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.
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
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
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
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.