Let us consider the humble pencil. If you want to acquire one, to write your grocery order or to note down your to-do list, there are many places you can find one. If you live in the city, the corner store in your neighbourhood or the supermarket a little further away, will most likely stock them. The bigger the establishment you want to buy the pencil from, the greater the variety. There are different colours, a wide choice of sizes, some can write faintly and some more boldly. There are those made for artists and those for engineers. If you live in a rural area, your choices are limited. The local supermarket might only stock what students need. The fascinating thing is that in all these places, pencils are available. In both locations, entrepreneurs have chosen willingly to supply pencils, and of a particular type, to the local markets. There is no master planner that decides on the quantity and type that should be made available to you but each business seeing a need, finds their own way to fulfil it.

This flow of knowledge on what people want and are willing to pay for, is sometimes interrupted through government directives and policies. Frank Dikötter, details in his book, Mao's Great Famine: The History of China's Most Devastating Catastrophe, 1958–62, about how the local markets were disrupted during Mao's reign in China. Whereas in the past before the communists took over, there were many traders in most of China, by 1961 there were now far fewer sellers in the towns. Before the revolution, the traders supplied all types of goods all over China, even to the remotest parts. He writes that traders would sometimes transport these goods on donkeys or mules and even on foot. However, this distribution system broke down when Mao collectivised everything. People found that “even ordinary objects such as shoes and pots”, were rare, scarce and dear. Hunger and malnutrition were very common during this time. For those who lived in the rural areas, in farms, away from the cities this problem was even more exacerbated by the breakdown of the logistics and distribution system in the whole country. Trains that used to be relied on, were now breaking down due to the poor quality of steel being supplied and used to build the tracks. Surprisingly, in all the chaos and supply shortages, Mikhail Klochko, a russian scientist, while in Beijing during this time, was able to buy a box of pencils. Economics is not simply a study of how goods and services are produced, consumed and the choice in how resources are used, but it is also about how these things are distributed to the final consumers.

Urban areas provide unique advantages for individuals, organisations, nations, states and businesses. These places make it easy to create, distribute and they provide more choices to both consumers and producers. Additionally, producers find that with so many customers within easy reach, the knowledge of what they want and need is much easier to find. The feedback loop is also shortened for those who make their goods and services close to their customers. This results in even better products overall. The Nobel prize economics committee found this idea intriguing and awarded Paul Krugman the prize in 2008 “for his analysis of trade patterns and location of economic activity”. Paul Krugman explored this further and noted that the economics of scale show up in urban populations and lead to a “self-enforcing” process that leads to more goods and more variety. While the ordinary cost of living is lower outside cities, you might not find the exact colour of pencil you want. With the reduced choices in rural areas, the cost of obtaining specialised items goes up the further away you are from the central business district. Even with the ubiquity of internet access, there is a stark difference. While you do get the variety when shopping from anywhere in the world, transporting these goods is still a challenge even when not accounting for the time. The cost of sending books to the island of Tristan da Cunha, 2,437 km off the coast of South Africa, is a good example of this.

This principle applies to nations also. Historically, cities that were built near important transport corridors and hubs benefited greatly; the nations were partly shaped by their physical environment- environmental determinism- and trade. These cultures were enriched, their knowledge in science and other endeavours were greatly perfected simply as a result of interacting with people from other places in the world. Goods were cheaper, of greater quantity and of higher quality than in other places. Workers also benefit from living in a big market or close to a city. Specialised and non-specialised skills alike are sought after by many businesses and not just the few local shops in the village thus driving their wages even higher. The cost of switching jobs is also lower for skilled individuals as both the current and future employer are sometimes located on the same street. The obverse is also true. Nations that were isolated from each other or were too far off for trade, remained underdeveloped for longer periods of time. This isolation can also be a result of state actions or the ukase of kings. Japan under the Sakoku policy between 1603 and 1868, is a good and extreme example. Tariffs and quotas have similar effects on how the stuff that we need are made, used and transported, as well as how we make our decisions to allocate scarce resources. These policies raise the cost of goods and services. While many of the policies might be well intentioned, to “strengthen the local market”, it robs the consumers of free choice on how to spend their own money. The lesson here is that when markets break down or where trade is curtailed everyone loses.

Notes:

1. Leonard Read, I Pencil: My Family Tree as Told to Leonard E. Read. An essay exploring the complex global network involved in the product of a simple pencil. https://en.wikipedia.org/wiki/I,_Pencil
2. Nobel Prize in Economic Sciences 2008: Awarded to Paul Krugman for his analysis of trade patterns and location of economic activity. https://www.nobelprize.org/prizes/economic-sciences/2008/illustrated-information/
3. Tristan da Cunha: One of the most remote inhabited island group in the world https://en.wikipedia.org/wiki/Tristan_da_Cunha
4. Mao's Great Famine (1958-1962): Details the devastating famine in China caused by Mao Zedong's economic policies. See: Frank Dikötter, Mao's Great Famine: The History of China's Most Devastating Catastrophe, 1958–62 (2010). https://en.wikipedia.org/wiki/Mao%27s_Great_Famine
5. Sakoku: The isolationist foreign policy of Japan's Tokugawa Shogunate during the Edo period (1603-1868) https://en.wikipedia.org/wiki/Sakoku
6. Environmental Determinism: A theory examining the influence of the physical environment on societies and economies. https://en.wikipedia.org/wiki/Environmental_determinism
7. Unlocking the Potential for Domestic Market to Thrive: A Case of Buy Kenya Build Kenya https://kippra.or.ke/unlocking-the-potential-for-domestic-market-to-thrive-a-case-of-buy-kenya-build-kenya/