The New Humanities

principles of economic life
(Random House: 1984)

“When a technological enterprise like the design of a machine or a building runs into trouble, the appropriate response can be ‘Back to the drawing board’.... However, in the face of so many nasty surprises, arising in so many different circumstances and under so many different regimes, we must be suspicious that some basic assumption or other is in error, most likely an assumption so much taken for granted that it escapes identification and skepticism. Macro-economic theory does contain such an assumption. It is the idea that national economies are useful and salient entities for understanding how economic life works, and what its structure may be: that national economies and not some other entity provide the fundamental data for macro-economic analysis. The assumption is about four centuries old, coming down to us from the early mercantile economists, who happened to be preoccupied with the rivalries of European powers.... Nations are political and military entities, and so are blocs of nations. But it doesn’t necessarily follow from this that they are also the basic, salient entities of economic life, or that they are particularly useful for probing the mysteries of economic structure, the reasons for the rise and decline of wealth. Indeed, the failure of national governments and blocs of nations to force economic life to do their bidding suggests some sort of essential irrelevance. It also affronts common sense, if nothing else, to think of units as disparate as, say, Singapore and the United States, or Ecuador and the Soviet Union, or the Netherlands and Canada, as economic common denominators. All they really have in common is the political fact of sovereignty. [But,] once we remove the blinders of mercantilist tautology and try looking at the real economic world in its own right, rather than as a dependent artifact of politics, we can’t avoid seeing that most nations are composed of collections or grab bags of very different economies, rich regions and poor ones within the same nation. We can’t avoid seeing, too, that among the various types of economies, cities are unique in their abilities to shape and reshape the economies of other settlements.... Distinctions between city economies and the potpourris we call national economies are important, not only for getting a grip on realities: they are of the essence where practical attempts to reshape economic life are concerned. For example, failures to make such distinctions are directly responsible for many wildly expensive economic debacles in backward countries, debacles which have resulted from the failure to observe that the all-important function of import-replacing or import-substitution is in real life specifically a city function, rather than something a ‘national economy’ can be made to do.”

(Jacobs, pp. 29-35)

When intellectual historians come to write on the late twentieth century - in say, another hundred years - it wouldn’t at all surprise me if they were to argue that the most important intellectual of that (overly specialized & ideological) era was Jane Jacobs...even if her works were mostly misrepresented by the specialists of the day. Not content with exposing the illusions of urban planning in her first work, The Death and Life of Great American Cities, she then followed this up with works rethinking some of the basic assumptions of economics and moral philosophy from the ground up...injecting a much-needed empiricist /comparativist streak of common sense into those overly abstract disciplines. Trouble is, she has been basically ignored by the specialists of those regions, even though her arguments are clear, sensible, and backed by a large amount of very convincing evidence.

Still...given that intellectual endeavours advance “funeral by funeral”, I have no doubt that the compelling ideas represented in this book will eventually triumph...although, I do doubt she’ll ever be forgiven for her bluntness re the state of the discipline when she wrote. Funny thing is, it’s all of twenty-five years later...and this dismissal still rings true:

“Macroeconomics - large-scale economics - is the branch of learning entrusted with the theory and practice of understanding and fostering national and international economies. It is a shambles. Its undoing was the good fortune of being believed in and acted upon in a big way. We think of the experiments of particle physicists and space explorers as being extraordinarily expensive, and so they are. But the costs are as nothing compared with the incomprehensibly huge resources that banks, industries, governments, and international institutions like the World Bank, the International Monetary Fund and the United Nations have poured into tests of macro-economic theory. Never has a science, or supposed science, been so generously indulged. And never have experiments left in their wake more wreckage, unpleasant surprises, blasted hopes and confusion, to the point that the question seriously arises whether the wreckage is reparable; if it is, certainly not with more of the same. Failures can help set us straight if we attend to what they tell us about realities. But observation of realities has never, to put it mildly, been one of the strengths of economic development theory.”

(Jacobs, pp.6-7)

When this was written, stagflation was the menace, and many were the works written to explain how it worked...or, rather, didn’t work. Of these, the historical view from David Hackett Fischer, the rational choice view from Mancur Olson, and the urbanist approach by Jacobs all dovetail (in their different ways), to suggest how & why such a condition emerges - as well as why it has proven so difficult to shake in truth, even if that has often been obscured by other factors. For, as Jacobs argues, stagflation (rather than growth) is actually the default economic condition of mankind...

“We [should] think of stagflation as a coherent condition in its own right: a condition of high prices and too little work. The moment we think of it so, we instantly realize that this condition is not abnormal or unprecedented. Rather, it is the normal and ordinary condition to be found in poor and backward economies the world over...[albeit] we often fail to think of prices in poor, backward, long-stagnated economies as being wildly inflated because, to us, those prices seem low.... [Moreover,] stagflation is not as unprecedented or abnormal as we may suppose in the United States. One need only look at economic life in the poor county seats that string through Appalachia, or at life in any other poor and backward pockets of the country to realize that high prices and scant work have long been normal in such places.... [But] only recently have these twin afflictions begun victimizing the country as a whole. That is what is abnormal.... [However,] it is not just a problem of inflation to be gotten under control, along with a problem of unemployment to be dealt with by mastering inflation, or vice versa. It is a condition in its own right, the condition of sliding into profound economic decline.”

(Jacobs, pp.24-7)

Now, given Jacobs’ status as an urbanist, it is perhaps to be expected that she will downplay non-urban economic processes and, to a degree, this is true. Yet the picture she paints of economic growth is so much more coherent (and plausible, and supported by the historical record) than that which prevails in mainstream economic circles, that it is surely carping to say she is overly city-centric. For this remains the best analysis of economic development available, by far:

“Cities that replace imports significantly replace not only finished goods but, concurrently, many, many items of producers’ goods and services. They do it in swiftly emerging, logical chains.... The process pays for itself as it goes along. When Tokyo went into the bicycle business, first came repair work cannibalizing imported bicycles, then manufacture of some of the parts most in demand for repair work, then manufacture of still more parts, finally assembly of whole, Tokyo-made bicycles. And almost as soon as Tokyo began exporting bicycles to other Japanese cities, there arose in some of those customer cities much the same process.... Import replacing is now...and always has been, a city process, for good practical reasons. In the first place, the replacement of former imports is impossible to achieve economically, skilfully and flexibly - meaning in ways suitable for the time and place - except in a settlement that is already versatile enough at production to possess the necessary foundation for the new and added production work. Cities can build up that kind of versatility, often very rapidly, in part as a result of their already existing export work (if it is reasonably diversified), in part as a result of their previous simpler achievements in import-replacing, and in part through the complex symbiotic relationships formed among their various producers. In the second place, city markets - whether of consumers or producers - are at once diverse and concentrated. These two qualities of the local market make production of many kinds of goods and services economically feasible that would not be feasible in rural places, company towns, or little market towns, and most especially so at the time production of former imports is just starting up, and getting a first foothold in its markets.”

(Jacobs, pp.38-9)

“Economic life develops by grace of innovating: it expands by grace of import-replacing. These two master economic processes are closely related, both being functions of city economies. Furthermore, successful import-replacing often entails adaptations in design, materials, or methods of production, and these require innovating and improvising, especially of producers’ goods and services.... Tight-packed bunches of symbiotic enterprises...huge collections of little firms, the symbiosis, the ease of breakaways, the flexibility, the economies, efficiencies and adaptiveness - are precisely the realities that, among other things, have always made successful and significant import-replacing a process realizable only in cities and their nearby hinterlands.... But for the most part, city import-replacing is not all that economically glamorous. The replacements are usually small initially, frequently involve items that in themselves are frivolous, and in many cases absolutely imitative - but nevertheless, in the aggregate, they add up to momentous economic forces.... [For] any settlement that becomes good at import-replacing becomes a city. And any city that repeatedly experiences, from time to time, explosive episodes of import-replacing keeps its economy up-to-date, and helps keep itself capable of casting forth streams of innovative export work. Why ‘explosive’ and why ‘episodes’? In real life, whenever import-replacing occurs significantly at all, it occurs in explosive episodes because it works as a chain reaction. The process feeds itself, and once well under way, does not die down in a given city until all the imports that are economically feasible to replace at that time and in that place have been replaced.... [And] when a city replaces imports with its own production, other settlements, mostly other cities, lose sales accordingly. However, these other settlements - either the same ones which have lost export sales or different ones - gain an equivalent value of new export work. This is because an import-replacing city does not, upon replacing former imports, import less than it otherwise would, but shifts to other purchases in lieu of what it no longer needs from the outside. Economic life as a whole has expanded to the extent that the import-replacing city has everything it formerly had, plus its complement of new and different imports. Indeed, as far as I can see, city import-replacing is in this way at the root of all economic expansion.”

(Jacobs, pp.39-42)

“It is important, if we are to understand the rise and decline of wealth, for us not to be fuzzy about an abstraction like ‘expansion’ but to be concrete and specific about how expansion occurs and of what it consists. The expansion that derives from city import-replacing consists specifically of these five forms of growth: abruptly enlarged city markets for new and different imports consisting largely of rural goods and of innovations being produced in other cities; abruptly increased numbers and kinds of jobs in the import-replacing city; increased transplants of city work into non-urban locations as older enterprises are crowded out; new uses uses for technology, particularly to increase rural production and productivity; and growth of city capital. These five great forces exert far-reaching effects outside of import-replacing cities as well as within them, ultimately rippling out even to the remotest places.... [But,] in the hinterlands of some cities - beginning just beyond their suburbs - rural, industrial and commercial work places are all mixed up together. Such city regions are unique, being the richest, densest, and most intricate of all types of economies, except for cities themselves. City regions are not defined by natural boundaries, because they are wholly the artifacts of the cities at their nuclei; the boundaries move out - or halt - only as city economic energy dictates.... [And] by no means do all cities generate city regions...[for] cities good at working up export activities or drawing visitors or serving as cultural, political or religious capitals do not necessarily generate city regions. Something more than exporting or administration is required. That something is the capacity of the city to replace wide ranges of its imports exuberantly and repeatedly...[for] the very mechanics of city import-replacing automatically decree the formation of city regions.”

(Jacobs, pp.42-7)

Arguably, Jacobs was offering us a complexity theory approach to macroeconomics before people like Brian Arthur had got past increasing returns...and she certainly wasn’t thanked for it! Not that she was modelling these systems...merely applying the same analytical eye that had worked so well for her as an urbanist. Still, I have little doubt that her basic approach will be vindicated - eventually - since it makes sense of the historical record, and that is no small ask. It also makes strong sense of the mosaic of economic geography - and with comparatively few assumptions, too...albeit it also suggests that we are wasting our time trying to kick-start development in most places, sans any bottom-up network diversity...

Now, we may not like that conclusion...but, I’d have to say it’s strongly suggested by the disastrous history of “developmental” initiatives - which (in scientific, if not political terms) ought really to count in Jacobs’ favour...

“Upon its own hinterland...all the forces of a city are brought together and in roughly reasonable balance with one another. Not so when those same forces reach into distant regions, as they always do. It is as if the net of complete economic ties with which a city binds its own hinterland unravels at the borders of a city region. The various strands - markets, jobs, technology, transplants, capital - separate from the mesh and take off by themselves, each in its own idiosyncratic directions. In this fashion, cities shape stunted and bizarre economies in distant regions. The most important among such economic grotesques are supply regions. They are disproportionately shaped by the markets of distant cities. Supply regions are often poor, and thus the stultification of their economies is often attributed to their poverty, but a rich supply region is as stunted and stultified as a poor one [for] the shortcomings of these regions go deeper than poverty. Indeed, sooner or later the shortcomings compel poverty.... The reason such regions are specialized and narrow is that, in the first place, their production for others so overwhelmingly outweighs production for themselves. That unbalance is exaggerated even further by two peculiarities of the distant city markets on which supply regions depend.... First, the distant markets [are] highly selective about what they want.... Second, although the distant markets [are] composed of the markets of different cities and city regions, they [tend to be] so much in agreement at to what they want from [supply regions] that in effect they act as one. [And] this concerted selectivity is an enormously powerful force.”

(Jacobs, pp.59-63)

“Supply economies have their intellectual enthusiasts, on the grounds that their specialities represent division of labour at regional or international scale, that division of labour is efficient, and therefore that supply economies form and persist because the arrangement is efficient.... [But] supply economies are not efficient.... That is why they are commonly so poor, or else are subsidized. To be sure, their specialities are sometimes (not always) efficiently produced. But that is not the same as saying these economies are efficient. An economy that contains few different sorts of niches for people’s differing skills, interests, and imaginations is not efficient. An economy that is unresourceful and unadaptable is not efficient. An economy that can fill few of the needs of its own people and producers is not efficient. To say that the economy of Uruguay, ‘the Switzerland of South America’ was more efficient because more specialized than the economy of Switzerland is to stand reality on its head.”

(Jacobs, pp.69-70)

Ihave concentrated here, as is usual, on the theories presented in the book...rather than citing from the wealth of case studies and examples that Jacobs is so liberal with. However, I must (briefly) depart from this model here, to quote her list of the alternate fates that might have befallen the Japanese village of Shinohata, had it not had the surpassingly good fortune to become part of the expanding city region of Greater Tokyo in recent years. For, in this brief listing, she sums up so much that is well explained in her work...and either ignored or misunderstood in all of the conventional schools of development economics...

“The fates that befall traditional rural settlements tend to be drab and dispiriting when only one or another of the great city forces impinges upon them. Changing markets might well have meant worse poverty for Shinohata, if the changes only meant declining demand for its traditional cash crops, as indeed markets for silk cocoons have declined. The pull of distant city jobs might simply have depopulated it.... A heavy influx of city technology to save farm labor, taken only by itself, might have left most of its people idle. A single transplanted city factory might have made Shinohata a company town. Or it might have come mainly to live on outside money, either earnings sent back home by sons, daughters, or husbands who had left, or welfare subsidies of some sort. In the event, however...the moment Tokyo’s expanding city region reached out to embrace Shinohata, all five forces of expansion came to bear on it, each force interplaying with the others.”

(Jacobs, p.49)

Jacobs has never suffered fools gladly, and she is - perhaps - at her best when tackling the usual pieties of development - transfers, of various sorts, to underdeveloped regions. And...given that she had provided us w/a genuinely strong argument why such do not work, it is simply a scandal that governments continue to pursue such dead-end policies. But they do...

“When city enterprises transplant themselves into a city’s own hinterland, they balance their needs to be close to their suppliers and customers against their conflicting aims of escaping the costs of city space, and the congestion or other disadvantages of the city.... In short, many enterprises that a city generates can move, but they can’t move far. They are tethered to relationships with other producers, or customers, or both. This is why, in the aggregate, city regions produce amply and diversely for their own people and producers, as well as for others. Conversely, freedom from those relationships, the very freedom which makes an industry capable of moving to a distant region without a city, automatically creates transplant economies that do not produce much for themselves, no matter how successful in attracting industries.... [So,] when transplants leave...they leave behind...only economic vacuums, along with soaring unemployment.... No web of symbiotic relationships remains.... [Similarly,] loans, grants, and subsidies sent into regions lacking vigorous cities can shape inert, unbalanced, or permanently dependent regions, but are useless for creating self-generating economies - which is to say, useless for creating import-replacing cities. The failure is built into the fact that they are loans, grants, and subsidies; those golden eggs, being only gold, don’t hatch goslings.”

(Jacobs, pp.97-110)

“Development is a do-it-yourself process; for any economy it is either do it yourself, or don’t develop. All of today’s highly developed economies were backward at one time, yet transcended that condition. Their accumulated experience demonstrates how the thing is actually done. Historically, we find two major patterns, or motifs: reliance of backward cities upon one another, and economic improvisation. [Thus,] the Shah [of Iran] and Peter [the Great, of Russia] were as far off the track as it is possible to be, trying as they did to wrest development from their simplistic two-way trade with much more advanced economies, and relying as they did upon already developed methods and products, thereby short-cutting indigenous trial, error, and improvisation...[for] it is fatal if backward cities confine themselves to that kind of trade, for such trade is only a springboard for embarking on a different kind of intercity trade: trade with cities in much the same circumstances and stage of development as themselves.... Otherwise, the gulf between what they import and what they can replace with their own production is too great to be bridged....[And] mutual city import-replacing stimulates markets for city-made innovations.... This mechanism is the means by which streams of innovations are injected into everyday economic life. Then in their turn they are replaced with local production, opening up new city markets for still more innovations. What this means is that the trade among vigorously developing cities is volatile, continually changing in content as cities create new kinds of exports for one another, and then in due course repeatedly replace many of them.”

(Jacobs, pp.140-4)

“The backward cities of medieval Europe had to improvise because they had little choice. Backward cities today must improvise just as surely because, for one thing, they have...to bring the price of what they make into the range of what they their own people and enterprises - and people and enterprises in other backward cities - can afford. One advantage they usually have is cheap labor, but this is a practical advantage only in cases where labor-intensive methods of production can be improvised.... Smallness of enterprises, as in the Japanese bicycle-manufacturing development, is an asset because smallness cuts down administrative and other overhead costs both in individual enterprises and in the aggregate...[and] improvised materials often cut costs by letting producers put to use what is at hand or can be gotten cheaply.... [Moreover,] apart from the direct practical advantages of improvisation, the practice itself fosters a state of mind essential to all economic development, no matter what stage development has reached at the time. The practice of improvising, in itself, fosters delight in pulling it off successfully and, most important, faith in the idea that if one improvisation doesn’t work out, another likely can be found that will. Invention, practical problem solving, improvisation and innovation are all part and parcel of one another...[and] all innovations, all new ways economizing on materials, including energy, are inescapably masses of improvisations and experiments, some successful and some not, combined with imitations of what has already been achieved. Thus, to buy a developed economy...or to sell or give the trappings of progress to backward economies, under the pretence of bestowing development, fails to work not only because the development, such as it is, takes place somewhere else entirely, but also because the transactions denigrate and discourage rather than foster a basic practice of all true and creative development work.... [And,] paradoxically, appropriate technology for backward cities can sometimes be the most radical and freshest technology. That is because new things...tend to start with new simplicities. Backward cities, in the nature of things, lack some of the great overburdens of elaborated and rococo ways of doing things which have evolved in advanced cities: overburdens that can stifle and discourage fresh departures, simply because the existing ways exist, and because so much has been invested in them.”

(Jacobs, pp.149-54)

The most radical aspect of the work, however, is her critique of monetary union. However, it is actually an entirely orthodox conclusion...that is, if you accept her critique of the nation as a natural macroeconomic unit. Trouble is, it goes directly against our current pieties, and so requires that readers will actually think through the issue in toto - perhaps a little too much to ask?

Nonetheless, it makes sense - as does the rest of the book - even if it insists we must recast much of our economic thought. But, if we did...promoting innovative small business networks as against top-heavy market power, using local currencies rather than tariffs and export subsidies, and encouraging genuinely bottom-up development, I suspect that we’d all be (pleasantly) surprised by the result. And, even without us doing so, at least she has given us some real insight into the sources of economic life

“We must suppose that the very earliest proto-cities and cities, trad[ed] with each other in prehistoric times...[and] unmediated by currency, bartered goods would have fluctuated sensitively in value, relative to one another.... Once cities invented currencies, at first each had its own; at any rate, the very earliest city-states of which we have knowledge in Mediterranean Europe, the Near East, China and India created their own currencies, and circulated them in trade.... Even the Roman Empire only gradually eliminated the non-Roman currencies of its conquered provinces and dependencies...[and] in early medieval Europe, city currencies once again became the norm...and indeed multiplied as European economic life itself developed with the multiplying of cities...and many such currencies persisted even into recent times.... Today we take it for granted that the elimination of multitudinous currencies in favor of fewer national or imperial currencies represents economic progress, and promotes the stability of economic life. But this conventional belief is at least worth questioning in view of the function that currencies serve as economic feedback controls. I am going to argue that national or imperial currencies give faulty and destructive feedback to city economies, and that this in turn leads to profound structural economic flaws, some of which cannot be overcome [within the current system] no matter how hard we try.”

(Jacobs, pp.156-8)

“As we all know, when a nation’s currency declines in value relative to currencies of other nations with which it trades, theoretically the very decline itself ought to help correct the nation’s economy. Automatically, its exports become cheaper to customer nations, hence its export sales should increase; and at the same time, its imports automatically become more expensive, and this should help its manufacturers. Theoretically, then, a declining national currency ought to work automatically like both an export subsidy and a tariff, coming into play precisely when a nation begins to run a deficit...because it is exporting too little and importing too much. Furthermore, this automatic export subsidy and tariff ought to remain in play precisely as long as it is needed, no longer. If that were indeed the effect that national-currency fluctuations had, they would be elegant examples of feedback control.”

“Whichever city in a nation happens to be contributing most heavily to the international export trade is apt to be the city whose needs are best served by the national currency.... [However,] if one city and its region gets an edge of that sort, even a small edge, we must expect that the advantage...must logically be self-intensifying and self-reinforcing, because the more economically successful that city is...the more closely the feedback from the national currency will suit that specific city. But it won’t coincide with other cities’ needs and the timing necessary and natural to them; it may even contradict them outright, certainly must deaden them.... What I have been presenting is a hypothesis. If it is correct, what we should expect to find in a nation with a large international trade in city goods is not a nation with many city regions - as one might offhand expect - but rather a nation with one overwhelmingly important city and city region...[which] would become increasingly dominant economically.... That is the pattern the feedback anomaly I have been describing ought logically to produce, and that is indeed the pattern that typically exists, and grows more marked with the passage of time.... [Moreover,] the pattern is distinctly a national phenomenon...[for] it seems as though, in nations with very different histories, populations and geographical sizes, some force is bent upon transforming multicity nations into something resembling city-states, that is, states overwhelmingly dominated by one city region and its city or cities. That force, if I am correct, is the faulty feedback provided by the consolidated national currency.”

(Jacobs, pp.172-5)

Jane Jacobs' Cities and the Wealth of Nations remains a truly key work, even a quarter century after publication, since it clearly explains much about economic life - particularly at the foundations - that no other theory has even pretended to tackle. Moreover, it does so based upon a wealth of detailed comparative work, of the sort that economists have generally ignored in their love of abstract modelling. As Jacobs shows, much that seems mysterious about macroeconomics can be rendered tractable by refocusing upon cities - rather than nations - as the fundamental unit at that level and, whilst an interest in economic networks/geography is now much more mainstream than when she wrote, the fundamental insight here still remains entirely alien to the economics profession - meaning that they’ll continue to get it wrong...

Read in conjunction w/Olson’s The Rise and Decline of Nations, these two books offer us our best guide to the strong determinants in economic history - particularly Jacobs on the rise, and Olson on the fall - albeit there seems to be no real recognition of this...probably since economists dismiss Jacobs unread (as several brief “critiques” of her work have embarrassingly shown) and few outside economics circles are familiar w/Olson. Just perhaps, one day, we might attempt to remove our professional blinkers re this one? If not, then I have little doubt macroeconomics will continue to sink into its v.public slough, having failed to ask the most necessary question...

“Thinking in terms of national economies, [economists] naturally think of import-replacing or import-substitution as a process involving only foreign imports, blinded to the fact that replacements of domestic imports are quite as important to the expansion and development of economic life, and often more so. A city economy which does not or cannot replace domestic imports with its own production is feeble at best, and helpless at worst, when it comes to replacing foreign imports. So little is this acknowledged, although the realities are there for all to see, that we do not even have a word meaning ‘both the domestic and foreign purchases alike’ of a city or of any other settlement. Too bad, because in the workings of a city’s economy it make no inherent difference which of its imports, or how many, originate within its own country.... [For] none of this can we comprehend at all by dwelling on theories about abstracted supply and demand chasing themselves around in the amorphous blurs known as national economies.”

(Jacobs, pp.43-4)