What Put The Brakes On Detroit’s Economy?


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The proportion between the real recompense of labour in different countries, it must be remembered, is naturally regulated, not by their actual wealth or poverty, but by their advancing, stationary, or declining condition.” – Adam Smith, Wealth of Nations, p. 288The latest news about the population decline in Detroit has unsurprisingly generated a lot of commentary as to its causes.

Particularly on the right, the generalized and oft-repeated view in myriad columns has coalesced around Detroit being “the most striking example of a once-thriving city ruined by years of liberal social policies.” Union power has also been mentioned quite a bit too, and while both explanations are compelling, basic thinking renders these notions overly simplistic.

Indeed, San Francisco has similarly suffered decades of what conservatives would consider overbearing “liberal politics”, but it has ultimately thrived, and will presumably continue to attract many of the world’s best and brightest. If liberal-leaning San Francisco and neighbouring Silicon Valley now represent the heart of economic innovation in the U.S., the question becomes why Detroit (arguably the Silicon Valley of the first half of the 20th century) surrendered its economic status. It seems the better, more compelling answer lies in the teachings of Adam Smith, along with poor dollar policy embraced by many conservatives in modern times.

First up, Detroit, and the state of Michigan more broadly, embraced what Smith would describe as a stationary economic existence, and its debased situation today is evidence of it having done so. For its citizenry and the politicians they elect having clung for decades to a once grand manufacturing model characterised by Big Three automakers General Motors (NYSE:GM), Ford (NYSE:F) and Chrysler, Detroit was set to decline, and this would have occurred whether policies there were liberal left, or laissez-faire right.

To understand why, it has to be remembered that profits attract imitators. Inhabited by some of the most entrepreneurial and visionary minds in the first half of the 20th century, Detroit’s massive wealth served as a model for others eager to grow rich around the world. So while Detroit became extraordinarily wealthy thanks to its “vital few” creating world-renowned car brands, the expectation that doing what had previously worked would serve to maintain that wealth was severely flawed.

As Smith noted centuries ago, “Though the wealth of a country should be very great, yet if it has been long stationary, we must not expect to find the wages of labour very high in it.” The latter is the case because the ambitious imitators, eager to capture some of that wealth, would naturally pursue their own transportation innovations that would turn what was once a source of great profits into something quite prosaic, and wages would have to reflect the latter reality.

Rather than evolve with the times, and move into areas of commerce not overrun by imitators, the Big Three carmakers that continue to define Detroit’s distressed economy largely – but not totally – stuck with what they knew. But with automobile production having gone global on the way to cars themselves reaching commodity status in the figurative sense, what was once a promising destination for some of the world’s greatest minds began to repel them. Innovation is what attracts the investment necessary to fund continued growth, but with Detroit and Michigan itself stuck in the past, the financial capital necessary for its continued evolution simply found places where it would be utilized more profitably.

Heavy taxation and absurd social policies are once again fingered here, but if true, it would also be true that San Francisco would have become a ghost town once the flawed liberal model descended. The difference, particularly in a city like San Francisco and neighbouring Silicon Valley, is that there are no sacred cows in northern California’s technology economy, and there are no bailouts. Failed ideas are allowed to die so that quality ones can replace them, and with northern California’s economy the opposite of stationary, it has evolved with the times, and its evolution has attracted the financial and human capital necessary for its continued growth.

Unions? No doubt their rise didn’t help, and as Smith observed, “if all persons in the same kind of work were to receive equal wages, there would be no emulation, and no room left for industry and ingenuity.” At the same time, it should be said that union demands were to some degree a symptom of the greater dollar problem; specifically the dollar’s decline after President Nixon (prodded by conservative heroes including Milton Friedman) severed its link to gold.

The debased dollar not only made large American cars unattractive for the spike in oil which occurred amid the greenback’s decline, but it also created a desire among autoworkers for higher wages in order to keep up with inflation authored by self-described conservatives. This is not meant to defend unions as much as it’s to say that absent Nixon’s horrific decision, union demands for the very wage increases that made the American manufacturing model even more unworkable would have been less urgent.

So while logic and historical evidence make plain that American-style liberalism wreaks enormous economic and personal hardship, for so many conservatives to reduce Detroit’s decline to a function of those failed policy ideas is a gross oversimplification of what actually occurred. And it ensures that little will be learned from Detroit’s collapse.

The sad truth in today’s world is that irrespective of political party affiliation, there’s a peculiar worship of manufacturing and the backbreaking jobs it allegedly creates. That worship has perpetuated a commercial concept that would have long ago disappeared whatever the quality of local governance. If so, as in if Detroit and Michigan had evolved with the economic times on the way to a reduced emphasis on the Big Three and the low-value, easily exportable jobs they create, the city and the state would likely be thriving today.

This post originally appeared at Wall St. Cheat Sheet.