The Physics of Local Prosperity

The Hidden Negative Trajectory of Your Community’s Economy (and what to do about it!)

The Emergent Economy

Something weird is afoot in communities across the United States. We see towns with very low unemployment, yet 25% poverty. We see huge new development projects, yet increased homelessness. We see hundreds or even thousands of jobs available in the community, yet workforce participation rates as low as 60%. So, what’s going on? Why the tale of two cities?

Well, let’s ask a simple question: Is your community’s economy a good economy or a bad one? The answer, it seems, depends on whom you ask. The economic development set says a good one, and they see growth, jobs, amenities, development, and more. Yet, the community development set says a bad one, and they see poverty, homelessness, food deserts, lack of mobility, lack of wealth-building, and deteriorating access to healthcare.

So, let’s pause and develop a common definition of what makes a good local economy versus a bad one. I’d say that a good economy yields the outcome that more people in the community are becoming more prosperous over time. And a bad economy yields the outcome that more people in the community are becoming less prosperous over time.
So… what does it mean to be prosperous? Well… to be prosperous is to have constant safety, comprehensive healthcare, healthy food, quality housing, social and physical mobility, political and creative freedom, financial security, and access to infrastructure and amenities.

Therefore, if you want to know if your economy is a good economy or a bad one, then ask the question: Are more people in your community gaining access to these prosperities, or are fewer people able to afford them? The answer to that question will tell you whether your community’s economy is net good or bad.

You may find that, even among billion-dollar development projects, hundreds of new jobs, increases in wages, and the addition of wonderful new community amenities, fewer people in your community are able to afford the elements of prosperity that define a good economy. This makes your economy a net bad economy, even as you celebrate so many wins.

I believe that our national economic trend is for fewer people to have prosperity over time. This trend is sometimes difficult to see at the national level as stock markets soar and GDP rises. It’s difficult to see locally alongside new development, businesses, and investments. And it’s difficult to see personally like the movement of the earth’s crust is difficult to see on my morning walks.

Yet, we know that people are struggling. Food banks are struggling. Household debt is increasing. Credit card debt is increasing. Homeownership is decreasing or delayed. Healthcare outcomes are some of the worst among developed nations, while the cost consistently increases. Any of these measurements may be up or down in any short cycle, but the overall trends are clear.

The problem is difficult to see because it is an invisible hand, a combination of forces that is making our economy increasingly extractive in nature. The net story of a community in today’s economy is that the wealth leaves the community over time. Whether it’s by people shopping at Walmart, the defunding of public institutions, or corporations owning our natural resources, our wealth is consistently flowing out of the community and out of local control.

As wealth leaves the community, people are getting poorer. Regardless of data that may show that local wages increased over the past few years, in the context of attaining a middle-class lifestyle, people are getting poorer. Prosperity is becoming less and less attainable. Think of housing, healthy food, education, healthcare, and more. All less attainable. Home ownership. Property ownership. Retirement security. Less attainable.

It is important to note here that I do not seek to try and stop all wealth or value from leaving the community. I do not promote isolationism. Just the opposite. I advocate for free and fluid trade, ease of transaction, and wealth co-creation wherever possible.

A good local economy has energy flowing in and out from other communities, businesses, and governments regionally, nationally, and even globally. Flow is good. But, the value created must circulate locally and disseminate among the local population. It must produce economic multiplication and be a wealth-building engine for the community. If not, then all of that successful commerce is nothing but the building of a giant vacuum that extracts resources and wealth from the community over decades.

We’ve spent so long thinking that jobs are the answer. Jobs, jobs, jobs. Yet we have hundreds of unfilled jobs in our communities, and people are getting poorer. If we can’t get this right while there are ample jobs available, what happens if AI takes those jobs away? Then, how will our system create local prosperity?

The truth is that an extractive economy is not inevitable. It is just the economy that is currently emerging. But, this can be changed. We just need to see it first, to understand it, and then we can change it.

We start by mapping the flow of energy through our economy. What forces in our economy are extractive? What forces are circulatory? What forces are compounding?

Once we can see the flow and transfer of energy through our economy, then we can redesign that flow to generate better local outcomes. We can create outcomes that increase prosperity over time for more and more people in the community. We can create a good economy, write a tale of one city, and create a place that is increasingly prosperous for all.

Lessons from Physics

Physics is the study of energy and movement. It has a lot to teach us about complex systems like economies. How does energy flow through the system? Where and when does it change form? How do we wrangle the forces at play? And how can we guide them toward our collective prosperity like we guide rivers to fertilize civilizations?

Gravity

Isaac Newton described gravity as a force. His calculus offered accurate predictions of the movement of heavenly bodies as well as mundane objects on earth, permanently changing our collective picture of how the universe operates. Centuries later, Einstein brought us the concept of “spacetime” which offers a wholly different understanding of gravity and changed our vision of what the universe even is.

A common explanatory example of Einstein’s spacetime is that of a bowling ball sagging at the center of a trampoline. Just try to roll a marble across the surface of the trampoline. The marble will veer off course and circle around the bowling ball until it crashes into it. This is not a force between two objects, it is instead the changing of the shape of the surface of the trampoline by the mass of the bowling ball, thus changing the path of the marble. This is our current picture of gravity, that mass reshapes the fabric of spacetime, thus affecting the paths of other moving bodies.

Our economy has its own fabric that is also reshaped by mass. Large concentrations of wealth function like bowling balls at the center of trampolines. They alter the economic landscape around them. And if Wall Street is a bowling ball, then we’re all out here losing our marbles.

We need to develop a density of wealth in our own communities, for our own stability, and to create our own gravity. We need more locally-owned businesses, assets, and capital. We need stronger local institutions and more local infrastructure. We need our own local mass of wealth in order to stay in harmonious balance with the larger masses of wealth in our economy, like the earth around the sun. Or, we are simply a meteor soon to be consumed by bigger forces.

Inertia

An object at rest remains at rest. An object in motion remains in motion… unless something acts upon it.
Communities have plenty of inertia. Our industries, institutions, regulations, land-use patterns, workforce systems, purchasing relationships, organizational structures, and cultural expectations continue operating in familiar ways long after the conditions that created them have changed.

We must recognize these trajectories and ask: What outcomes are the existing patterns yielding? And, therefore, what patterns do we need to change?

Friction

Friction slows movement and transforms mechanical energy into thermal energy (or heat).

Our workforce is full of friction. A person may be willing and able to work but lack childcare or transportation. An entrepreneur may have customers but no access to capital. A small manufacturer may be capable of supplying a hospital or university but unable to navigate its procurement system.

We should look for opportunities to reduce friction. A relatively small reduction in one barrier can unleash large amounts of pent-up economic activity.

Leverage

Leverage describes the advantage created by using a lever and a fulcrum to magnify an applied force. We use handtrucks to easily move objects we could never lift. We use crowbars to multiply our hand strength ten fold. A longer crowbar creates more force. “Give me a place to stand,” said Archimedes, “and I will move the earth.”

Communities have limited resources. A small city or rural county cannot solve every problem, fund every project, recruit every employer, or compete dollar-for-dollar with much larger places. But the amount of force available is only part of the equation. Where and how that force is applied can matter just as much.

A relatively small investment in childcare, for example, might allow hundreds of people to enter the workforce. A transportation connection might connect an entire neighborhood to a cluster of employers. One intervention can sometimes influence many other parts of the economic system.

Therefore, we should look for points of leverage, places within the economic system where a relatively small and well designed intervention can produce disproportionately large and continuing positive effects.

Potential Energy

Potential energy is energy associated with the position of an object or the configuration of a system. If you hold a rock in the air, it is full of potential energy. As long as you hold the rock, that energy stays in the form of its weight and its position. But if you let the rock go, it will travel with speed and force downward to the ground.

Communities possess enormous amounts of potential energy, or unrealized economic capacity. An empty downtown building has potential. So does an underused industrial property. So does a skilled retiree, a technical college, a local food tradition, a natural resource, a business without a succession plan, a resident with specialized knowledge, or a relationship between institutions that has never been activated.

Traditional economic development looks outside the community for the next source of activity. But, what capacity already exists here that has not yet been activated?

Kinetic Energy

Kinetic energy is the energy associated with motion. When that rock is falling through space and time with a force that will create a significant crash on impact, then it is full of kinetic energy.

In our economy, kinetic energy is the current activity. This is measured well by our current economic development models. People working. Factories producing. Tourists visiting. Houses being built. Businesses selling. Trucks moving. Developments opening. Money changing hands.

We do a good job of creating energy and tracking growth in all of these areas. And that’s great. We need the movement and the flow. We need the kinetic energy. But motion and accumulation are not the same thing. Billions of dollars can move through a place while profits, equity, intellectual property, ownership, investment returns, and appreciating assets accumulate elsewhere.

Traditional economic development often measures the motion but not the accumulation. That must change.

Transformation

Energy is neither created nor destroyed. It just changes form.

Economic value also continually changes form. Labor becomes wages. Wages become purchases. Purchases become business revenue which becomes wages again, and supplier payments and profits and investment in equipment, property, financial assets, and intellectual property. Even taxes transform to become roads, schools, broadband, parks, utilities, and public institutions.

Instead of counting only the first transaction, we must follow value creation and value transformation through the system. What does it become? Where does it go? A healthy economy continually converts today’s activity into tomorrow’s productive investment in the local community.

Flow

Physics is filled with flow. The smooth flow of energy is key for any system. Think of your body’s circulatory system. The smoother the flow, the healthier the system.

Similarly, value moves through economies in a flow. The more fluid the flow the better. Prosperous communities participate in regional, national, and global economies. They import things. They export things. They invest elsewhere. They buy technology. Their residents travel. Their businesses purchase specialized services. Money continually enters and leaves the community, and that’s good.

The question then is: What happens to that money, that energy, as it flows through our community? Does it find the quickest way out of town? Or does it circulate and compound, generating local wages, profits, investment, taxes, assets, and wealth before it leaves?

The goal isn’t to stop the flow. It is to increase the flow and then capitalize on that flow for the benefit of local community prosperity.

Networks

Systems are more about the connections between parts than they are about the parts themselves. Look at the human brain. Your consciousness does not live in the meaty tissue packed inside your skull. It lives instead among the connections between the synapses in your brain and the physical world around you.

Economies work this way too. A resident, business, bank, hospital, school, government, and nonprofit can each be understood as a node in an economic network. But having good nodes doesn’t guarantee a productive network. It is the connections that matter, allowing the smooth flow of energy, and allowing for its transformation, circulation, and compounding in the community.

Economic development is about creating new things, yes. But it is more often about creating new connections, or improving the flow of connection, among things that already exist.

Probability

Quantum mechanics does not commit until it has to. At the smallest levels of matter, objects do not exist in a specific place and time like some bowling ball on a trampoline. They exist as a field of probability.

An electron is not in one position, it is in all positions and none of them at the same time. This is called a superposition. Then, when you look for an electron, or interact with it, the electron manifests itself into a fixed position whenever and wherever you measure it or engage with it. The electron appears as an object when an object is needed. Before that, it is a field of probability. Therefore, reality renders, so to speak, as conscious beings move through it, the way a video game world renders as your character walks through it.

Probability gives us an important way to think about economic development. A community cannot create successful businesses. An incubator cannot create successful entrepreneurs. A loan fund cannot create successful borrowers. A workforce program cannot guarantee employment. A downtown investment cannot create private development.

But communities can change the probability of outcomes by changing the nature of the probability field. We can increase the connections and flow among capital, education, infrastructure, mentorship, networks, customers, housing, transportation, childcare, healthcare, and institutions.

We cannot manufacture prosperity, but we can change the conditions that make prosperity more likely to emerge as it is needed, to render here in our community.

Feedback

Many physical systems are nonlinear. They have feedback loops that emerge in the system. These feedback loops are not an input component (one of the parts put into the system). They are instead emergent. They are behaviors born of self-reinforcing loops that develop in the flow of energy.

Consider how a microphone will feedback if it is put in front of its own speaker. The noise goes into the microphone, then out of the speaker, then back into the microphone, and so on. Creating an escalating effect that yields a louder and louder squeal of feedback. It’s a loop that strengthens as it cycles.

Economic systems are filled with feedback loops. A successful downtown, for example, attracts visitors and can snowball. There isn’t one specific ingredient for a successful downtown. More parts and pieces are put in until self-reinforcing behavior starts to take shape. More people, more businesses, more tenants, more economy, and more amenities.

The reverse can happen too. A business closes. A storefront becomes vacant. Foot traffic falls. Neighboring businesses weaken. Investment declines. Additional businesses close.\

Wealth itself creates powerful feedback loops. Assets generate returns. Returns create investable capital. Capital acquires additional assets. Those assets generate additional returns. And so on, intensifying in its speed and power.

What feedback loops are emerging in your current economy? Whom are they serving? Are they contributing to an outcome where more people in your community become more prosperous over time? Or are they extractive in nature and thus harmful in their outcome.

If recognized, feedback loops can be supported, altered, or even eliminated in service to positive community outcomes.

Phase Change

Physics teaches us that gradual quantitative changes can sometimes produce sudden qualitative changes. Water cools gradually, but at the appropriate conditions it undergoes a phase transition and freezes.

Communities sometimes appear to behave similarly. One new business may not transform a downtown. Neither may five. But at some point, enough businesses, residents, customers, investment, activity, and confidence can accumulate that, all of a sudden it seems, the character of the place changes. And after 30 years of working diligently on downtown revitalization, people will say, What an overnight success!

The same happens with an entrepreneurial ecosystem, industry cluster, local food system, arts district, technology sector, or supplier network. This suggests that economic development initiatives shouldn’t be judged independently. Sometimes the objective is to build enough connected activity to reach a critical mass, the point at which the system begins producing behaviors that none of its individual components could create alone.

Emergence

In physics, emergence describes the appearance of collective properties and behaviors at larger scales that are not properties of the individual components. The temperature, for example, is a collective phenomena arising from billions of interactions among enormous numbers of microscopic constituents.

Economies are complex systems too. No mayor controls where every resident works. No economic development organization decides what every entrepreneur creates. No chamber determines what every business purchases. No planner decides where every dollar flows. No institution controls every relationship, investment, transaction, idea, career choice, business formation, property purchase, or innovation.

And yet, out of all of those interactions, an economy emerges. It may be prosperous or impoverished. It may be resilient or fragile. It may distribute opportunity broadly or concentrate it narrowly. It may generate local assets or extract them. It may create owners or merely consumers.

These outcomes emerge from the system. To steer them, we must understand the economy that is currently emerging, and then design changes in flow that will emerge a different type of economy – one where more people in the community are gaining more prosperity over time.

Conclusion

The Emergent Economy is a quest to understand the extractive economy that is currently emerging in our nation and in our communities, and to redesign the flow of energy to instead emerge a circulatory and compounding economy that leads to the people in the community becoming increasingly prosperous over time.

We seek to understand the extractive forces negatively affecting our local community outcomes, how those negative long-term trends are disguised by short-term local wins, and how we can redesign those forces to create better outcomes for our community.

The job of community economic development is not to control the economy. Complex systems don’t work that way. The job is to understand the system well enough to influence the conditions from which economic outcomes emerge.

We can reduce friction, activate potential, strengthen networks, and create new connections. We can create additional centers of economic gravity. We can eliminate or reinforce feedback loops. We can invest in achieving critical mass.

These endeavors in economic physics will allow us to help economic value circulate, to create mechanisms through which wealth compounds, and to thus change the probabilities of local success. Then, we measure our work on whether it contributes to the outcome of more people in the community becoming more prosperous over time.

We must start this process of change now.