strategy affect production factors. When Woodhaven officials built the golf dome they provided direct competition to a small business, which now faces the difficult prospect of competing with a well-funded public enterprise. This is not the message that Downriver communities should be sending to potential entrepreneurs, whether large or small.
To summarize, community leaders should understand the full implications of economic development before pursuing a strategy. Firms will act to maximize profits and minimize costs. Land, labor and capital are the primary production factors. Government actions can influence economic development in a positive or negative manner to the extent that they lower or increase the cost of any production factor. Actions not thought to be part of economic development affect production factors.
