In a way, a mall or superstore is like a small town’s downtown. Instead of a library, there’s the bookstore where you can browse books, thumb through magazines, and read today’s newspapers. Instead of the old corner coffee shop, there’s the food court. Most of the retail categories in a traditional downtown area are represented, from the clothing stores to the drugstore to the optometrist. The mall has its own police force and its own street-sweepers and maintenance crew. There are even sitting areas — the equivalent of the old parks — although they’re usually lacking in squirrels and pigeons.
Shopping malls and big-box retailers are so much like downtowns that in most of the world’s suburban communities where they exist, they’ve replaced the downtown areas of previous centuries. From the outside it looks like a change of location and style, but not one of great significance. So people now shop at the mall instead of downtown. So what? Isn’t it just one business replacing another? Isn’t that the way of commerce? Well … no. It’s not the same thing.
The Local Money Recycling System We Lost
There is one huge difference between a mall full of chain stores or a big-box retailer and a downtown area full of small businesses, and it’s a difference that is destroying local communities on the one hand and creating mind-boggling wealth for a very few very large corporations on the other. Here’s how it works.
When I shop in downtown Montpelier, Vermont, and buy a pair of pants, for example, at the Stevens Clothing Store on Main Street, at the end of the day the store’s owner, Jack Callahan, takes his proceeds down to the Northfield Savings Bank and deposits them. From Stevens, I walk next door to Bear Pond Books and buy today’s newspaper, a magazine, and a copy of Thomas Paine’s Rights of Man, a book that is as fascinating today as when it was first written in 1791. At the end of the day, Bear Pond’s manager, Linda Leehman, will take my money down to the Chittenden Bank and deposit it. From Bear Pond I go to one of the dozen or so local restaurants and exchange some of my cash for a good meal. At day’s end that cash, too, will end up in one of Montpelier’s local banks.
Watch: How a City Thrives or Dies
The next day Montpelier’s banks are richer by my purchases, as are Stevens, Bear Pond, and the restaurant. If my daughter, the wWeb designer, wanted to start her own design firm in an office on Main Street (or from her home), she could visit one of those banks, and, if her credit was good, they could loan her some of the money that was deposited with them the night before from the townspeople’s purchases.
If her work is good, Stevens or Bear Pond or the restaurant may decide they want to hire her to design their wWeb site, using the profits they made from my and others’ purchases to pay for her work. She’ll put her money into the local bank, increasing its deposits available for local lending. Thus, by keeping money within the community, the community grows. This is how communities in America and most of the rest of the world have historically grown.
In the process of patronizing local businesses, people get their social and exercise needs met by walking into and around in downtown areas, and they contribute wealth to the local community, which eventually recycles back to them in the form of an improved quality of life, local taxes for local services like schools and police and parks, and a thriving entrepreneurial environment. That’s a healthy local economy.
The Out-of-town Money Vacuum
Consider, though, if my shopping trip had been to a mall full of chain stores or to a national superstore. Strict management of cash flow is the name of the game for such businesses, and some of them make deposits several times a day. But the money stays in town for only a day at best.
At the end of every day, somebody somewhere pushes a button and all the money from each of the national or international chain’s outlets all over the world goes whoosh to a distant location (usually near the headquarters of the chain). Of course, some of the money comes back into the local community in the form of wages, rent, taxes, and purchased services, but it’s a fraction of what it would be had it all stayed in the community from beginning to end. And none of the profit ever finds its way back into the local community unless, coincidentally, there are local stockholders (and except in the most extraordinary of cases, the amount would be minuscule).
At the moment one of the main things that prevent local communities from defining and protecting their own local economies from these cash vacuums is based on the concept of corporate personhood.
How Corporate Personhood Set the Stage
When Thomas Jefferson pushed so hard for two years for the Bill of Rights to include “freedom from monopolies,” he may well have anticipated the very problem I just identified: the dominance of distant mega-merchants (such as the East India Company) over local merchants. On the other hand, his Federalist opponents thought a strong central government could prevent the rise of monopolies while controlling the entrepreneurial engine that could drive great prosperity for a new nation in a vast, relatively untouched commons.
As America industrialized through the 1800s, it went from a minor agricultural nation to an industrial powerhouse central to the world’s economy. This brought vast and rapid leaps in what we would call progress, but it also left huge areas soiled by industrial waste and strip-mining and resulted in one of the most rapid and dramatic losses of topsoil in the history of the world. Overall, though, most Americans today would consider it a good foundation laid for contemporary comforts.
While our history books tend to focus on the rich and powerful of the past — the John Rockefellers, Andrew Carnegies, and Prescott Bushes — the reality is that hundreds of thousands of small business people built much of America and the rest of the modern industrial world.
These small businessmen and women didn’t just create personal wealth for their families; they also kept wealth circulating in the communities where they lived. They provided employment, improvements, and economic vigor to their towns or neighborhoods, and they responded to the needs of those communities — because they lived in them.
State and local governments recognized the value and the importance of having local entrepreneurs responsible for the local business, rather than out- of-state monopolies, chains, or multinational corporations. During the 1920s and 1930s, in a wave of anti-chain-store populist sentiment, more than 25twenty-five states passed laws that taxed out-of-state or multinational businesses at a higher rate than local entrepreneurs, to discourage the distant and encourage the local.
But this was overthrown in 1935 when the Lane Drug Store chain sued the state of Florida, claiming that because its corporation was actually a person under the Constitution it was illegal discrimination under the Fourteenth Amendment for a state to give preferential treatment to a person in that state while not offering the same treatment to a person from out of state. The Supreme Court, looking back to 1886, sided with the Lane corporation, and now states and local communities all over the nation find themselves without the legal tools to encourage and nurture local businesses.1
Like the Santa Clara case, this one too went all the way to the Supreme Court because a very large corporation could litigate over an astonishingly small amount of money: $25. At that time local businesses were assessed a $5 annual fee and out-of-state businesses were charged up to $30 in Florida.
Chains and Category-Killers: No More Building for Posterity
The fallout from that 1935 decision has been far-reaching. Just as individual humans are woefully outmatched by a corporation that wants to fight them, so are local communities outmatched.
A related effect is that individuals today are far less able to build an enterprise that will last in their community. And due to the attraction of enormous amounts of money from distant areas, they’re often not even interested in doing so.
I first noticed the change in the mid-1980s, although it was probably underway for a decade or more. A young friend was pursuing the American dream — starting his own business — and as a fellow entrepreneur, he had adopted me as a mentor.
“People who start businesses aren’t always the best to run them as they get larger,” I advised him. “Leadership and management are two different skill sets, and only in very rare individuals do you find both together. When your company gets large enough that it needs real, day-to-day management of the details, I recommend you plan now to hire somebody to replace yourself so that you can move into sales, idea-hatching, or some other function that you still find fun but that doesn’t get in the way of the bean counters you’ll need to bring in.”
“Not gonna be a problem for me,” he said. “I have no intention of keeping this business beyond its initial growth phase.”
“Why not?” I said, reflecting that small businesses were what had built and sustained virtually every American community over the past 300three hundred years. Why go to the trouble of starting one if you weren’t going to let it sustain you for your lifetime?
“Because that’s not how things work anymore,” he said, reversing our advice-giving roles:
People don’t start businesses anymore thinking they’ll have security for their old age or something to pass along to their children. Whether it’s a restaurant or a retail store or a software company, the plan now is to grow big enough and fast enough to be noticed by one of the big guys, and then cash out before they squash you like a bug. Make it easier and cheaper for them to buy you out than for them to spend the time and effort running you out of business or simply stealing your idea. And to succeed, you’ve gotta do it quickly.
After that meeting, while driving home in suburban Atlanta, I noticed with new eyes the stores that lined the main roads. Nearly all were large corporate chains, from the video stores to the bookstores to the fast-food outlets. The crafts store was a chain, as was the bicycle store. Nearly all the entrepreneurial ventures that had populated the area up until the late 1970s and mid-1980s had died, replaced by such a numbing sameness of product and presentation that I could just as easily have been driving down a suburban street in Dallas, San Diego, Seattle, Memphis, Detroit, or Boston. Or, increasingly, Paris, London, Frankfurt, Rio, or Taipei.
Retail has been taken over. There’s a good reason why national superstore chains are known in the business press as “category-killers.” When such a chain enters an industry, whether it’s hardware or stationery or anything else, it typically puts dozens to hundreds of local, family-owned businesses into bankruptcy. Other local merchants, having seen the fate that awaits them, “get while the getting’s good,” closing down before they lose everything they’ve earned in decades of business. In either case, the category-killer relocates locally generated profits to its distant corporate headquarters, and the local, community-oriented, full-service merchants are gone.
Manufacturing too has been moved far away from the local economy to labor-cheap countries. Taking Amtrak from Boston to New York, you see miles of empty, decaying, vandalized factory buildings once serviced by the railroads, their products now manufactured in China or Indonesia, their former workers now flipping burgers or unemployed. And even when the foreign companies do their manufacturing in the United States (like Toyota and Kia have done — and extol in their advertising), the profits from all that manufacturing effort go back to Japan or South Korea or whatever the corporation’s country of origin may be. The principle is pretty much the same.
Big, nonlocal corporations have largely inhaled even service industries, traditionally the last bastion of lower-paying local labor: fast-food chains, day-care and learning-center chains, home-service franchises, and hospital and medical chains.
Relocalizing Our Economies
In summary, consider these benefits of local communities being allowed to give special breaks to local companies, or to regulate out-of-town companies, to support their local economy:
- They keep cash local.
- Local companies are more sensitive and responsive to regional issues — they are far less likely to be “bad citizens” because their families have to live with the consequences.
- They are more heterogeneous and responsive in the services and the products supplied.
- They preserve regional culture, personality, and perspective.
- They provide greater stability, given that the economies become more self-contained. The demise of a business or two won’t prove nearly as devastating as when a large employer decides to shut down a plant and move production to Mexico.
This is not to say we shouldn’t have large businesses. Instead, as Teddy Roosevelt pointed out, they must be kept in an appropriate context and submit to regulation by the local communities in which they operate.