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This is a famous quote from Douglas Adam's The Restaurant at the End of the Universe:

Many years ago this was a thriving, happy planet – people, cities, shops, a normal world. Except that on the high streets of these cities there were slightly more shoe shops than one might have thought necessary. And slowly, insidiously, the number of the shoe shops were increasing. It’s a well-known economic phenomenon but tragic to see it in operation, for the more shoe shops there were, the more shoes they had to make and the worse and more unwearable they became. And the worse they were to wear, the more people had to buy to keep themselves shod, and the more the shops proliferated, until the whole economy of the place passed what I believe is termed the Shoe Event Horizon, and it became no longer economically possible to build anything other than shoe shops. Result – collapse, ruin and famine.

Are there real world examples from history where a society's economy has become so mono-industrialised that it collapses? Does this situation have an alternative (more serious) name in economics?


I'm not sure if this will be a constructive question. A potential edit could be to ask if something like Ireland's potato famine is an example of the shoe event horizon.

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Detroit? Technological obsolesence and changing environments can certainly be linked to the rise and fall of a region's economic fortunes, especially when they are over-specialized. –  Jason Nichols Nov 19 at 18:37
    
Also, I think if you had cited Ricardo (regarding specialization and comparative advantage) as opposed to Adams, anonymous person would not have close-voted. :) –  Jason Nichols Nov 19 at 18:37
    
No good example comes to mind. Also, unclear what this is asking. That is, unclear that the "channel" of the shoe-overtaking-business is clear here. –  CompEcon Nov 19 at 18:57
    
I would expect that there would be some examples from developing economies which become overly dependent on a crop like coffee for example. Any ideas? –  curiousdannii Nov 20 at 0:59

4 Answers 4

According to David Ricardo's theory of comparative advantage, all regions should pursue specialization to an equilibrium point.

Beyond that point it would not be rational to continue developing a given industry.

That being said, many regions have seen their prosperity rise and fall as they "lost" their comparative advantage (especially in modern times as labor has no longer been considered the only factor input).

More accurately one could say globalization has opened up trade with markets that have even greater comparative advantage that may be the result of cheaper labor as opposed to invested capital or natural resources, rendering many regions less productive.

The American Rust Belt and Detroit spring to mind.

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The dutch disease is when an economy is so dominated by a single export industry that the success of that industry drives up the currency and makes the exports of other industries un-competitive. This drives some of the firms making other goods out of business.

Continuing this cycle can lead in the short term to even greater concentration of the economy in that industry.

If later the export industry experiences a significant shock, the broader economy also experiences that shock. This happens for two reasons:

  1. In a diversified economy some firms are experiencing positive shocks when others experience negative ones. In a concentrated economy it is less likely that the other industries will collectively experience an sufficient offsetting shock.
  2. A negative shock to the primary exporting industry is likely to depreciate the currency which should help other industries but shrinking capacity from the expansion will diminish other industries' ability to generate sufficient exports to offset the shock.

Further, if the industry responds by boosting output (like sometimes happens when oil prices fall and producers become desperate) this can make export prices fall further still, worsening the shock.

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In international trade, this is called immiserizing growth.

This occurs when a major producer of a commodity, call it coffee, produces so much coffee that it drives down the price of coffee faster than the rising quantity can make up for it. (This happens when the demand for coffee is "inelastic.") Then the country is worse off then BEFORE the increase in production occurred.

This happened to Brazil in the 1930s (see Celso Furtado, "The Economic Development of Brazil), and the "solution" was for the Brazilian government to buy "cheap" coffee, and store or burn it, to boost the price on international markets.

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This refers to the discussion on whether bubbles exist or not (look at the previous year nobel laureate's talks).

If you believe that bubbles might exist, the following can be the (simplified) story.

Take the Spanish housing market, under the Euro bubble. We saw that financed through low prices, an over investment into houses happened, paying workers in that industry high wages (due to the high demand).

  • People who owned houses saw increases in their income.
  • People observed an increase in prices, hence investing into housing
  • Since workers get higher wages, they can afford the houses

At some point, no one was buying houses anymore, the demand was satisfied. The housing industry didn't see this coming [1], and collapsed. People got fired. Oversupply of housing implied a crash of housing prices, and those who had houses on their balance sheets lost a lot of wealth.

[1]: You see, that's the gist: We needed irrational expectations. Otherwise, by backward induction, this bubble wouldn't have happened the way I told it here.

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Bubbles are easy to understand and frequent. I was more interested in actual examples of mono-industrialisation though. –  curiousdannii Nov 20 at 0:49

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