Working Paper 18
Promoting Economic Development:
Government Programs
or Economic Freedom?
BENJAMIN POWELL *
Abstract
Once economic development is properly understood, it becomes obvious
that Oklahoma’s development policies and the jobs they have supposedly
“created” do not actually promote growth, but instead retard it. To promote
real economic development, the state must change its policy focus from
specific development programs to instead providing a stable institutional
environment with strong private property rights and high degrees of
economic freedom.
*
Benjamin Powell (MA, George Mason University) is a Social Change Fellow at the Mercatus Center and
PhD candidate in economics at George Mason University. He has been a visiting fellow at the American
Institute for Economic Research. His articles have appeared in the Washington Post and the Boston Herald,
and his latest academic paper, “Economic Freedom and Growth: The Case of the Celtic Tiger,” will appear
in the Cato Journal.
The ideas presented in this research are the author’s and do not represent official positions of the Mercatus
Center at George Mason University.
Promoting Economic Development:
Government Programs or Economic Freedom?
Benjamin Powell
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Nutshell: Once economic development is properly understood, it becomes
obvious that Oklahoma’s development policies and the jobs they have
supposedly “created” do not actually promote growth, but instead retard it.
To promote real economic development, the state must change its policy
focus from specific development programs to instead providing a stable
institutional environment with strong private property rights and high
degrees of economic freedom.
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The state of Oklahoma began taking a more active role in managing economic
development with the passage of the Economic Development Act of 1987, and it has
continued to expand its role since. And though the state claims that non-farm
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employment has expanded 35 percent since 1987, Oklahoma has seen its per capita
income fall relative to other states — by 2000, it was only 79 percent of the national
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average. Once economic development is properly understood, it becomes obvious that
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Oklahoma’s development policies and the jobs they have supposedly “created” do not
actually promote growth, but instead retard it.
The following section describes what real economic development is. The second
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section examines whether state economic development planning is capable of promoting
only the businesses that promote real growth. The third section looks at specific policies
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Oklahoma has enacted in an attempt to promote growth and explains why those policies
failed. The fourth section outlines the only feasible way to promote real, consumersatisfying development. The best strategies for competing with other states for economic
development are examined in the fifth section. Specific policy recommendations for
Oklahoma are made in the final section.
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What Is Economic Development?
Conventional wisdom holds that an increase in the number of jobs, businesses, or
office buildings and industrial parks is synonymous with economic development. In a
recent publication of Oklahoma 21st Century Inc. (a research affiliate of the State
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Chamber), it was noted that “from the very beginning through recent years, the principal
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metric by which economic development [in Oklahoma] is measured has been new jobs.”
Oklahoma’s economic development strategies seek to promote more jobs and businesses.
If creating more jobs were the goal of economic development, that goal would be
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quite easy for the state to achieve. The state could tax citizens and use the revenue to hire
people to dig holes and fill them back in. The state could create as many jobs as it wanted
this way. Digging holes and filling them back in obviously does not produce any new
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goods or services that anyone wants, but it does create jobs. To pay for this
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“development” program, the state would have to tax other citizens who had their own
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private-sector jobs. All that this development program accomplishes is reducing the
income of those working in private jobs and transferring it to those who have holedigging “jobs.” This may seem like a silly example, but it was once a Keynesian policy
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recommendation during depressions.
Since economic development obviously involves more than just creating jobs,
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what if businesses and factories were created to go with the new jobs so actual goods and
services could be produced? Would that be economic development? If so, the state could
promote development much more effectively than it does with the current programs.
Current programs seek to partially subsidize entrepreneurs for creating new businesses
and jobs. The state could instead just use tax revenues to build its own businesses, hire
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employees (creating jobs), and produce goods and services. The more “development” the
state wants, the more it would tax, and the more businesses it could create. At the limit,
taxes could be 100 percent and the state could create as many new factories and jobs as
possible. Sound familiar? It’s called socialism, and it was tried unsuccessfully in the
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Soviet Union. Once the Soviet Union collapsed, it became obvious that the
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“development” that supposedly occurred was not development at all. Sure, people were
working and there were offices and factories, but they were all producing poor quality
products in the wrong quantities, and consumers could never get what they wanted.
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Real economic development is about making sure that consumers get more of
what they want. It’s about getting the citizens of Oklahoma more of the “stuff” (goods
and services) they want. It takes the creation of businesses and jobs to do this, but not just
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any businesses and jobs. Only the right jobs and businesses that produce the products that
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consumers desire most can promote real economic development. Every time the state
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uses tax funds to subsidize one business, it must take that tax revenue from consumers
who would have spent the money on other businesses. This takes potential investment
funds away from one business and puts them where the state thinks it is promoting
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economic development. The key question for economic development planning becomes:
Can the state help in creating only the “right” businesses and jobs  those that satisfy
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consumer desires more than the businesses that would have been funded by the market if
the money had remained in private hands?
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Can State Development Planning Promote the Right Businesses?
Businesses that are successful and make profits are the ones that produce the
products that consumers value more than the resources used to produce them. When a
company incurs losses and goes bankrupt, it is the market’s way of showing that the
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product was valued less by the consumers than the resources (material, labor, capital) that
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were needed to make it. A firm incurring losses is essentially destroying wealth. It is
taking valuable resources and turning them into something less valuable. Economic
development occurs as more and more positive-value-added firms are created and
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negative-value-added firms are eliminated. This raises per capita incomes and standards
of living. The market has a built-in mechanism for encouraging positive-value-added
firms and eliminating negative-valued-added firms. When the government engages in
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economic development programs, does it help or harm this process?
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In either the unaided market or state development plans, someone must make
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decisions about which businesses to allocate scarce resources to. What are the differences
in experience, incentives, and knowledge between a businessman in the marketplace and
a bureaucrat in an economic-development planning office?
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When an entrepreneur decides to start a business, he or she normally has had prior
experience in the industry or has been successful as an entrepreneur in other lines of
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business. When private businessmen (whether entrepreneurs, venture capitalists, or
bankers) make large investment decisions, they typically have been successful at making
smaller investment decisions before. That is how they have amassed the capital required
to be in a position to make such a decision. If they’ve been unsuccessful in previous
investment decisions, they’ve lost their money and no longer have the power to allocate
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large amounts of resources. This is the market’s internal discipline mechanism, which
continually weeds out those who do not make good decisions and rewards those who do.
This mechanism also gives private businessmen a huge incentive to make the
right decisions. They bear the costs and reap the benefits of their decisions. If they are
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successful, they receive the benefits, and if they are unsuccessful, they directly suffer the
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consequences. This forces them to be careful when making investment decisions. They
will typically have extensive knowledge of and experience with the industry and market
they are investing in. This is certainly not to say that no mistakes are made. The key is that
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everybody has a strong incentive to avoid mistakes, and that when they are made, the market
automatically reduces the decision-making power of those who made them and increases the decisionmaking power of those best at undertaking investments that satisfy consumers.
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When the government attempts to promote economic development by
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encouraging particular businesses and industries, the situation is quite different. Here the
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decision maker has very different experiences, incentives and knowledge. The
politician’s expertise is in getting elected. The bureaucrat’s expertise is in pleasing the
politicians who appoint him or her. In this situation, decision-making power is gained
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through the political process, not the market process. The incentive is to make decisions
that please the political process, not consumer preferences. Those who are successful in
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the political process, not those who make the best investment decisions, get the power to
make more and bigger investment decisions. The incentive in this system is for job
creation in particular districts to please voters or for subsidies to particular businesses that
will help fund future campaigns. The knowledge possessed by the decision maker is not
local and specific industry and market knowledge, but rather it is local and specific
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political cost-and-benefit knowledge. An internal selection mechanism of decision
makers is still present, but it’s not one that automatically selects those who are best at
making good investment decisions that satisfy consumer desires. But as we have seen,
satisfying consumer desires is what economic development is really about.
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Another impediment to economic development is created when the state decides
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to subsidize businesses. Absent state involvement, businessmen only compete to produce
the best products at the lowest prices. This promotes growth. Once the state provides
subsidies, it is in these same businessmen’s interest to also compete for state subsidies.
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They will spend time, money, and effort trying to secure state funds for themselves
(economists call this rent seeking). This same time, money, and effort could have been
spent trying to produce better products more cheaply. Resources that could have been
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used to promote economic growth are instead wasted trying to secure a transfer from the
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state. The funds that the state supposedly uses to help economic development actually
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hinder it by redirecting private business activities away from satisfying consumers and
towards lobbying the government.
This section has examined the general differences between decisions that result
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from state development planning and those that result from private, market-based
activities. It has also looked at the way these decisions affect the process of economic
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development. The next section analyzes Oklahoma’s economic development policies in
light of these differences.
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Oklahoma’s Economic Development Policies
Oklahoma has created a number of boards and agencies that are supposed to
promote various types of economic development. These include Oklahoma Futures, the
Department of Commerce, the Oklahoma Center for the Advancement of Science and
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Technology, the Oklahoma Capital Investment Board, the Oklahoma Development
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Finance Authority, the Bond Oversight Commissions, and the State Bond Advisor. The
Legislature and these various boards and agencies have tried a number of programs to
promote economic development since 1987. The effect of some of these policies will be
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examined individually below.
One of the most celebrated programs in Oklahoma is the Quality Jobs program.
This program was started in 1993 and has been expanded numerous times since to make
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more and more types and sizes of businesses eligible to participate. The basic mission of
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the program is to attract new businesses to the state by providing cash payments of up to
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five percent of payroll for 10 years to firms creating new jobs (some must meet minimum
requirements for out-of-state sales) with at least a gross increase in payroll of $2.5
million (some particular industries can qualify with a smaller increase; the qualifications
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vary). There is a small-employer version of the program that allows firms with 90 or
fewer employees to be eligible for a five-year period if their annual salaries are at least
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150 percent of the per capita income of the county in which they are located. In late 2001,
it was reported that since the Quality Jobs program began, 275 companies had
participated in the program, involving $4.5 billion in eligible payroll.
The program probably does attract businesses, but it does not promote real
economic development. For example, on April 18, 2002, The Daily Oklahoman reported
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that three companies promised to create a total of 830 jobs over the next 10 years in
exchange for a combined $12 million in cash benefits through the Oklahoma Quality Jobs
program. Even in terms of job creation, it is not clear that the program is responsible for
“creating” these 830 jobs. All three companies were already located in Oklahoma, and
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given that the program is picking up a maximum of five percent of the payroll, on the
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margin, most of these jobs likely would have been created anyway. If that is the case,
then the Quality Jobs program has merely taken resources from taxpaying citizens and
businesses and transferred them to these three companies. These jobs would have been
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created anyway, and the money that was transferred to them would have been spent and
invested elsewhere, creating jobs in those industries.
If, however, these jobs really would not have been created without the transfer
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from the Quality Jobs program, then economic development has been hindered even
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more severely. If it would have been unprofitable for these companies to create these jobs
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without the subsidies, that is the market’s way of signaling to the entrepreneur that these
scarce resources (labor and time) could be better used elsewhere. By transferring
taxpayer funds to create jobs in these companies, the state is taking resources from
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businesses that were providing goods and services the consumers valued and transferring
them to businesses in which the extra goods and services produced are worth less than the
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resources used to produce them. In this case, the government is effectively reducing the
wealth of Oklahoma. The Oklahoma Quality Jobs program can either be a form of
corporate welfare, subsidizing firms that were expanding anyway, or it can create
negative-value-added jobs that should not have been created. The program cannot
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produce any consumer-satisfying development that would raise the standard of living in
Oklahoma.
The Oklahoma Center for the Advancement of Science and Technology also tries
to promote economic development. The agency’s mission is to foster enhanced
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competitiveness by small and medium-sized manufacturing firms by stimulating
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productivity and modernization. In fiscal year 2000, OCAST was allocated $11.6 million
for that task. One way OCAST seeks to promote growth is by providing “seed capital” to
firms involved in new-product or process development. This program is administered
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through the Oklahoma Technology Commercialization Center.
The market provides “seed” or venture capital to firms all the time. Is there any
reason to believe that government bureaucrats are better at identifying profitable
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investments for seed capital than the market is? Venture capitalists are experts in
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identifying potentially profitable investments; the people who are most successful at it are
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the ones with the most venture capital to risk. These people also have a great incentive to
be right. If they are, they make lots of money; if they are not, they lose money. These
people have the knowledge and the incentive to fund all profitable opportunities. As
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mentioned earlier, the government bureaucrat is selected for different reasons, without a
natural-selection mechanism for weeding out those who make bad investment decisions.
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The projects the state funds through its seed capital program are either bad investments
that should not be funded or, if they are good investments, they’re projects that the
market would have funded anyway.
A similar analysis applies to the Oklahoma Capital Investment Board. The OCIB
administers two programs that provide equity and near-equity capital. The Venture
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Investment Program uses tax-credit guarantees for portions of equity investments by
private venture capital funds. In 2000, the board had commitments to eight private
venture capital funds. The OCIB also has a Capital Access Program that uses tax credits
as a form of credit insurance for banks making business loans that require a higher-than-
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normal loan risk reserve.
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Between 1992 and 2000, 968 business loans worth $27 million had been made
through the Capital Access Program. In this case, the state is subsidizing private
investment risk. Investments with a high risk of failure but a large potential reward will
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still have a positive expected present value. Venture capitalists and banks find ways to
fund these types of investments in the market all the time. The types of investments that
will not be financed in the market are ones with negative expected values. To promote
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economic development, these investments should not be financed anyway; they will
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likely use more valuable resources than they will create. When the state is willing to bear
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part of the risk burden for private financiers, it means it is willing to finance some
projects that would not be funded otherwise. These projects still have a negative expected
value (meaning they are more likely to harm consumers than help them), but for the
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company doing the financing, they now have a positive expected value since the state
will pick up part of the tab if the investment fails. The investments the state encourages
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through this type of program either would have taken place without state involvement
(meaning they had positive expected values anyway) or are the type of investments that
are not expected to cause economic development.
Another program with which the state attempts to encourage particular
investments is the Small Business Linked Deposit Act. The law, passed in 1988, allows
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the state treasurer to deposit state funds in banks participating in the program and to
accept interest rates up to three percentage points below the U.S. Treasury Bill rate. The
program is currently capped at $200 million. The bank that receives the deposit lends an
equivalent amount of funds to businesses with gross receipts of less than $4 million or
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fewer than 200 employees. In fiscal year 2000, $52 million in state bank deposits were
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used as the basis for favorable interest treatment for 152 small business participants. This
program basically uses state funds to subsidize loans to small businesses. In order for this
to promote economic development, we would have to assume that these loans would not
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have been made without government subsidization (otherwise this just represents an
income transfer) and that they would have been profitable loans even without the
subsidization.
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If the loans would not have been profitable to make without the subsidy, it is a
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sign that the investment will likely use up more valuable resources than it will create. If
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the loans would have been profitable without the subsidy, the banks have the experts and
the incentives to identify these projects and invest in them. For this project to have any
positive impact on economic development, it must be assumed that private businesses,
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which have the incentive to find profitable investments, are consistently failing to make
these loans and that the state has some method to identify these projects and encourage
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the banks in this program to lend to them. The government does not have a method
available to make these calculations. What this program really does is transfer wealth
from taxpayers to lenders and small businesses engaged in projects that would have
occurred anyway, and it encourages some investments that otherwise would be
unprofitable  indicating that they will likely make the economy poorer, not richer.
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Once it is realized that direct government involvement in promoting businesses
hinders the process of economic development, it might be argued that the state could
more effectively promote economic development through more general expenditures that
support the infrastructure that attracts businesses. But it must be realized that the funds to
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build the new infrastructure must come from somewhere. The funds must come from
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taxpayers. If the government leaves these funds in private hands instead of using them for
infrastructure expenditures, they will be spent on private businesses, giving businesses
more funds to invest in future expansion. The funds used to build roads or other projects
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provide a directly observable benefit to development, but what is not seen is the
development that could have taken place if the money had been left in private hands.
Consider, for example, another part of Oklahoma’s economic development
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strategy: promoting development in rural areas. The Oklahoma 21st Century report notes,
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“The Oklahoma Department of Commerce’s goals for attracting and expanding industry
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emphasize the need for all regions of the state to share in development.” One way the
state attempts to do this is through the Rural Economic Action Plan (REAP), passed in
1996. In 2000, the plan was approved for $20 million in funding and is supposed to fund
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economic-development-related rural infrastructure. In order to promote development in
rural areas by building infrastructure (or through any type of spending), additional money
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must be taken from private hands or must be taken away from infrastructure expenditures
in metropolitan areas. This money could have been spent in other areas.
Once the decision is made to invest in more infrastructure development, the
question that must be decided is: What new roads (airports, etc.) should be built? In the
private sector, these decisions are made on the basis of expected profits and then are
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evaluated through profit-and-loss accounting to determine if they were successful. This
method of calculation is not available to governments when they invest in infrastructure.
The government-provided services are not bought and sold on the market. There is no
economic cost-benefit method available for the government to use when determining
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where the optimal location for a new rural road is or if the resources used to make the
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road could have been put to a more highly valued use in the private market. With no
economic method available, decisions will be made for political reasons. Particular
groups of voters or businesses in a given district will influence the government’s decision
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of where to promote “economic development.”
Infrastructure expenditure should result from economic growth, not cause it.
Infrastructure expenditures in rural areas can help to attract businesses there, but only at
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the expense of businesses that could have been created elsewhere. If infrastructure
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improvement follows where businesses choose to locate, then businesses will naturally
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locate where they can produce the best product or service at the cheapest cost, creating
the greatest possible value for the consumer. When infrastructure is used to attract
businesses to different areas, businessmen will still look to locate where they can produce
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the best product at the lowest cost. But because the state has picked up part of the
expense by building infrastructure, businesses do not need take that expense into account
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when selecting a location, since they don’t have to pay for it. More value could have been
produced if the businesses had located where they naturally produced the most value and
infrastructure was later developed to further support it.
Even if all of this development occurred in cities, the rural areas would still
benefit. They would be getting more diverse and greater quantities of higher-quality
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goods and services  what real economic development is about. It is a fact of nature that
not all areas are equally suited to produce goods and services. Everyone benefits if goods
and service are produced where they can be made for the lowest cost. Sure, we can
change the location of where they will be produced through government expenditures that
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change the costs that businesses face. But someone still must bear the cost of moving
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investment to a less-than- ideal location. If it is the state spending “economic
development” money, the citizens of Oklahoma must still ultimately bear the cost
through increased taxation or lower state spending elsewhere. By shifting production to
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areas where the market would not naturally place them, potential resources must be lost.
Fewer goods of lower quality will be produced.
Good economic analysis requires policy makers to consider both what is seen and
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what is not seen. In Oklahoma, it is easy to see particular businesses that have taken
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advantage of the development policies. One can readily point to jobs that have been
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“created” in businesses that are reimbursed through the Quality Jobs program or
businesses that located in a rural area next to a new road or high-speed telephone line.
But all of the resources used to create these things could have been used for something
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else. What goes unseen are the countless ways the money the state has spent on economic
development could have been spent and invested by private citizens. If citizens had spent
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the money, it also would have encouraged businesses to expand and use more labor and
capital, but it would have been different businesses than those that the state chose. It
would have been those businesses that could efficiently produce the products and services
the citizens of Oklahoma wanted most. Efficiently producing more of what people want
is the essence of economic development. Once what is unseen is taken into account, it
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should become clear that the state’s various economic development programs do not
promote growth. They get in the way of the real process of economic development that is
internal to the market.
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How to Promote Economic Development
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Although Oklahoma’s current policies do not promote real consumer-satisfying
economic development, the state can do some positive things to influence economic
development. The key is to focus on policies that do not favor one producer, industry, or
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region over another. The state can set an overall institutional environment in which
private entrepreneurs can better work to promote economic growth.
The key institution for economic development is private property. There are a
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significant number of economic studies that link stronger private property rights, smaller
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government, and greater economic freedom with higher levels of economic growth. In
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the United States, property rights are more secure than in many other parts of the world.
There is some variation in property rights between states, however. Lower taxes, less regulation, and
contract enforcement all result in less attenuated property rights and greater economic freedom.
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Since real economic development depends on satisfying consumer desires, we
want entrepreneurs channeling as many resources as possible to their highest-valued uses.
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With lower taxes, more money gets allocated through the market process. Consumers are
left with more to spend on what they see fit, and businesses receive more money and are
able to invest in producing more of what consumers want. Various regulations prevent
businesses from engaging in what would be mutually beneficial activities with their
employees and their customers. Decreasing regulations allows businesses to satisfy more
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consumer desires. Courts that uphold contracts as they’re written make businesses and
consumers more secure in knowing what the outcome of their transactions will be. This
will lead them to enter into more transactions, which will satisfy more desires.
All of these types of development policies are broad policy changes that change
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the institutional environment. They would promote economic development among all
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industries statewide, allowing consumers and businessmen to determine which products
Competition With Other States
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to produce and where to produce them.
There is much concern about competition between states that are trying to lure
new businesses. Much of this competition is done through various forms of subsidies and
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tax abatements to particular firms who agree to bring in a certain number of jobs. It has
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been argued above that these are exactly the types of polices that do not promote growth.
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But if other states are engaging in them and attracting businesses, does Oklahoma have to
do it too?
When other states engage in preferential policies that attract businesses by giving
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them subsidies, it actually promotes consumer-satisfying development in Oklahoma.
When a corporation is given a subsidy, it comes from the taxpayers of that state. They are
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transferring some of their wealth to subsidize the production of whatever the company is
producing. This enables the company to offer more and better products for cheaper prices
to consumers everywhere, including Oklahoma. The consumers of Oklahoma are actually
better off when a factory locates in another state to collect a subsidy and then sells its
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products to consumers everywhere, including Oklahoma. Oklahomans get better products
cheaper.
Oklahoma can compete with other states by trying to create a better institutional
environment for entrepreneurs to operate in. While measurement of economic freedom is
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often ambiguous, one study has attempted to measure the economic freedom of the 50
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states. The study uses data from the middle to late 1990s. Compared to its neighboring
states, Oklahoma was found to have more economic freedom than Louisiana and New
Mexico, but less economic freedom than Texas, Missouri, Kansas, Colorado, and
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Arkansas. The regulatory, judicial, and government-size categories are where Oklahoma
fared worst. These margins are where Oklahoma should attempt to compete with its neighboring states.
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Increasing economic freedom will give entrepreneurs more ability to satisfy consumer desires.
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Policy Recommendations
In order for Oklahoma to achieve higher levels of economic development, it must
eliminate programs that hinder development and implement new policies that will
promote economic freedom. To do this, government should cut taxes and spending to the
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minimum possible level and reduce its interference in the economy as much as possible.
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The following policy recommendations are not meant to be an exhaustive list but are
instead a first step in the direction of freeing the economy and ending harmful
development policies.
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• Reduce taxes across the board: income taxes, corporate taxes, capital-value and
franchise taxes, sales taxes, and estate taxes. Taxation reduces the incentives to work,
invest, create new jobs, or start a business. Lowering tax rates across the board leaves
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more money in private hands so the market can direct economic development to the
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projects consumers value most.
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• Reduce regulatory burdens, including state occupational licensure. When individuals
and businesses engage in voluntary exchanges, they demonstrate mutual gains from
trade. Regulations that get in the way of voluntary contracts should be eliminated.
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Occupational licensure should be reduced because it restricts entry into professions,
impeding business creation and the process of competition.
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• Phase out the Oklahoma Quality Jobs Program. This program either provides a form
of corporate welfare by subsidizing jobs that would have been created anyway, or it
helps fund jobs that the market would not create. When the latter is the case, the
program supports jobs that hinder economic development instead of promoting it. The
government currently has some commitments to existing businesses from
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this program. No new grants should be made through the Quality Jobs
Program, and once the existing commitments have been fulfilled, the
program should be abolished.
• Abolish the Oklahoma Center for the Advancement of Science and Technology and
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its current programs, including the provision of “seed” capital. There is no reason to
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believe that government bureaucrats are better able to identify profitable investment
opportunities than private businessmen. The market provides “seed” capital to start-ups
all the time.
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• Phase out the Oklahoma Capital Investment Board’s Venture Investment Program
and Capital Access Program. These programs subsidize private investment risk. When
they subsidize investments that would have occurred anyway, they are a form of
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corporate welfare. When they cause investments to take place that would not have been
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made in the market, they are financing projects with a negative expected value,
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indicating that the project would likely use up more valuable resources than it would
produce. This type of investment harms economic development.
• Phase out funding for the Oklahoma Development Finance Authority and its Quality
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Jobs Investment Program. By matching private funds dollar for dollar in investment
enterprises qualifying under federal law as small business investment companies, this
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program helps create the wrong jobs for economic development, just like the
Oklahoma Quality Jobs Program.
• End the Linked Deposit program. This program suffers from the same problems as the
Venture Investment Program and the Capital Access Program. It either encourages
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loans that will likely harm economic development or provides a transfer from
taxpayers to businessmen for investment that would have occurred anyway.
• End programs that attempt to promote development in rural areas. General economic
development benefits everyone, including those in rural areas, by providing less
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expensive and better quality products and services. When the state attempts to promote
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development in particular rural areas, it can only do so at the expense of development
that could have occurred elsewhere. The best way to decide where new development
should locate is through the decentralized, individual, and profit-maximizing decisions
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of entrepreneurs. Let the infrastructure follow development, not the other way around.
• Eliminate the Oklahoma Department of Commerce and Oklahoma Futures. The
Oklahoma Department of Commerce is the primary public-sector economic
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development agency. Oklahoma Futures creates five-year plans for development and
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advises policymakers. The state cannot plan real economic development in the short or
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long run as effectively as individuals in the marketplace can. Oklahoma Futures’ fiveyear plans will fail to promote real economic development, just as the Soviet five-year
plans and India’s five-year plans failed. There is no need for the Oklahoma Department
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of Commerce or Oklahoma Futures once development decisions are left to the market.
The public-sector “economic development programs” managed by the Department of
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Commerce do not promote real, consumer-satisfying economic development. Once
these programs are eliminated, there will be no need for a department that manages
development.
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Conclusion
Although the state of Oklahoma has spent much time and effort trying to promote
economic development, most of the state’s efforts have been misplaced. Specific
development policies have sought to give incentives to particular businesses for locating
R
in particular places or creating a number of jobs, or they have sought to provide start-up
PE
capital to businesses. Real economic development is about consumers achieving a higher
standard of living. Only through the market are consumers able to transmit the
information necessary to signal which businesses and industries should expand and which
PA
should contract. When the state engages in specific economic development programs, it
interferes with this market process. To promote real economic development in Oklahoma,
the state must change its policy focus from specific development programs to instead
G
providing a stable institutional environment with strong private property rights and high
N
degrees of economic freedom. Once this institutional environment is in place,
R
KI
entrepreneurs will be given the information and incentives from consumers to promote
W
O
real economic growth that will benefit the citizens of Oklahoma.
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W
O
R
KI
N
G
PA
PE
R
Notes
1
See, for example, Robert Barro, “Economic Growth in a Cross Section of Countries,”
Quarterly Journal of Economics, vol. 106 (1991); Robert Barro and Xavier Sala-i-Martin,
Economic Growth (New York: McGraw-Hill, 1995); Herbert Grubel, “Economic
Freedom and Human Welfare: Some Empirical Findings,” Cato Journal, vol. 18 no. 2
(1998); James Gwartney, Randall Holcombe, and Robert Lawson, “The Scope of
Government and the Wealth of Nations,” Cato Journal, vol. 18 no. 2 (1998); Philip
Keefer and Steve Knack, “Why Don’t Poor Countries Catch Up? A Cross National Test
of Institutional Explanations,” Economic Inquiry, vol. 35 (1997); Steve Knack,
“Institutions and the Convergence Hypothesis: The Cross-National Evidence,” Public
Choice, vol. 87 (1996); Steve Knack and Philip Keefer, “Institutions and Economic
Performance: Cross Country Tests Using Alternative Institutional Measures,” Economics
and Politics, vol. 7 (1995); Seth Norton, “Poverty, Property Rights, and Human WellBeing: A Cross National Study,” Cato Journal, vol. 18 no. 2 (1998); Gerald Scully, “The
Institutional Framework and Economic Development,” Journal of Political Economy,
vol. 96 (1988); Gerald Scully, Constitutional Environments and Economic Growth
(Princeton, NJ: Princeton University Press, 1992).
2
John Byars, Bobby McCormick, and Bruce Yandle, “Economic Freedom in America’s
50 States” (1999). For more information on economic freedom in Oklahoma, see Chapter
1 of the present volume.
22