The question of local economies came up in a recent discussion on the Microcapitalism Facebook Page. I had posted something about Alice.com, a new online marketplace for grocery goods.

Jim Bryant raised the question of how such marketplaces might impact local economies. Until that point I had not given much thought to the “Buy Local” campaigns, or their place in an economy. In most cases, though, I find that it is a marketing gimmick, not a sound economic principle.

“Buy Local’ is most commonly used by merchants. Those merchants, while local to you, seldom buy from local producers. Therefore, “Buy Local” stimulates a local market economy that in actuality hurts producers and consumers.

My wife presented an example she saw on a “Buy Local” segment. A mother buys a glass of lemonade from her son for $1. The boy spends the dollar at a local train shop. The train shop owner spends the money somewhere else local, and one way or another the dollar comes back to the mother.

Remember, money is not capital, it merely represents capital. So where is the capital? The mother (we assume in most cases these days) provided the lemonade mix from a supermarket which bought the lemons (if any real lemons were used) from a farm out of state, or perhaps outside the country. The proceeds of that first dollar were as diluted at the mix was in water by the time it reached the producer. At the train store, at least half the dollar went to the distributor, and perhaps only 35 cents went to the manufacturer of the train. Both the distributor and the manufacturer are likely outside not only the community, but the state.

In this scenario, unless the boy squeezed the lemons from the family tree, nothing was produced in the town, and the example of the dollar being passed around is merely the shuffling of money, with large chunks of it going outside of the community anyway.

Besides, what is local? Do we mean the township, the metro area, the county, state, or national economy? Certainly, microcapitalism is concerned with personal economy, that of a family unit, but beyond that where do regional boundaries matter? More focus should be on shortening the chain from producer to consumer than on geographic location.

There are of course exceptions: the most direct producer to consumer chain for produce is a local farmer, bypassing not only the store but also transportation companies. Local merchants who have developed their business around a marketable service are “producing” something that is added to the product they import. Expertise, service, consultations – these are the things a merchant must add, lest the become merely a leech on the production of others.

To build up a local economy, the locale must be producing some good or service that is exported outside the community. If the local economy is based on keeping their own money in the local economy by buying from local merchants, the economy is sickly. Silicon Valley need not worry about whether or not people “buy local” because the whole world buys things produced in their fertile region. Detroit used to not have to worry about buying local, but now even buying local cannot save a city’s economy when their chief export dries up.

There is on other exception: a national economy must also be seen as a “local” economy. Like the family unit, nations should strive to produce as much as they can for themselves, trading only what cannot be obtained easily in their location. A nation that only consumes, and reduces its own production, will slowly see its economy, and that of its citizens, rot away.