Are there real world examples of a shoe event horizon?

Question

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?

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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.

Answer 1

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.

Answer 2

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.

Answer 3

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.

Answer 4

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.

Answer 5

I would say that a "shoe event horizon" could be possible with other products. A positive feedback loop that cannot be interrupted(easily).

Management Event Horizon

There is an incentive when the pool of directors and upper level management is small to reduce the number of managers. This leaves more money for the remaining managers. The incentive to remove managers and directors is quite large. The incentive to add new managers is quite small.

However when upper management and the board of directors gets large enough managers have less incentive to prevent new people from becoming managers because each new manager would only shrink their take in bonuses and salary by a very small amount. This means that managers and the board of directors will actually try to increase their number in order to ease administrative burdens. However eventually any suggestion by the CEO to trim management or the board will be met with a calls to replace the CEO by the board, and managers trying to fight administrative reductions. At this point the company may loose profits, and managers may fire workers to justify salaries. Consultants and other managers may be hired, further worsening the corporations profit margin. This eventually results in a company very very top heavy with management, and few workers to support it.

At this point corporate restructuring may happen, and management styles may change either resulting in a highly managed company in a better position. The managers get paid less but there are more of them. Or if this goes badly and the company cannot improve its situation, the company may go out of business. The CEO and managers must either use incentives and superior market placement to support management or start cutting management. This can mean that the CEO is more likely to be removed if he is not being transparent with funds, and does not make the company profitable.

The concepts for coalition size in corporate management can be found in "The Dictators Handbook".

Alcohol and Gambling Event Horizon

Another such even horizon in some communities would be gambling and alcohol sales. This can be seen in some depressed desert areas in the united states. The areas were so depressed that people turned to alcohol as an escape. Unfortunately this also made them financially worse off. Eventually casino's and liquor sales would be one of the few businesses commonly associated with those areas.

Drug Event Horizon

Yet another "event horizon" is drug use. People who buy illegal street drugs are often depressed. The use of these drugs make the person more depressed later and more financially worse off. The individuals selling said drugs make less than minimum wage. The community gets poorer and the only viable businesses are local drug dealing. All of the money reaped leaves that community. This can be seen in Freakanomics.