The Myth of State Economies Undermines the Development of Effective Economic Policies

“In other words, if we think of state borders as physical barriers, do we also irrationally imagine that these borders protect us in some way? …

The idea was that the dark line would reinforce the biased notion that borders are impermeable—and that states are therefore meaningful categories to rely on for decision making. …

As reported in October in the online version of the journal Psychological Science, when the radioactive waste was being stored in neighboring Nevada, residents of Salt Lake City perceived much greater risk of contamination if the border was a light, dotted line. In their minds, that light, sketchy border minimized the distinction between Utah and Nevada—and thus increased their perception of risk. The thick, dark border offered psych­ological protection from radioactivity.”

 Wray Herbert, Border Bias and Our Perception of Risk, Scientific American, February 21, 2011.


The use of the term “state economy”, and even more to the point, terms like “Michigan economy” and “Nevada economy” by economists, economic policy experts, and policy makers is common and has the same psychological effect as drawing a dark border around a state.  The use of such terms reinforces and perpetuates the illusions that state boundaries have economic importance and that state economic policies have the power to change economic outcomes.

A state economy is nothing more than an artifact of geopolitical decisions made long ago.  Like the mix of bird species in a state, the mix of economic activities and relationships in a state is little more than an arbitrary consequence of the intersection between where a state boundary was drawn and where particular economic activities and relationships later developed.  Just as habitats expand and contract and change shape and location with time, so too do the economic boundaries defined by the distributions of economic activities and economic relationships among people.  But, state boundaries almost always stay put.

There is now only one economy, the world economy.  State economies exist only in our minds.  So too, the power of state governments to improve investment and employment outcomes exists only in our minds.