Community Economics
Economic forces—resources, markets, society, institutions/rules, decision-making and space—that explain community change. Each of these six components is described below as the Shaffer Star of community economic development.
Community Economics and Community Development
Community leaders and concerned citizens are continually seeking new ways to improve the economic wellbeing of local residents. This can range from a desire to create jobs for high school graduates who wish to remain in the local community to women who wish to enter the labor force after their children are in school, or even retirees who want to return to the workforce. These leaders may also want to create an environment in their community that is concessive to the creation of small businesses or the expansion of existing ones. The economic environment that the community faces is partially determined by national and regional economic conditions, but community residents can play a significant role in influencing specific circumstances of the community.
Before effective policies can be crafted and implemented at the local level, it is imperative that these community leaders and concerned citizens have a basic understanding of the economics of smaller communities within the context of larger regional and national economies. This can best be done with an application of the broader underlying aspects of economic theory. The study of “community economics” focuses attention on basic economics as it pertains to smaller or “open” economies. These smaller economies can take the form of a remote rural hamlet to urban neighborhoods or even a collection of neighboring towns. From the broadest perspective the study of community economics addresses three basic questions: what is the economic situation now? What could the economic situation be? How can the economic situation be changed?
Shaffer Star of Community Economic Development
The study of community economics is derived from the broader study of community development and focuses on the economic rather than the social-political-environmental perspectives of the community. But it must be emphasized that while community economics is rooted in the parent discipline of economics, to truly understand the dynamics of the community one must take an interdisciplinary approach. As advanced by Shaffer, Deller and Marcouiller (2004 and 2006), an interesting way to view community economic development is to think in terms of a star diagram (Figure 1). Around the nodes of the star, we have three elements that are typically associated with economics: resources, markets and space. Three additional elements are associated with our broader definition of community economic development: society, institutions/rules and decision- making. Before turning to our focus on economics, consider the three non-economic elements. Figure 1. The Shaffer Star of community economic development.
The “rules of the game” are an often overlooked and an assumed given element but are critically important to community economics. Societal norms drive the larger milieu in which the economy functions. Society is an important background force that defines the norms, values and ethnics that determine right from wrong, good from bad, acceptable from unacceptable behavior. Any economy operates in a social context that is built by tradition, historical precedence and cultural mores. These are not determined by the economic system, although there can be subtle feedbacks between the economic system and society. For example, the goals of economic policy are often driven by social norms; one community may be willing to accept higher levels of environmental risk than another or the inherent risks associated entrepreneurial activity may be more acceptable in some communities. The societal node highlights the “unwritten rules” that govern behavior.
Within the context of the Shaffer Star, the rules node speaks to the formal or written rules that govern what can be done with markets, resources and space. The formal “rules of the game” often focus on rights and responsibility of ownership and their respective enforcement. In a capitalist economy, the notion of property rights is fundamental to the functioning of the economy. A rule that prevents a community’s business from selling product to Cuba is a rule that limits access to a potential market. The rule that prevents the use of child labor is a rule that governs the types of resources that are available to the community. Recent legislation on telecommunications, for example, means that some communities, especially rural communities, now do not have universal access to some elements of the new telecommunications technology such as fiber optics and the Internet. These rules are human-made limits or openings that guide the use of community resources and exploitation of markets.
The decision-making capacity of the community centers on the ability to distinguish between problems and symptoms, and implement solutions. A symptom is a visible sign that there is an underlying problem, but treating the symptom does not correct the problem. For example, a community may think that it is experiencing a labor shortage and thinks that it might need to recruit new residents to the community. This could be in error for a couple of reasons. For example, are the jobs being offered attractive enough to draw people into the labor force? Alternatively, are sufficient support services in place, such as quality child care, to allow women to enter the labor force? Each and every community faces symptoms and problems like these. It is important for people involved in community decision- making to really focus on the problem rather than address just a symptom; in this example, people cannot buy a home.
Implicit in decision-making are the community’s needs to establish its values and set priorities. Each community, at any given time, is faced with a range of issues, and effective decision-making requires the community to not only identify issues, but also rank them in terms of priority. How these issues are identified and ranked hinges on the values that the community possesses. These values are driven by the larger society. If you feel the market has the only say, then the housing example might not even appear on your radar screen until firms cannot hire local labor. Each community faces a plethora of problems, and community priorities go a long way in determining which one will be addressed first, second, or not at all.
The markets node has several important dimensions and could be argued is at the heart of community economics. First, and perhaps foremost, the markets node speaks to the notions of supply and demand and the underlying forces that drive supply and demand. Supply represents the theory of production and most often focuses on the firm’s problem of maximizing profits. In specific situations, supply can also be represented as the individual’s ownership and supply of primary factor inputs such as labor, land and capital. Regardless of the application, there are two aspects to profit that are important to distinguish. These include costs and revenues. In order to maximize profit, firms attempt to minimize costs and maximize revenues. Demand represents the theory of consumption by individuals. In specific situations, demand can also reflect the firm’s use of factor inputs such as land, labor and capital. Regardless of the application, demand theory rests on the notion of maximizing utility from the perspective of the consumer and profits from the perspective of the firm subject to a budget or cost constraint.
The markets node also refers to the spatial boundaries of goods and services upon which a community relies for production (supply) and consumption (demand). The local market comprises businesses buying and selling locally to other businesses and households. It is important to remember that the local market is composed of two distinct parts—households and businesses. The non-local or external market refers to those goods and services that the community produces locally and sells to non-local households and businesses. It is important to remember that the critical element of the non-local market is that the non-local market is essentially an external source of sales and income. Thus, it can be the local production of manufactured goods or agricultural products that are sold outside the community or health care that is paid by a third party, such as Medicare. It can also be the local production of goods and services that are sold to non-local residents including tourists and in-commuters. The external market is modeled by the export base theory. The internal or local market is often modeled by central place theory and local market analysis.
The notion of non-local markets as the driver of local economic growth has been at the center of growth policy at the regional and community level for decades. Rooted in the notion of export-base theory, communities often make the mistake of thinking that economic growth policies must focus on businesses or industries that produce goods and services for the export market. This narrow approach fails to capture the importance of local markets and the ability to not only capture but also retain dollars. Economic growth policies at the community level must balance the spatial notion of markets.
Resources are the primary factors used in production and include land; labor; capital, both private and public; and the technology that the community uses to produce output. Increasingly important in the functioning of local economies is an amenity base that could be included as the fifth factor of production. This is particularly true for rural communities that are endowed with natural resources such as lakes, forests, mountainous landscapes and/or coastal resources. Here, natural resources were traditionally thought of within the framework of extractive industries including agriculture, forestry and mining. Today, these resources are increasingly being thought about in terms of quality-oflife attributes and tourism and recreation. The policy challenge for forested areas, for example, is how to maintain a working forest while at the same time promote wildlife diversity and tourism and recreation. Amenities can involve cultural, historic, natural or human- made environmental resources that increasingly contribute to our notion of quality of life.
Land refers to the finite resource upon which production activities take place. This can be suitable land for extractive industries such as agriculture but also land for the location of residential and commercial development. Labor refers to the number of and skills embodied in people who are actually working and the people who could be working. This can include local residents as well as people living in surrounding communities who could commute into the community. Private capital refers to liquid assets such as financial capital and non-liquid assets such as buildings and machinery. Much of the study of community economics here focuses on financial markets and the ability of local businesses to access financial assets such as lines of credit. Public capital refers to roads, schools, parks and landfill sites, among others. Social capital is often referred to as the glue that holds communities together and overlaps with the society node discussed above. Technology is how land, labor and capital are combined to produce output. Technology can be industry sector- and/or business-specific and is generally regulated by management or community processes. It can involve the latest innovation or something that has been around for some time. Technology can be product- specific, such as how we produce a good or service by combining inputs, or it can be process-specific such as new ways of dealing with workers or decision-making. Much of modern economic growth theory focuses on the market forces and institutional rules that encourage changes in technology through innovation and new ways of thinking about entrepreneurship.
Space is explicitly included in the Shaffer Star because it reinforces the idea that the community is part of a larger regional and national economy. Indeed, within a globalizing economy many economists maintain that economic clusters within space are becoming more, not less important (Porter, 1998). Within a more local setting, space is included because communities are generally defined within some spatial connotation as well as some form of communication network. In addition, people commonly identify with some spatially defined community. It could take the form of this community versus that community, or the north side of town, or school attendance boundaries. Furthermore, every community must move product and resources, and communicate over some physical distance. Community also means that some form of communication is also occurring. Generally this is noted in terms of community boundaries that imply some people are members of a community and some people are not.
Conclusion
In the end, the study of community economics is about how economic forces and theory explain community change. It is about how economic structure influences the choices that communities can make. It is about increasing community wealth, both monetary and nonmonetary forms of wealth. It is about how movement or flow across boundaries influences choices. It is about how dynamics and the resultant disequilibrium or changing circumstances create tensions within the community that require choices. Implementing decisions and strategies means the people are intervening in the economy, and more, with the idea that they can achieve some type of desired outcome.
— Steven C. Deller
See also Community Capitals; Development, Asset-based; Development, Community and Economic; Economic Development; Sustainable Development; Sustainable Rural Economies
References
- Porter, M.E. On Competition. Cambridge, Mass.: Harvard Business School Press, 1998.
- Shaffer, R.E., S.C. Deller, and D.W. Marcouiller. Community Economics: Linking Theory and Practice. Oxford: Blackwell Professional Publishing, 2004.
- Shaffer, R.E., S.C. Deller, and D.W. Marcouiller. “Rethinking Community Economic Development.” Economic Development Quarterly. 20, no. 1 (2006): 59-74
