Economists tend to be skeptical of place-based development strategies on efficiency
grounds, considering that localities may benefit at the expense of aggregate national welfare.
There is little empirical work on this topic and theoretical work tends to focus on the default,
mathematically tractable assumption of constant returns to scale. However, the major
contribution of the new growth theories is to recognize that knowledge benefits from increasing
returns to scale rather than the constant or decreasing returns associated with physical
commodities. Activities that create knowledge and opportunities for sharing of knowledge
generate increasing returns that would lead to increased national welfare. But at this point neither
theoretical nor empirical economics can address the appropriateness of different interventions
and mechanisms. Policy makers cannot afford to wait. As Klein and Moretti (2013:34)
conclude, “Second best may,
in practice, be very attractive relative to the status quo.” The case
for place-based policies is accepted for the remediation of localized market imperfections and a
key role of governments is to provide services that raise the quality of life of local residents.
The ultimate goal of economic development is to create economic prosperity and high
quality of life. Intermediate goals - for example, to increase innovation or to reduce barriers to
entrepreneurship and private sector investment - are the means to the ultimate end of creating
this prosperity. The investment challenge is to ascertain progress towards these goals in complex
environments, and under conditions for which impact is difficult to attribute to any one specific
investment. It is certainly possible to consider the impact of investment on outcomes for
individual firms. However, economic development investments aim to build capacity that
extends beyond individual firms to benefit the larger ecosystem. Advancing the public interest
requires finding balance that scaffolds economic transactions while not over regulating, provides
support and incentives without discouraging initiative and enables all economic actors to realize
their potential.
