Jane Jacobs, the Economist
Jane Jacobs, the Economist: A Review of "Cities and the Wealth of Nations"
Jane Jacobs at a press conference in 1961.
Jane Jacobs is a beloved figure by many urbanists for her fiery opposition to Robert Moses’ freeway plans, as well as her magnum opus, The Death and Life of Great American Cities (1961). However, her lesser-known works cover a broad range of topics, including economic analysis. I had the chance to read one of these economic books and thought I’d synthesize and share some of the really big ideas I got from her analysis.
Jane Jacobs’ 1984 book, Cities and the Wealth of Nations, is a fascinating document for those interested in urban economics, development economics, and heterodox economic theory. It is a follow-up book to her first economic-centric book in 1969, The Economy of Cities (which, admittedly, I have not had a chance to read). It utilizes case studies of nations and cities to explain what drives economic growth, why traditional economic development policies have failed, and explain how the United States entered a period of stagflation, which is the contextual backdrop of the whole book. Interestingly, it is also a testament to the values of free and open markets, polycentricity, and “bottom-up” decision-making.
Jane Jacob’s central thesis is that all of the classical economic theory is tainted by the pervasive idea that the nation is the primary unit for understanding economic growth and prosperity. She points to (in her view) flawed thinking from all sides of the big economic debates, from classical political economists, like Adam Smith and John Stuart Mill, to modern Keynesian and Neoclassical economists. Instead, Jacobs’ proposes that to properly understand economic growth, one must look at individual cities. She says,
“...we can’t avoid seeing that most nations are comprised of collections or grab bags of very different economies, rich regions and poor ones within the same nation”.
The prosperity of Japan is not, actually, all of Japan’s, but is instead the result of Tokyo’s prosperity. While prosperous cities may encourage growth in other nearby cities, due to domestic trade and worker migrations, it is futile to understand economic conditions at the national level because of geographic diversity in economic conditions within each country.
The ideas presented in this book are controversial, or even completely overlooked, by mainstream economic standards. Jacobs’ idea of “import-replacing” cities is, for example, controversial due to its closeness to problematic “import substitution” policies used in developing nations. Furthermore, her arguments about the role of the nation vs. the city in economic life; her opinions on monetary systems; as well as her ideas about Value-Added Taxes (VATs) are often more in line with “Mainline” economic theory, rather than mainstream economics. Despite their marginality, I think there are really interesting ideas throughout Cities and the Wealth of Nations for economists, policy wonks, activists, and social scientists to all pay attention to. I lay out a few of these ideas and concepts in this post.
What are import-replacing cities?
The idea of import replacing is, as the name implies, a city economy beginning to produce the goods and services it previously imported. At its core, cities can be adaptive to changes in the market and willing to diversify their local economies to meet the demands of the modern economy. Jacobs goes as far as to say that an import-replacing region necessarily will become a city in its own right, creating an urban region built around its dynamic economy.
The process is; however, not exactly straightforward or linear. Firstly, Jacobs makes clear that this process should occur organically, and that the goals of economic development must be open-ended, rather than with any specific ends in mind. Furthermore, it is not simply that a city that used to import one good has simply replaced that good with a new export. Jacobs uses the case of fruit preserves. Not only do you create a local production facility for making the preserves themselves, but you also notice that the inputs for these goods begin to crop up in the area - jar making, fruit growing (if geography and climate permit), and label making.
It’s important to note that Jacobs’ concept of import-replacing is not anti-trade or a call for cities to become self-reliant. Instead, Jacobs says,
“an import-replacing city does not, upon replacing former imports, import less than it otherwise would, but shifts to other purchases…”.
Her concept of import replacing positions cities as the centerpieces of international trade. She argues the national origins or destinations for goods and services in trade are irrelevant. Instead, dynamic urban economies that drive this international market process are defined by their import-replacing capacity.
Why is Appalachia poor and California rich?
Jacobs answers the above question with a case study of the Tennessee Valley Authority (TVA). TVA is the largest public utility in the United States, covering all of Tennessee, as well as parts of Alabama, Mississippi, Kentucky, Georgia, North Carolina, and Virginia. TVA was created by FDR’s New Deal legislation. In some sense, TVA was straightforwardly about improving and expanding infrastructure and electricity into the Appalachian region, which, by the time FDR was president, was still largely cut off from electric grids. However, TVA was also created to be an economic development agency designed to modernize and grow the Appalachian region’s economy through government planning.
Jacobs argues, using the TVA as an example, that grants and subsidies to economically struggling regions often create perverse incentives, or are simply ineffective, at addressing the reasons why these regions are poor. In the case of TVA, she praises the organization for being the strongest example of regional economic development. The organization was not rife with corruption (according to Jacobs), it remained politically stable, produced real infrastructure, and created what Jacobs called an “artificial” city region. However, despite these successes, Appalachia remained deeply poor, and its economy was only worsening. Jacobs goes into deep detail as to what went wrong with TVA, but essentially, in her view, these schemes are doomed to fail from the start. TVA created an unbalanced, artificial economy based on one export – cheap electricity.
Essentially, the reason Appalachia is poor and California is wealthy is that one has import-substituting cities, and Appalachia does not. The remedies for this are not easy or particularly politically attractive. Instead, our political institutions favor what she calls “transactions of decline”. To this day, wealthy regions of the United States subsidize poorer regions, but according to Jacobs, these are “time bombs”. Once the subsidies are put in place, they become entrenched and economic sustainability is never actually achieved by the region.
Should we have national currencies
?
In chapter 11, “Faulty Feedback to Cities”, Jacobs offers an interesting and unique perspective on the relationship between national currencies and urban economics. She argues that national-level currencies provide faulty feedback to cities, leading them to make potentially disastrous economic decisions. Essentially, these currencies provide a lot of powerful information, but it is not useful information for correcting city economies. It cannot tell the city whether to produce more or less of this good; instead, if they see a “good” number, they have to assume things are going relatively well - even when that is firmly not the case. This inaccuracy also leads to clumsy federal policies to address issues with currency, such as tariffs. Jacobs provides a narrow range of scenarios where tariffs may be beneficial to cities but point out that this currency “price signal” may lead to tariffs that correct some areas while harming others.
What taxes hurt (or help) cities?
One interesting argument in Jacobs’ book is that taxation should take seriously how it impacts urban economies and ensure taxation does not obscure the economic realities in cities. In a similar vein to her views on monetary policy, Jacobs’ takes a city-centric approach to taxation. She analyzes common taxation practices, including tariff regimes, and what their impact appears to be, as well as the incentives they create.
Jacobs shifts most of her criticism to the Value-Added Taxes (VATs) common in many European countries. Her criticisms might make today’s self-described neoliberals bristle, but she effectively argues that taxes at every stage of production for goods inhibit local economic growth and favor already large, multinational corporations. This prevents smaller firms in growing cities from entering into these markets, halting any potential economic growth.
Is polycentric governance the answer?
One of the most interesting aspects of this book is how aligned it is with the “Mainline” economics of Elinor and Vincent Ostrom that promoted polycentric governance. Polycentrism refers to many different centers of decision-making power. Within Ostrom’s framework, polycentric governance includes a complex web of interdependent institutions making decisions, without a “top-down” approach to economic or resource planning. This preference for polycentric governance is scattered throughout Jacobs’ book.
In a similar vein to her opposition to national currencies, she views many national-level development and regulatory policies as harmful to urban economies. She says:
“As a rule, nationwide or international product standards, other than the relatively few strictly required for health and safety, recklessly harm cities as well as hampering economic development and expansion generally.”
Instead, Jacobs supports innovative policy-making at the city level. At most, the national government may provide light-handed assistance to cities that are not “self-correcting”. However, this assistance still must be based on the strengths and naturally occurring creativity that appears in an individual city. It cannot just be handed down from above. She believes that cities themselves will be most adept at addressing issues as they arise and being flexible as the times change.
This polycentric approach has deep implications for all aspects of policymaking. In particular, it casts a pessimistic view of the prospects of international development policy and urban revitalization projects from national governments.
Concluding Thoughts
Cities and the Wealth of Nations is a masterful work, that is also accessible and relatively short. Those of us interested in economics, political economy, urban planning, and urban policy should all take seriously the ideas she poses here. Despite a lack of rigorous empirical research on these questions, the book provides a great jumping point for experimental empirical analysis. Furthermore, her deference to local knowledge and polycentric decision-making provides a useful corrective to the history of federal urban renewal programs.
I’ll end this post with one of the most concise and illustrative sentences in the book:
“Economic life develops by grace of innovating; it expands by grace of import-replacement.”
(Thanks for reading my first post!)