The Great Separation Part 2 - Causes

March 4, 2019

In our last post we introduced the idea of the great separation where the largest metros that drive the U.S. economy are starting to grow at radically different rates. We identified 8 metros (the Great 8) that seem to have separated themselves from the others and are achieving greater economic growth in this new idea-based economy. 

 

In this post I want to discuss three causes of this separation.

 

The Idea Economy is a Winner Take All Economy 

When we cruise through the aisles at our local grocery or department stores, we can find many, many varieties of the same product. Sure, some brands are considered better quality than others and they might capture the largest share of their market. But there is always room for the second best brand, and often the third best, fourth best etc.

In the idea based economy, there is no room for second place. The firms with the product or service that is deemed to be the best, dominate the market. Those firms get windfall revenues that help to maintain that status. 

If the product is digital there is likely very little difference in cost between what is considered the best and the also-rans. So, why would anyone buy the second best product? There are no real rivals to Google in terms of search, or Facebook in terms of social networking. I will have a much better shot at getting my own brand of potato chips on the store shelves than I will launching my own search engine.

 

The Idea Economy Feedback Loop

To turn a good idea into a market dominating firm you need access to a key resource, technical talent. Just as firms in the past located close to resources to have better access, firms in the idea economy have located to where the talent is. Tech hubs like San Jose, San Francisco, Seattle, Boston, and Austin produce talent through their many top research colleges and universities. This attracts more firms. The pool of exciting new firms is deep in these metros. This depth is attractive to young talent who know there are opportunities in these metros and they can decide to move there knowing they will find a good job even though they may not know at which firm.

A deep pool of firms attracts a deep pool of talent, which attracts more firms which attracts... well, you get the idea.

 

The Idea Economy Doesn’t Care About Your Low Cost

Economics 101 tells us that when one market gets too expensive, resources will flow to another lower cost market and we will return to equilibrium. This sounds good in a text book, but it is not working in real life. Firms in the idea economy are seeking to dominate new markets, not compete in existing ones. They are not operating on the margin. In fact, if they have investors, they probably expect to lose money for many years before turning a profit. Costs are secondary. Access to idea-creating talent is primary.

Economic developers who rely on low costs and tax incentives to satisfy companies are going to find limited success in attracting and retaining idea producing firms. The bottom-line costs just aren’t as important to them as they would be in manufacturing or retail. Costs will matter more if your firm is a traditional service provider or goods producer because those firms operate on a tight margin where every dollar counts.

If your region is following a low-cost approach to economic development, you may be missing out on the idea economy. Idea producing firms need talent, and they are not afraid to pay more to operate in a region that will provide it.

 

Is your metro providing the talent it needs to grow in this idea economy? We will explore this question in our next post.

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