Before the second world war, there were several myths about Southern California's economy. These myths echo still in the urban rivalries that jostle American life. The first myth said, sarcastically, there are two kinds of people in Southern California--those who buy real estate and those who sell real estate. The point of this myth is that Southern California's economy didn't really produce anything, it only recycled the same money around the economy; no growth could, therefore, occur. The second myth, which offered a solution to the first myth, said that Southern California was settled by retirees, who brought nothing to the region and its economy except their retirement money. The retirement money was the basis for real estate expansion. The region's real estate, therefore, amounted to a Ponzi scheme. Southern California was a bubble without substance, an empty fantasy of self-promotion. It could never rival the great American cities of broad shoulders, such as Pittsburgh and Chicago, or the commercial and cultural capitals of New York and Philadelphia, which were also great manufacturing centers.
The myths were nasty put-downs and completely false. For Southern California was, before the late 1930s, a remarkable economic engine. It was a dual economy. The first economy was a local economy that produced manufactured and agricultural goods for the local population. This local economy was not the basis for the region's growth, however. The growth economy was based on exports. Three exports to the rest of the country and to the world returned the revenue that built the region: agriculture, mainly citrus; movies; and aircraft. Oil was also important, but it was not originally an export product, intended instead for local consumption.
Agriculture and citrus were the first export industries. In the 1880s, the cow counties, as they were called, Los Angeles and neighbors, supplied cattle and other agricultural commodities, truck vegetables, and fruit to San Francisco, competing with central valley producers. These were not lucrative exports and did not bring back the capital that was needed to build a civic and industrial infrastructure of growth. That capital was provided by citrus--navel and Valencia oranges and lemons.
Until the mid-1930s, when citrus prices were ruined by the economics of the depression and the new labor law, citrus exported to the Midwest and Eastern cities returned capital that was invested in the region. Citrus money developed the water resources, the water delivery system, the land survey and development, the roads, and, most importantly, the "citrus" towns that dotted the San Fernando, San Gabriel, San Bernardino, and Santa Ana River valleys. Pasadena, Pomona, Fillmore, San Bernardino, Riverside, Corona, Fullerton, Anaheim, and Escondido were developed with a social infrastructure of civil engineers, mechanical engineers, lawyers, bankers, surveyors, accountants, business entrepreneurs, scientists, doctors, teachers, and other professionals who were paid, ultimately, by citrus money. The institutions necessary for civic settlement and growth--city and country government, schools and colleges, vocational schools, banks, hospitals, newspapers, machinery manufacturers, factories, construction contractors, builders, and land developers, labor agencies, trunk railroads and street car railroads were developed for and paid by citrus capital. It was the citrus bourgeoisie that brought the industrial revolution of factories and mass production to the region in the packing houses, self-consciously modeled as factories, that formed the center of each of the citrus towns. On their basis, the other great agricultural industries of the region were built--grapes, olives, avocados, cherries, nuts. Southern California became an "agricultural wonderland", as Carey McWilliams put it.
The citrus bourgeoisie were self-conscious in their understanding of their project, building Southern California into one of the great regional economies of the world. They understood that, to be prosperous and to grow, the region needed to manufacture valuable products that could be exported over long distances to customers who would pay premium prices for them. Citrus provided the first of these manufactured, highly price objects. The citrus bourgeoisie understood that the region could not be prosperous for all its residents and grow only as a local economy or a service economy.
This rich, regionally distributed, export economy was in place by 1914, and was the basis for the region's growth before the 1930s. After 1914, movies, oil, and aircraft exploded upon the industrial scene, catapulting Los Angeles City to national prominence. The movies and aircraft created a public relations reputation that forever identified Los Angeles city as the economic power of the region; but that city did achieve that role until the 1930s and 1940s, when aircraft and war industries poured into the region, transforming it.
It was the citrus industry's development of land as profitable enterprise that made land valuable in Southern California. Land values rose, because the products they produced were valuable. Investors outside the region realized that investment was a good opportunity, so they invested money in the region. The prosperity of the region attracted people, not just money, especially people who had little to offer the economy except their labor. Mexican and black communities prospered and grew. They replaced the Chinatowns, which had provided the original citrus labor before 1914.
The presence of these new populations was one of the motivations for an effort of the elites to expand industrial manufacturing throughout the region in the 1920s. They understood that Los Angeles' destiny was not to remain a predominantly white city. They understood that the continued prosperity of the city and region required high wage employment for these new workers. In such organizations as the Los Angeles Chamber of Commerce, they developed a strategy for expanding industrialization. In their vision, Los Angeles would become a "smokeless Pittsburgh," manufacturing high quality industrial products that could be transported over long distances and command high prices, thus providing the basis for both good return on investment and high wages. To power the new, smokeless factories and illuminate the laborers homes, they needed electricity, and they needed more water. The result was the great campaigns of the 1920s and early 1930s to expand the electricity supply and water supply for the region--and it was a regional effort. Los Angeles could not have done it by itself and knew that.
This historical saga was interrupted and transformed by World War Two. With a great war in the Pacific, Los Angeles became a center of aircraft and a launching point for the defeat of the Japanese empire. (San Diego, San Francisco, and Seattle likewise were transformed by the war.) From 1941 through the late 1980s, Southern California became the nation's center of aircraft and missile research, development, and manufacturing. The regional elite did not have to go out and beat the drums to try to get manufacturing industries to locate in the region; it exploded here. Greater Los Angeles became the nation's largest manufacturing region. In most of the former citrus towns, aircraft and aircraft component manufacturing became the biggest industrial enterprises. Suburbs for the laborers crept upon agricultural land. Agriculture shifted to the Coachella and Central Valleys.
What lessons can we derived from this story? The lessons are two. First, the myths are historical economic truths, but mythological because they were misapplied to Southern California. It is true that an isolated local economy, producing for itself, without trade, cannot grow and cannot become rich. And it is true that if it grows by using outside investment to boost prices, rather than investing to boost production or product quality, the growth is a Ponzi scheme. Second, Southern California's founding generations understood both these points. Self-consciously, deliberately, they built an export economy of manufactured products, considering agricultural products as factory products. Their success was not without debate, not without difficulty, not without experimentation, not without failures; but it was the basis for regional growth and democratic prosperity.
Ray Bradbury was asked, what would it be like to start a colony on the moon? He answered, we already have; it's called Southern California. Southern California is the example of how a great society and economy is built on a region with zero natural assets many miles from anywhere. It contrasts with San Francisco, which started life with stupendous natural riches--a great harbor and proximity to the gold fields. The only assets brought to Southern California were the brains and determination of its settlers. Capital is useless without intelligence to invest, so brains precedes capital in importance.
Southern California is an instance of capitalist developmental economics. Of course, Southern California is not the only example of such development, but this region's history reveals the keys to economic prosperity and success. The rules of the development game changed fundamentally in the 1930s and 1940s. A new kind of economy emerged in response to the expansion of government regulation in the 1930s and the war, the change in technology after the war, and the rise of the service economy. We think the rules of the old development game still apply, that they can be conceptually transferred to a service economy not powered by manufacturing, as if productivity in a legal practice or a hospital is the same, in its qualities, its value added, and its meaning to society, as productivity in a packing house or a metal fabrication plant. For current economic theory, it's all just a matter of inputs and outputs, regardless of what is "made". But do we really know that all "production" is qualitatively the same, to be described by the same mathematical formula? I don't think we do know, in fact, that a governmentally regulated, welfare service economy will support the same level of democratically distributed prosperity as an economy that manufactures tangible products.
As America faces its economic destiny in the current housing, financial, and banking meltdown, the nation needs to ask itself a question derived from this story about Southern California. To what extent is a service economy, that does not produce tangible goods, a Ponzi scheme? Is this government regulated, welfare service economy the Ponzi scheme that has now collapsed? Is the housing, financial, banking crisis only a symptom, not a cause?
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Note. See my discussions, organized under the topic heading, "Financial Crisis".
Revised.
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