Cities are engines of wealth creation, and Maine needs wealth. We are a poor state, and there are many good things we could do with more money. Maine is a rural state, and Maine’s rural nature is part of our identity. Is there a way to be a rural state and simulate being an urban state? I think there is. This essay explores why cities create wealth, and how a rural state can simulate being an urban state.
Why do cities create wealth, while rural areas do not?
It may seem counterintuitive that large, open tracts of land, where farming and industry finds fertile soil, are not the wealth creation engines of the world. After all, where does food come from? Where are widgets made? Certainly not in urban centers. It is true basic resources are created, extracted, or made outside urban centers. In Maine, think about the fisheries industries. Fish do not come from urban centers. They come from the wide open sea. Farming is a rural industry. Mining is a rural industry.
In reality, most wealth creation happens in and because of cities. A lobster may be worth $2.00 a pound in Stonington, but it is worth $15 a pound in New York City. Why? There is no demand for a lobster in Stonington. They are a dime a dozen. Transporting lobsters from Stonington to New York City creates $13 of wealth per pound of lobster because that lobster is now in front of someone who will pay $15 a pound. The Stonington lobsterman is making $2 per pound, but is not benefitting from the rest of the supply chain.
What about Stephen King novels? They are written in a small city in rural Maine. Are they an example of rural wealth creation? The answer is “yes” and “no.” Stephen King novels are like lobsters. Only selling them in Bangor does not create wealth. Distributing them throughout the country creates wealth. Stephen King is making money, but more money is being made by everyone else up the supply chain who is part of the effort to sell those novels nationally.
What about wooden boats? They are manufactured in rural areas along Maine’s coast. They do create wealth, in the sense the manufacturer is taking raw materials and transforming them into a valuable object. Who buys these boats? People who have made enough money in cities to afford them. The secret to making money as a wooden boat manufacturer is to sell them to city dwellers.
My point, shown in the three examples above, is that wealth creation starts with creating a new thing, but really takes off by broadening the market for that thing. It is created by exporting something from an area where it has no value to an area where it does: where it can be seen and purchased by a buyer. Wealth creation happens when a previously unavailable transaction is now available. Rural areas, relatively short on people, can still manufacture, but their products have no value absent the presence of a buyer. This dreadful situation is compounded when the means of creating those transactions is controlled by outsiders.
In short, cities create wealth because that is where the people are, and transactions between people create wealth.
How can rural areas create wealth if they simply do not have the people? Simulation.
It may be possible for sparsely populated areas to simulate being densely populated areas. Key to this effort is to understand what it is about large, concentrated populations (cities) that creates wealth, and then see how that attribute can be simulated. What are some of these factors?
Cities have an abundance of well-educated people. This is partly due to in-migration of educated people who leave rural areas for more opportunity in cities. These educated people, because of their global world view, are more productive, and better at wealth creation. Is average educational attainment in cities higher than in rural areas? This may be the case. It is also the case that it is easier to create a high density of educated people in rural areas simply because there are fewer people to start with. In other words, a rural focus on the educational attainment will not lead to high numbers of educated people, but it will lead to a greater concentration.
Well-regulated and competitive commerce
A common myth is that regulation hurts commercial activity. This is not true. Overly free markets are worse at creating wealth than well-regulated markets. First, well-regulated markets are level playing fields. It is harder to cheat in them. Second, well-regulated markets force time consistency in behavior. In other words, contracts are enforced, and people keep their word. Markets depend on trust, and well-regulated markets are trusting and trustworthy markets. Third, well-regulated markets internalize costs, such as the cost of pollution. This keeps markets healthy for the long term.
Rural areas, particularly largely rural states like Maine, tend to have weaker regulations than urban areas. Think of California and Massachusetts, and then think of Wyoming and Maine. As counterintuitive as it may seem, the states with more regulation are better at wealth creation than the states with less.
Rural areas also tend to have more informal markets: business is conducted among friends or relatives. While business in small, tight-knit communities may seem more trusting, in practice business is less efficient and more prone to cronyism. We see this in the difficulty of new businesses to break into tight-knit markets. We also see this in decreased demand for competitive pricing.
An actively engaged consulting class
Urban areas have consultants for every type of activity, rural areas have businesses that do everything themselves. Think of marketing, tax preparation, my own field of architecture, strategic planning. I often tell people that dentists are in higher demand than architects because nobody pulls their own teeth, while a lot of people are comfortable designing their own buildings. They really should not be.
Consultants have specialized knowledge and greater skill in using that knowledge, and are therefore better than others at the application of that knowledge. I might know a little about marketing, but why try to figure out marketing on my own when I could hire an expert? It is far better for me to spend time engaged in my area of competitive advantage than it is to spend time outside that area.
Rural areas tend to be thin on consultants, which is a problem. Luckily, the world is a much more connected place now. The actual consultants do not have to reside in rural areas. They simply need to be available and utilized in those areas.
When I step outside of my office onto Main Street in downtown Ellsworth, I sometimes pass somebody, and I sometimes do not. There just are not that many people in Ellsworth. It is hard to bump into people. Step outside an office building in San Francisco, and it is a very different experience. Everyone has a story about landing a new job or a new project because of a chance encounter. I got a project casually joking with a stranger at the Blue Hill EBS Building Supplies.
When these chance encounters happen every day, or even several times a day, wealth is created. How can we simulate the busy urban street in Maine? Better professional networks could help. Friendly people at Chamber business after hours events could help. Maine-focused internet communities could help. In fact, better internet could help.
All the above factors are specific ways of being more open. Educational attainment brings openness to new ideas, different cultures, a broad world view. Well-regulated and transparent commerce means being open to shared rules and conducting business with strangers who win on merit. Having and using an actively engaged consultant class means being open to using the expertise of others, and also to opening oneself to scrutiny by those with whom we consult. Finally, connectivity is openness. We connect by opening ourselves up to others. We recognize the network is the business.
Maine as a state needs to be open to more people; we need more people. At the same time, to fully urbanize Maine is to destroy that which attracts us and keeps us here. Can we simulate some of the factors that lead to wealth creation in urban areas? Can we be rural and at the same time a locus of wealth creation? Yes, I think we can.