Amazon no more

This past weekend, a bright Georgetown undergraduate asked me how I squared my passion for localization with the theory of comparative advantage. For economics newbies, he was referring to David Ricardo’s argument that every community should find one product to specialize in and trade for everything else. I gave my usual response that the theory is great — except for the thousands of goods and services that are cheaper to produce locally — but that answer left me uneasy.

Once the dust settles from the Covid-19 crisis, communities across the world will find their economies shattered — in part because we uncritically followed the ideas of David Ricardo over the past two centuries. Restaurants, retailers, theaters, service providers of every stripe, even physician practices will be seeking bankruptcy protection by the millions. After the trillions in federal assistance run out, we will all be looking for ways to rebuild our economic lives. As we do so, we will need a new set of principles and practices of economic development that do not leave us sitting ducks for the next crisis.

For an idea of what should come next, I dusted off my copy of Brittle Power: Energy Strategy for National Security, written by Amory and Hunter Lovins in 1982. That book was mostly about the huge vulnerabilities in the U.S. energy grid, but it was also about economic design. Chapter 1 begins: “The United States has reached the point where: a few people could probably black out most of the country; a small group could shut off three-fourths of the natural gas to the eastern U.S. in one evening without leaving Louisiana;…a few people (perhaps just one person) could release enough radioactivity to make much of U.S. uninhabitable….”

Chapter 13, titled “Designing for Resilience,” contains a brilliant distillation of the criteria for creating resilient systems — concepts any good engineer would recognize. Resilience requires creating a network of relatively independent, self-reliant nodes, so that the failure of one node does not imperil the entire system. Connections between nodes should be optional, not compulsory. Diverse systems are critical because they are less likely to fail all at once or in the same way. These systems should be simple, replicable, and transparent.

The hyper-specialization promoted by David Ricardo is the opposite of resilience. And our historical embrace of this theory is one reason Covid-19 has been so devastating. Following the recommendations of Ricardo, our community economies became too narrow, too dependent on outside forces, too vulnerable to complete shut down by an unforeseen crisis.

Diverse systems are critical because they are less likely to fail all at once or in the same way.

We need a different way forward, what we might call the Theory of Comparative Resilience. My basic proposition is simple: Those communities that are best able to withstand future crises — whether pandemics, climate disruptions, or financial meltdowns — will be the ones that thrive economically. They will be the best places for investors to park their money. They will attract the best and the brightest people. They will be the places where residents feel secure enough to innovate.

Those communities that are best able to withstand future crises — whether pandemics, climate disruptions, or financial meltdowns — will be the ones that thrive economically.

As your community begins the long road of rebuilding, here are eight criteria by which you might measure your community’s comparative resilience:

1. Local ownership

What percentage of jobs are in businesses owned by people living in your community? A high percentage means your community is relatively independent and will enjoy the high multiplier benefits of local businesses buying from one another. Local businesses have always been the building blocks of a successful economy, but now we can’t afford to get distracted by global businesses. Putting a penny into attracting an Amazon HQ — let alone a few billion dollars — rather than expanding locally owned businesses is the most counterproductive approach to economic development imaginable.

2. Local investment

To what extent are your residents investing in local businesses, projects, and people? Localizing purchasing patterns boosts prosperity but it’s not enough. Why invest in global companies, about which you know little and which leave you vulnerable to the whims of public markets, when you can make a higher return, with less risk, by investing in the merchants you love, or your city’s stormwater management system, or getting your son out of student loan debt?

3. Economic diversity

Is your economy diverse enough to meet the basic needs of residents? Put another way, how self-reliant is your economy? The more self-reliant you are — on local food, energy, water, and finance — the less global disruptions will matter. Diversity also boosts your local economic multipliers, which increases income, wealth, and jobs.

4. Regeneration

Is your economy living within its natural means? We are already spending 70–80 percent of our family budgets on services, which is great news for sustainability, because most service businesses have light environmental footprints. But even for goods like food, water, wood, and paper, we will need to bring inputs of our diverse industries in line with what our local ecosystems can renewably provide.

5. Innovation

To what extent are you fostering local innovation? The key to economic dynamism is entrepreneurship. Is every person in your community with a great business idea, especially young people, able to find the capital, people, space, and partnerships needed to succeed? The proliferation of incubators, maker spaces, and shared workspaces are among the many tools communities can deploy realize this objective.

6. Social equity

Is your community economy leaving no one behind, irrespective of race, gender, ethnicity, and so forth? Look out for blind spots in your economic-development strategy. One reason to embrace locally owned businesses is that we know, thanks to studies by the Federal Reserve, that communities with high densities of local business have higher per capita incomes and less inequality. Entrepreneurship and workforce development programs should focus on those who most need inclusion. This means embracing social inventions like worker cooperatives, community land trusts, and Time Dollar systems.

7. Connectivity

To what extent is your community cosmopolitan and connected with the rest of the world? Are your businesses learning from their peers elsewhere? Are your policymakers? Those connections — especially with people, culture, and knowledge — will allow you to take advantage of the best of what the world offers, without becoming dangerously dependent on it. When other communities get in trouble, your connections will enable you to offer help. When you get in trouble, they can help you.

When other communities get in trouble, your connections will enable you to offer help. When you get in trouble, they can help you.

8. Social performance of business

Are all your businesses embracing the principles above? How many, for example, are measuring their performance through tools like the B-Corp assessment? Those businesses that are monitoring their social performance with regard to their workers and other stakeholders and that are steadily trying to improve it should be recognized and rewarded, and their practices shared and spread with other local businesses.

These principles of comparative resilience will play out differently in Oregon versus Alabama. Vive le difference! Every community has a different history, culture, place, demography, marketplace, and political philosophy, and should adopt these eight principles in its own creative way.

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Michael H. Shuman is an economist, attorney, author, and entrepreneur, and a globally recognized expert on community economics.