The law of gravity is unyielding and acts instantly; if a child jumps out a fifth story window, in seconds, the child would be history upon hitting the hard ground below. The "laws" governing economics and investment are equally brutal and unyielding. However, unlike the law of gravity, they work slowly but surely over time. A simplified version of the laws of economics and investment would say: Investment and businesses go where there is business growth as well as protection for the investment. Naturally, a riot that destroys local businesses sends a loud and clear message: "Your investment and businesses are not protected here."
Riots cause self-inflicted economic wounds; the wounds may not heal at all or may take more than a generation to heal. The laws of economics and investment work slowly thereby fooling many to think that the laws of economics are a myth.
In one of my university courses, my students develop business plans for new products. Recently, two of them won top awards totaling $12,000 for their business plans at a university-wide contest for student business plans. They spent countless hours to bring their business plans this far; yet, have countless months of work ahead of them before their winning business plans could become real businesses. Exactly a week after their awards, I witnessed on national TV some of the 350 or so businesses destroyed in Baltimore; the years of planning and hard work of the owners, just to start their businesses, went up in smoke.
Baltimore Police Commissioner Anthony Batts, who grew up in South Los Angeles, was recently quoted as saying that parts of that west-coast city never recovered after the 1965 Watts Riots, and he hopes Baltimore's infrastructure would not suffer the same fate. Obviously, he has seen the negative side of the laws of economics in action in South L.A.
Businesses, while serving various stakeholders, create wealth and income for the local community. It takes considerable effort by the leaders of a city to bring new businesses to locate in their city for creating wealth for all stakeholders, including the surrounding community. In one of the cities included in the Forbes Magazine's "25 Best Places to Retire," city leaders are constantly developing business-friendly programs and are reaching out to the business community not only the U.S. but also overseas to attract new businesses to their city for creating wealth and a better community for everyone; Forbes recognition is one indication the city's efforts are paying off.
When city police appear passive, weak, ineffective and are unable to control lawlessness toward businesses on national TV, the city sends the strongest negative signal to investors. Rioters and their supporters in Baltimore, Ferguson and other cities may mistakenly believe that the burning and looting of their local businesses may make their city a better place to live. Riots make cities radioactive: businesses and investors avoid such radioactive cities, and consequently, employment opportunities dissolve; everyone loses, especially the younger generation.
Being a large business, the CVS store burned down in Baltimore may have the wherewithal to rebuild and restart after the riot in the community. However, small businesses damaged in a riot may not be able to do so.
Small business owners, faced with rebuilding after a riot, may be dissuaded by the increase in insurance premium to operate in the city that was a victim of riots and police passivity. Reopening a riot-damaged business without insurance is never an option.
The man on the street may not realize that all small businesses are not thriving profit-making businesses. In economically depressed cities such as Baltimore and Ferguson, there may be many marginally surviving small businesses that cannot take the economic blows landed by a riot and come back. They may not have access to investments or grants. Their owners may think it is unwise to take on new loans to rebuild their business in the same location, even if it is a low-interest loan. Would you borrow to reinvest in a structure in a city, whose citizens burned and looted your small business although you paid taxes to the city over many years for reasonable police protection?
Prudent economic thinking would compel small business owners to go elsewhere if they want to invest once again. Governor Larry Hogan of Maryland said that local law enforcement at Baltimore was simply "overwhelmed" by the rioters on Monday. This message cannot be encouraging to investors, businesses and employers. This message can only trigger economic forces to work against the city; the laws governing economics and investment can be brutal and unforgiving.
Paul Swamidass is the Thomas Walter Professor of Operations Management at the Auburn University (Ala.) Raymond J. Harbert College of Business. He is also associated with a non-profit organization assisting inner-city, at-risk children. His email is email@example.com.