#DevTalks: Economic Gardening and Capitalism's Conundrum

I'm not a professor and not a lecturer. I'm frontline guy that’s been doing economic development for 35 plus years. We changed economic development back in 1987 by adding an entrepreneurial approach. What I'd like to do is make this a little more interactive. As we go and pose some questions, take some questions, vote, we're going to take polls assuming it works, which is what we're trying to get to work here. I need to get some baselines. Was anybody in the Taubman Center seminar last fall that I gave? Okay, I apologize. There's going to be a little bit of overlap. But there's a lot of new stuff here. How many people are familiar with complex adaptive systems? Okay, fewer than I thought they might. I'm going to wade into that. I mean, people who know, Mr. Ned Ludd, Don't say anything.

Anyone familiar with the term Economic Gardening before? today? Okay, well, we're starting at Ground Zero. Good, because that's what I'm prepared to say. So this is just stablished my credentials. If you go in and Google Economic Gardening, put it in quotes, you're going to get vegetable gardens. You will see about 100,000 hits from some pretty major organizations in there.

Here's the question, I want to ask, does everyone benefit from our economic system? What if I said, anybody in this country can buy and probably has bought an HDTV for $49? Remember, I said if you took everything in that Walmart, super Walmart, Costco, Target, whatever, and took it out that parking lot and piled it up, that almost everyone in America can buy almost everything in that pile. And this is where the quads this is. I know that there are 1910 1000s of our population are homeless, but 334 million people do have homes.

Take the poll again. Does everyone benefit from our economic system? The vast, vast majority. Okay, even though anybody combined it may not be able to buy Mercedes. Let me ask a different question. I asked about Ned Ludd. But he sees rowdy little band of Luddites are talking about I mean, people know Luddites if I said that. Okay, everybody has had an economics course, right? For those that don't know, they were skilled laborers in England. They made high quality custom fabrics, in their homes, textiles, brocaded kinds of things. When the Industrial Revolution came along to England, factory owners replace them with these automated looms keep track of automated that's what I want to talk to you all the way through here. So the looms destroyed the weavers jobs, and the weavers smash the looms seemed like a real straightforward solution at the time. I found this photo in Google It was titled wandering Luddite and they said they roam the countryside looking for work.

So let's change the question a little bit. Should public policy encourage automation, mechanization, industrialization technology? I'm going to use the word automation all the way through, or should it discourage automation, or shouldn't be no public policy whatsoever and this is a private sector matter. You know, things work out, let her rip. Okay, so here's your three choices. In curry, public policy, encouraging automation, one to add additional people voting at the start over. How many we have in there 30 Maybe so half of the people 16 out of whatever six people we got. Thank you.

So we still got two other categories. Industrial Policy discourage automation. One, two. Okay. What about no public policy? This is the private sector thing. 1234. Okay. All right, getting a little bit of split in the population. How many people have been to Gary, Indiana, at least know the story of Gary. Half of you. These are pictures of the real Gary, you haven't been there. It's at the bottom of Lake Michigan. I used to fly into Chicago drive around in relation Michigan going over to the state of Michigan. And the interstate goes right through. And I'd get off every once in a while and drive around and just see what was happening there. It was established by US Steel, one of the biggest steel mills in the country. And at the tide of it employs 30,000 People that town was set 170,000. Let me give you the numbers are they're down to about 3000. And the population is down about 70,000. So they've lost 100,000 people. And you know, they lost jobs. You can see the homes you can see the downtown either. It's a major mess. I feel for it. I'm not criticizing I feel for gearing.

Okay, let's take the poll again. So most of those jobs, well, first of all those jobs once a couple places, some of them went to China and other places with steel mills. Some of those jobs, just automated. They just got rid of the people. So they dropped down from 30 to 3000 170 to 70,000. Take the poll again, how many people think we ought to encourage automation as a public policy? Sounds so maybe a third, discourage automation as a public policy. nobody's willing to discourage it, even though people don't care and you don't have places to go anymore. About no public policy, letting go.

Okay. And if people know or have heard of or been to Wakita, Oklahoma, that's zero. If you've heard of it at all, it's probably because you saw the movie Twister. And this was a movie about storm chasers. Helen Han. Bill Paxton. Wakita is a town that gets destroyed at the end of the movie up there at the top. And there's this scene where they're eating it at Meg's house and the news report comes on. There's an f4 Tornado they don't run out of the house get in their cars drive storm, fast out of town, and there's a helicopter shot following them leaving town and when they get to the edge, it rises up. You can see the Wakita water tower. Okita happens to be my hometown. My parents live across the street. That water tower was established in 1893. In the Cherokee Strip, Land Run 100,000 people as far down as you can see, and that photo lined up on the Kansas State Line so they could claim land in this trip and all you had to do race in the first drive a state with a white flag into the ground. You got 160 acres, yours to do whatever you wanted to build a house. It farm it, you can plot a town. It was free, absolutely free. To my great grandfather's were in that race there in that photo. So I grew up on the farm that was great grandfather's state in that race. And Wakita at the time had probably 500 people but there were farms every 160 acres all around. My dad's in the Navy in the South Pacific comes home wants to start a family like they all did in the original baby boom. I am a baby. When I grew up baby boomers were people born in 4647 48. That's when everybody came home and started families. Hamlet's full of kids. Stores are full schools who burn bolding, everything's thriving.

So after the run of Family Farm could farm a quarter section. Lamb quarter section is half mile half mile section is a mile by mile. And you may be two quarters at the absolute best. All that land was planted to wheat. And it took a crew of about 10 to 15 men to harvested and to run the machine over several weeks. Randy Laney, who was a high school classmate of mine, went college came back to farm. And Randy, with the help of three employees can cut more weed in the morning, and that threshing crew could cut in two weeks, Randy farms 48 quarters 48 of those farm families that state that original land are gone. So all the farm families settled in that land. Almost all of them are at 93 are gone, the jobs are gone. The stores that they used to shop to and Saturday are gone. Maybe 200 people left in town household incomes barely 30,000 Most people on social security, average age 82, Randy's use of numbers a lot in terms of average household income. Now only use Wakita as an example because I know it. But this same story occurs all through the Great Plains and the Rust Belt in the Midwest and in the South and in the timber towns and in the fishing towns. Anything that's a natural resource production town in this country looks a lot like this story. We corn, cotton, tobacco, timber, fishing, mining, towns that process natural resources are dying all over the country. It's not just Lockheed. You haven't seen in, take a road trip, just stay off the interstates you got to see what the other half of this country looks like. Those farmers go, what if I said some of them went to work for Boeing in Wichita, 90 miles away from my hometown. When a farm when something breaks down, you got to fix it yourself. Nobody's coming. And most farmers have deep mechanical knowledge and tools, and a lot of them started making jet airplanes at a much higher income.

So let's see where we stand again. We're going to ask both questions at the same time. Should public policy encourage automation, discourage automation or be no public policy? With the understanding? We started out with a small group of Luddites, England early 1800s. long ways off? Nobody much cared about Adams. Small problems. We expanded it out to Gary, Indiana. Well, what about if it's the old town? Well, it's a small city that just gets decimated because of automation. And we've expanded that out to Wakita and all the walkies across the country that are decimated. Should public policy increase automation decrease the no public policy? Increase automation? 123 the same by changing their mind and this? Put your hands up against getting quick candidate. Okay, we're coming to us decrease automation no public policy. One day you're voting the same way people are thinking about it. Are you keeping track my numbers on Thank you?

Let me ask the second question. Does everyone benefit from the economic system? Same issue. Small groups. Bigger city, a lot of people but you got Walmart, Costco and you can buy tons and tons of stuff. Does everyone benefit from the economic system? Yes. 1234? No, all the rest of the people I got doesn't mean not many people were in here. 3036 38 Something like that. I want to talk about something that's messy from our business and we have to deal with it every day. And I've always called a capitalism's conundrum. Here's what I think because people tend to argue Well, capitalism does everything and capitalism doesn't do anything. And, you know, maybe we have looked at different systems on and on and on. I think capitalism is very good at innovating new things solve problems. I think it's the best in the world. And I also think that it makes things cheaper, and it gets applied to demand efficiently. It's hard to argue with those things. There's data behind that. Its drawbacks is you can't have low wages. low speeds, me low price and high wages. There are two sides of the same coin wages as part of price, which is what's going up and down here. It throws people out of work. I don't think anybody's going to argue that there's a lot of people that got thrown out of work, if nothing else, Gary, and it destroys communities. What we're wrestling with, I think, is this little piece of logic because you can't have low prices and high wages. And they're two sides of the same coin. So what we're dealing with right now is everybody's wages are rising. And evergreen, Colorado where I live, you can go to work for Burger, burger, Wendy's started saying Burger Chef for the long run. 20 bucks. Used to be car wages, automobile wages. The hamburgers are $10. And so you give people raises to work at Wendy's. And it's like, Oh, that's good. And it's like, well, the prices just went up. Oh, well, that's bad. That's a conundrum in my mind, I don't think we can get around it. I'm going to talk about what we do about that sort of thing. But driving down prices, throws people out of work, destroys communities, it's hard fact to get around. Let me sweat for just a little bit. I want to talk about economic gardening. This is Littleton Colorado, where I work for 25 years, I live in Evergreen, but I worked in Littleton.

That's our transit station. So the we send out an article about the history of economic gardening. Okay, all right, that's fine. It's not Shades of Grey, 50 Shades of Grey anyways, got plenty of things to read. Before 1987 economic development was about my town, getting your towns companies to move to my town. That's the basic deal. And there's a man over here that probably just lights up here. Because there is lots and lots of issues around the basic issues of incentive packages. And are they fair? And are they transparent, on and on and on, probably ought to let Greg do the last half of this. So the whole idea of economic gardening was invented in Mississippi, more or less, and all the things that they do was, the first thing they did was they come up to New England and took your textile mills and move them down the Mississippi, because they had cheaper wages, that cheaper land, they had cheaper taxes, they had cheaper, virtually anything. And so that was the basic deal is we'll find a cheaper place for you to do business. Now. If that seems on paper to be a little bit sketchy. That's what's still being done today. And that's kind of what set us off. So if, excuse me, if that is called economic hunting, we'll go somewhere and bring a company to us. But we decided to stay home and work with the local entrepreneurs. We need water, fertilizer, do those kinds of things. So let me lay out some basic principles around our program. I know it's a little hard to read that all that information is in the blue swath. See if I can point it out here. This is this is title. Most jobs are local. This is by state running down this side. And the anything and Brown was recruited in so this darkest brown that you see here was a straightforward recruiting deal. What's what economic developments been about forever, never. The next brown means we recruited them last year and they did some jobs this year. We'll go ahead and give them credit. They weren't our jobs. They weren't local. And then this brown is franchises. And that's McDonald's. They're Illinois but they are creating jobs here. These jobs are created locally and accompany Look at that 80% line. Every state in the Union creates jobs locally on walk. 90% line running down and through there, some of them are as high as 90% of the jobs are created locally.

This is the other chart and I apologize, this is a screen chapter, there's a capture, there's actually two charts on here. And what I want you to pay attention to is this red line. And this red line. This is by size a company. And we deal with companies that are staged to 10 to 100 employees, one to 50 million in sales, that size of company, run 18 20% 15%. But it's really stable in all kinds of economic situations, all parts of the country. Down here, this is okay, by size the company, those stage two companies, how many jobs did they create? That's the 40% line right there, they're bouncing around 3839 40% in there. Here's a simpler way to look at it. And that is, as a general rule of thumb, you can say those states to companies, which are 15% of the total, are producing about 40% of the jobs, they're punching way above their weight. That's who we work with. This next principle of economic gardening is the idea that the wealth of the community is dependent on a small group of companies, we use a bathtub knowledge analogy, when we're talking to councils and mayor's club is the community. water in the tub is analogous to money circulating between the local businesses. So the CPA goes to the restaurant, restaurant uses the printer, the printer goes to CPA money's just circulating around in there. And theoretically, that town could live forever, my town could have lived forever. It's it made it made everything needed.

That no town does. New York City does not make everything it needs, doesn't make its own cars, doesn't grow its own weed, doesn't make its own carpet, most of the carpet in this country is made in Dalton, Georgia. So every time you buy a new car from Detroit, or Tennessee, or you take your family down to Disney World, some of that money is leaving town. Money in town drops down, there's less money, CPA only eats out once a week, instead of three times, the restaurant decides, you know, they're not gonna go get things printed, the printer decides they're going to do their own taxes this year. But obviously, there's another factor in this. And that is the tub gets refilled by a faucet by selling things to the outside world, bringing them in, Gary, it was steel. As long as that faucet is running at the same rate as the drain the town stable, it's a boss, it runs faster, and the drain town grows more money flow around with the local stores. Want to move the camera yet on a tight shot of that faucet?

Because who is that? Well, it turns out, it's mostly those stage two entrepreneurial growth companies that sell innovation to external markets. That sentence summarizes 30 years of experience. If you keep track of anything, just learn that. So this is those companies we saw back in the starting slide. You know, the people who are creating so many jobs are in economic gardening, our focus is on the small group of companies. That's all we do. And they do well the entire community does well. Not only is the CPA back eating three times a week, and now because of throwing there's a new chocolate shop that opens up down on Main Street. So I want to introduce complex adaptive system, which is really complex, but I'm not going to go through it in great detail.

But it's a new science created in 1984 Santa Fe Institute in New Mexico, Dr. Houseman, I think bunch of you have classes with him is the co chair of the science board down and he's one of the people helped create it. All we did was learn about it and apply it to our business. So in the simplest terms, complex science studies, the interaction and the adaptations of individual agents, things that can app adapt and interact. That sounds like life sounds like business just because it is life and business are complex adaptive systems. From the economic gardening standpoint, the most important thing is this is that complexity creates emergent systems, new properties, new characteristics, new signatures that are not found in those component parts. And these emergent systems have their own outcomes. But they're not planned keep track of that little sentence, this is gonna be a big factor in the benefiting conversation. And again, the example of why I think this is important. Our political system was planned. Inside, there'd be three equal branches of government and the checks and balances, two branches, the legislature for the big states, the small states Bill of Rights, we planned the political system. None of that is true about the economic system, it was not planned. No one said, you know, we need money, and I probably banks, and probably interest rates, and maybe stocks and bonds and derivatives, on and on. All of these emerged as part of the complex adaptive system. So we have a system that has outcomes, but not planned objectives. So when people talk about market failures, and it's like, what's the failure, there was never a proposal what it was supposed to do, it just emerged and started to operate. So I want to take a look at a couple of system properties that emerged and they're called commodity traps and leverage points. Commodity traps is absolute core in my idea of why I think things are going wrong. Because Rafale. Raphael, thanks, I have a one note drum because that's all I talked about. Commodity traps. Simplest way, this is what we use to explain the council. So simplest way to think about that is you can't differentiate it. And we use salt because it's the simplest way to think about it. And on the lower left, that's my business is in the orange and yours is in the white, and selling salt for two bucks or selling it for a buck 80 and the consumers gone? Well, this is a short conversation on pick the cheap one, thank you. So the bar chart to the right, all the customers shifted to you. On the bar chart to the right, the only way for me to get back into business is I gotta drop my price, you're gonna Buck 80.

So I'm not a buck 60. But I also got to get my expenses down. And I've got to drive out, you know, 5060 cents worth of expenses in there. So I order in bigger quantities. And, you know, I find more efficient systems. But there's a big number in that income statement. And it's wages. And it's like, whoa, can we get rid of some of these wages. And so I move them from the union north, down to the Right to Work south, then to Mexico, and then to China, because I'm getting cheaper and cheaper labor all the way. But sooner. And as soon as I do that, and I drive mine back down, you are back in to the same situation that I had. So you go okay, to drop my price below, you gotta get my expenses down, get my wages down. Pretty soon, probably both of us donate the thing that we voted on all the way through there. And the thing that we saw had real impact and real communities and real people. And it's like, we've got a system operating here. And this is like, a whoops, excuse me, let me back up just a second. This is like a arms race. Nobody wants to do an arms race. But you just built your arms and like, Oh, my God, we got to build that out. You got to build. This is exactly the same, except it's working downward. And it's like, oh, you drop your prices. And I don't want to drop my prices. But I'm losing all my customers, do you I dropped my prices, you drop yours. We're racing to the bottom, and the winner is the person that gets to zero first. No paper you've got? What? How does this work over the long run. So that, in essence is what a commodity trap is about. If you get to the situation where you can't differentiate anymore. You're commoditized. And once you're commoditize, you're in this game, whether you want to be ended or not. Let me talk about this core strategy that we use every company we deal with, we deal we've had about 3500 Some companies over the years. So we've done this a bunch of times. So all businesses can be defined as having a profit margin on their products times the number of products they sell, margin times volume, and that allows us to construct this diagram. So on the left hand side, you've got volume running from low to high down at the bottom, you've got margin running low to high that creates four quadrants out there. Two of those quadrants are not real and stop and think about how high margins I volume, we make a million dollars and what we're selling and we're selling a million of them. It's like a golden ratio, you're going to wake up in the morning people are going to be camped all up and down the street. You know, it's going to exist for about a nanosecond out there. The other one that doesn't exist, these are the gray ones is the Death Valley. And that is we don't make very much on what we sell. But don't worry about it because we're not selling. Oh, your little margins? Like, what's the point? Where are we going to work every day. So what you're going to find is that what we've found, and let me put it that way, is that all businesses have one or two core strategy.

They're either commodity and they say, You know what, we're going to fight it out on price, or Walmart or anybody that's producing big commoditized things. You know, the soap that you can buy a Walmart's the same as Kroger's are the same at Costco. And it's like, they sell it cheaper down here. So the rules for winning is to get big and drive your cost down. Real simple. And you got to make a choice. And we always tell our businesses, we're not telling you, we're not advising you, we're explaining how it works. You just tell us how you guys were. The other is a niche strategy. And in this strategy, niche, and the East niche in the West. From the west niche strategy is rules the winning is that you got to constantly innovate, you got to open up something a gap. And so I make something that you want, that you don't make, and you're going, Wow, that's really expensive, you got that big, huge margin built in there, but I need it really bad. And so I'm willing to pay for it, that's gonna exist for a little while the competitors go, we can do that. Apple, 18 months Samsung, country, Apple, Samsung. So the game there is you just got to keep opening up the gap on each one of the, the competitors you have. So if you're in the commodity quadrant, low price, high volume, Walmart, you're in, I just made this one up low button. So if you're in the niche, it's low volume, high margins.

So software for nucleolar plan, you know, the same not a lot of people do that. And it costs a lot of money to do it and you've got a monopoly. There's something else in the system. It's called leverage points. And H fac a SPAC is heating, ventilation and air conditioning. So your heating cooling system, the leverage the point to be made in systems thinking is that if you change the outcome of a system, you change it by the leverage point. And in the leverage point in the heating system is that thermostat. So let's say it's too hot. And so we go, okay, well, let's open up all the doors and the windows to cool it down. What that does is activate that it gets the heat back on. That's the leverage point, you can go out there on the edges and try to make changes go find the leverage point. And they aid in our economic system. We think the leverage point is supply and demand.

So what happens in innovation, I open up a gap, you try to close it down on me. But here's the thing, think about it is you do not have to be the absolute best. You just got to be better than the competitors. And I'll give an example. We work with a lot of job shop, males, companies in the Midwest, and they've all got five axis CNC machines. Sand machine has computer numeric control, it can make steel 1/5000 of an inch can drill holes do it's the best you can get. But guess what? A lot of other people have five axis CNC machines, and they got them in China and they got them all over. You got a mountain California. And so they are still commoditized. And if you stop and think about it, it's just exactly like salt. And it's like we're doing the best we're doing the last thing. So here's the basic commodity trap. You can do one or two things. You could be in the race to the bottom, you can be in the race to the top. So those are two core strategies for maps. And then we're done. This is it shows an argument I'm making is that what's causing the problems in our country is areas that got commoditize those people and I feel for them. They got thrown out of their jobs. You were working in Gary, Indiana, you you worked there 35 years and got raises you raise your children, you participate in the churches, you do all the good things from a personal standpoint, and you lost your job and it's like that's the best All right, here's what's happening is this is an innovation that Listen, I want you to pay attention to four patterns. Because these four maps are the same. These four areas on the West Coast is they're not very big. You know, geography wise, this is real big geography wise, but nobody lives there. So there's Montana and the Dakotas, Seattle, Portland, barre area, LA, San Diego, that pattern, this is the boss wash Boston to Washington. That's an innovation. This pattern across the South has low levels of innovation, these areas from here, train Michigan, Wisconsin, Pennsylvania, Ohio, that list sounds familiar, because that's the political those people are going to decide the election, you don't live in one of those states that make any difference how you broke it.

So six states take a look at household incomes, same pattern running down this side, same pattern running down this side, working very well. Household Income very low across the south. Take a look at this is called prosperous and distressed communities. Pattern problem here. This these this is the dicey states because we don't know which way they're going to go. election results of the last election. They're, they're right across here dicey in through this area. Closing arguments. There's a simple version of our take on whether the economy is working for everyone. Capitalism has a conundrum built into it. It's good at innovation, it's good at driving down prices.

But to do that, it throws people out of work and it destroys communities. And the mechanism behind that is commoditization, it's buried in there. It's like a commodity trap. And it's like a whirlpool in our economy. And if you slip into that commodity trap, your futures not going to look very well. So ultimately, it drives prices down and eventually they just automate it, like they did the weavers way, way back in the first part of this. That's the commodity trap. We think public policy ought to be about moving people forward. modernization is the root of poverty, and it's on the back end. Innovation is the root of wealth, and it's on the front end. And it's pretty clear. Look at those maps, big data is there. Public policy ought to be moving people from the back end, the front end, and from our standpoint, what we do with economic gardening, there's four principles. Local, it's already 80% stage two, that's the 1540 rule.

Innovation spend a bunch of time talking about why innovation versus commodities, external markets, those four things.