[swatow]

>putting aside the debate over free market theory for the moment...

But this is the central point, whether a person is interested in investing locally, or investing in small businesses. I already addressed the issue of investing locally in my top level comment.

>If small businesses and the Main St. economy matter to you, then so should Local Banking.

Free market theory says that there is no reason to prefer small vs large businesses. Which ever is most efficient will win in the market place, and will produce the most total welfare. And if income distribution is a concern, taxation and redistribution is a better way to address this than funding small businesses.

The term Main St. economy is misleading, because both small and large businesses contribute to the economy in exactly the same way. There is no way in which big businesses don't affect or benefit ordinary people.

[bobmarino]

Well, to address your main objection then that “the movement to buy/invest locally goes against all of economic theory.” That is not a correct statement. I would first point out that the quote from my first reply, which discusses the benefits of small businesses on local economies, is taken from the FDIC 2012 Community Banking Study. The study’s authors are trained, mainstream economists who based their conclusions on empirical evidence. Now, even if you stay within the bounds of pure neoclassical theory (which it sounds like you ascribe to) it remains the case that maximum utility (net benefit) accrues to localities when there is a preference for the goods and services of small, local-based firms over larger firms. This is mainly due to the local multiplier effect, the tendency of smaller firms to plow back a greater percent of their revenue into the local economy in the form of secondary vendor purchases than larger firms. Smaller firms typically use a local account, a local attorney, a local design firm, etc. In contrast, larger firms are much more likely to utilize larger, more distant firms resulting in money being transferred outside of the community. Lastly, in addition to the economic case, there are important cultural and political arguments for supporting small businesses and buying locally. One of the respondents touched upon an important cultural factor, avoiding cultural hegemony. As for a political argument, studies have also shown that communities with strong local businesses ownership tend to have greater civic engagement as measured by voter turnout and membership in civic organizations and community groups.

[swatow]

>I would first point out that the quote from my first reply, which discusses the benefits of small businesses on local economies, is taken from the FDIC 2012 Community Banking Study.

The quote doesn't actually demonstrate that community banks are better, it just states the benefits they bring. Compare "Y-combinator provides opportunities for startups, simulating the economy" from this it doesn't follow that I should prefer investing my money with Y-combinator to investing it with another similar company, or a VC.

>Now, even if you stay within the bounds of pure neoclassical theory (which it sounds like you ascribe to) it remains the case that maximum utility (net benefit) accrues to localities when there is a preference for the goods and services of small, local-based firms over larger firms. This is mainly due to the local multiplier effect, the tendency of smaller firms to plow back a greater percent of their revenue into the local economy in the form of secondary vendor purchases than larger firms. Smaller firms typically use a local account, a local attorney, a local design firm, etc. In contrast, larger firms are much more likely to utilize larger, more distant firms resulting in money being transferred outside of the community.

This shows that you don't understand neoclassical theory. In neoclassical theory, preferences are intrinsic. You don't create preferences based on so called "multiplier effects", that is doing things backwards.

The entire point of neoclassical economics is to dismantle specious verbal arguments like the one you've given. Neoclassical economics states that you plug in everyone's (intrinsic) utility into a big market mechanism, and it will give you a pareto optimal result.

Now (neo)-Keynsian economics does have multipliers. The (neo)-Keynsian argument is that during a recession (i.e. not all the time) the government should stimulate the economy by targeting money to where it has the greatest multiplier. This isn't an argument for buying locally but it might be an argument for supporting small business. In any case, that job is better left to the government's fiscal stimulus plan, not individual consumers.

[bobmarino]

another term for the local multiplier is the local premium, but the point being is that if you have 2 cities, one near , city L, and one far, city F, if you buy from small firms in city L more of your dollars will be recycled back into city L than if you purchased from larger firms. This is not an argument that purchasing locally produces a more Pareto efficient result for your "big market" comprised of both city L and F, it only means that a greater proportion of benefit accrues to city L. That is why I stated it is consistent with a neoclassical approach. Now I would separately argue that Pareto optimality should not be the goal of society, and that its public policy justification in Utilitarianism philosophy stands on very shaky ground. Moreover, that the niceties of neoclassical economics depend on simplified, ideal conditions that ignore real world complexities, human psychology, as well as empirical evidence.

[mgkimsal]

"Which ever is most efficient"

If I care about the most efficient way to make sure money stays local to my region, dealing with institutions that have a habit of keeping money in a particular region seems the best way to ensure that happens.

[righttoremember]

Efficient is a technical term from economics. It refers to whatever maximizes total welfare. Total welfare is also a technical term, and is roughly approximated by GDP.

You don't have to believe efficiency is an important goal (although my post was arguing that it is). But please let us have this word. Arguments should be had on the basis of refuting peoples ideas, not depriving them of the use of any word with a positive connotation.

[zapnap]

Amen.