In most my dealings with questions of economic development I run across men and women who view themselves as pragmatic doers, totally immune from anything quite as impractical as academic research.
That is an appealing stance for many, but it really means something quite different. Instead of living lives of practicality, these folks are simply devotees to some long discredited ideas on how the world works. Nothing better exemplifies this than the “economic base theory” that finds itself implicitly inserted into most local economic development/business attraction efforts and plans.
Economic base theory is the notion that a region’s economy is divided into two sectors — the base and non-base sectors. Regional prosperity is achieved by building up the base through exporting more goods from the base or preventing fewer imports. This appears in economic development policies as efforts to bring in out-of-state visitors, build up a local supply chain and, most frequently, attracting new businesses that sell their goods or services outside the region.
Economic base theory predates World War I and had its heyday in the 1940s and early 1950s. It has several advantages as an explanation for how the economy works, and how a region can generate prosperity, and it is easy to explain in a non-technical way. The data elements of the economic base model are now familiar to most of us, and easy to calculate. In short, the economic base theory enjoys all the benefits of a useful theory except for one. It is wrong.
Economic base theory was replaced in the late 1950s by theories that far better explained economic growth.
By the 1970s, economic base was taught only in passing at the undergraduate level, and lengthy condemnations of its use in policy were commonplace in those (impracticable) academic journals.
This does not mean there is not some truth to the old economic base theory, or that some parts of it aren’t useful. Calculating multipliers and location quotients offer some insight into regional economies. In the mid-1980s a young Paul Krugman used bits and pieces of economic base theory and combined it with other models to revolutionize how we think about regional growth and prosperity.
However, economic base theory tells us nothing about how regions become more prosperous. In fact, the places with the strongest economic bases in Indiana are quite frequently the most dismal, dying, impoverished places. Efforts to squeeze out prosperity by attracting more of an economic base will continue to fail. But we’ve known that fact since at least the 1980s.
If your local government is busy trying to attract a new factory or build a new shell building or to attract people who “make things,” they are simply wasting public money better spent on things that matter.
Oh, and by the way, those theories of growth from the 1950s onwards tell us it is almost only people that matter in the economic prosperity of a region. Remember that the next time you hear someone say they have a clever, practical idea of how to grow the economy.
