Economists in the City #3

A Blogged Conference

Economists in the City #3

Economists in the City #3 1020 786 Cléo Chassonnery-Zaïgouche

From Cities to Nations: Jane Jacobs’ Thinking about Economic Expansion

by Cédric Philadelphe Divry

Jane Jacobs (1916-2006) is best known for her critique of top-down forms of city planning and urban renewal projects, laid out in the groundbreaking The Death and Life of Great American Cities (1961). This had a profound impact on the profession of urban planning, boosted the institutionalization of urban economics, and considerably influenced community organizing. She was one of the most celebrated thinkers about cities in the twentieth century, and her ideas have had a long-lasting influence on urbanism.

What is less well known is her economic thinking, which was developed in her subsequent works, although a partial reinterpretation of this has gained traction since the 1990s. However, a more comprehensive interpretation is needed if we are to grasp the nature of her theorization of cities, and the policy lessons she drew from her insights.

Numerous interviews with her, events in her honor and commentaries on her work have mostly focused on her urban thought and activism, and advanced the appealing narrative of a housewife standing up to men bulldozing the neighborhoods of 1950s New York City. But when asked about her own legacy, she dissented from this view:

If I were to be remembered as a really important thinker of the century, the most important thing I’ve contributed is my discussion of what makes economic expansion happen. This is something that has puzzled people always. (Jacobs, 2001)

A reading of all of her works brings to the fore a thinker theorizing the economic behavior of cities on the basis of a rich understanding of the urban social fabric. Starting with The Death and Life of Great American Cities, and across during five subsequent decades, she led an enquiry into the mechanisms of what she termed “economic expansion,” and elaborated her own approach to the dynamics of economic growth and development.

The Economy of Cities (1969) and Cities and the Wealth of Nations (1984)

Two works are especially important in the development of her thinking. In The Economy of Cities (1969), she builds upon her insights of her earlier The Death and Life of Great American Cities to derive a “city economy model.” This describes how the economic lifecycles of cities depend largely on the relation between local economic activity and inter-city trade, from periods of “explosive” growth to eventual stagnation and economic decline. Fifteen years later, Cities and the Wealth of Nations: Principles of Economic Life (1984) argued against the idea of nations as economic units, highlighting the contradictory dynamics of political expansion and long-term economic development. In 2006, she left behind the first draft of what would have been a broader synthesis of her economic theory.

A series of diagrams in the appendix of The Economy of Cities (p.253, p.257) illustrates a number of stages in the lifecycle of a city economy. On the left, an early stage where the export (E) of a good previously produced (P) for local consumption (C) may trigger an increase in imports (I) accompanied by population increase, (part of the “export multiplier effect” EM). On the right, part of the process of a later stage dubbed “import-replacing,” when a local economy replaces an important number of former imports and grows relatively to its export economy.

Considering her contribution to economic theory may seem counter-intuitive. In addition to lacking academic credentials, she took little interest in engaging the discipline of economics. Her models were neither formal nor developed in reference to existing models. And her view of economic theory in general was dismissive. In the opening chapter of Cities and The Wealth of Nations, “Fool’s paradise,” Jacobs lays out a history of economic thought and arrives at this sweeping conclusion: “Choosing among the existing schools of thought is bootless. We are on our own.” The same dismissive stance extended to academic institutions, as she refused numerous honorary degrees from various Universities.

And yet, some economists had picked up on her insights. A type of economic externality has been derived from her detailed historical accounts of new economic activities arising from urban diversity. Chicago and Harvard urban economists Glaeser, Kallal, Scheinkman, and Shleifer credited Jacobs in 1992 for identifying cross-industry knowledge transfers, which they dubbed “Jacobs externalities.” The concept was based on Jacobs’ The Economy of Cities and posits that knowledge transfer occur between different industries, and that local competition supports economic growth. This came four years after future Nobel prize recipient Robert Lucas pointed to Jacobs’ work while investigating the external effects of human capital in his 1988 article On the Mechanics of Economic Development, although without formalizing his insight. Lucas’ endorsement earned Jacobs increasing recognition among economists over the following decades. Paul Krugman described her as a “patron saint of the new growth theory” and her unusual status was summed up by Robert Dimand and Robert Koehn who saw her as “her own distinctive kind of political economist … an exceptional instance of a woman without academic affiliation or university training achieving recognition among leading academic economists”. And a considerable literature grew up after Glaeser et al.’s piece. And in 2016, based on a growing number of attempts to quantify Jacobs externalities, academic interest for her work was at an all-time high.

But although Jacobs does repeatedly make the argument for local diversity which is captured by the externality bearing her name, it merely serves as the basis for her wider system. From her understanding of local economic life in an urban setting, she derived a model of the city as an economic unit with a structure and a lifecycle, which in turn she used to analyze macroeconomic phenomena. Despite this interest in her work, extended reassessments of her contribution to economic thought have yet to appear. Jacobs’ stance towards economic theory may somewhat explain this situation. But while her writings do not fit the template of conventional economics, they do connect her with other established interpretative paradigms.

Analogies and evolutionary thinking

One line of interpretation of Jacobs’ work explores her repeated use of ecological and biological analogies. She often made the case that looking at patterns in nature may help understand dynamics in the economy. But although these analogies highlight the dynamic aspects of her conception of city economies, they are not sufficient evidence of her evolutionary understanding of economic development.

The city economy model, first developed in The Economy of Cities,argues that the desirable diversification of local economic activities depends largely on the destination of goods and services entering the city’s economy. The key claim is that imports are key to economic development: they embody knowledge and allow further diversifications in the local economy, as imports are gradually replaced by local supply, and make “room” for new imports – in a similar manner to import substitution. Jacobs uses this model to stress the long-term undesirability of overspecialization derived from a focus on maximizing exports, and the importance of a large and diverse local economy – ultimately delivering a critique of comparative advantages as an organizing principle of trade.

The closing chapter of Cities and the Wealth of Nations provides a succinct version of two analogies which Jacobs uses to help conceptualize the dynamic features of a city economy. She likens the apparent order at work in cities in terms of “…biological evolution whose purpose, if any, we cannot see unless we are satisfied to think its purpose is us.” And further:

“[T]he more niches that are filled in a given natural ecology, other things being equal, the more efficiently it uses the energy it has at its disposal … That is another way of saying that economies producing diversely and amply for their own people and producers, as well as for others, are better off than specialized economies …”

The most elaborate study of Jacobs’ use of biological and ecological analogies is provided in mathematician and philosopher David Ellerman’s paper How Do We Grow? Jane Jacobs on Diversification and Specialization (2005). In this original treatment of Jacobs’ economic thought, Ellerman expands on Jacobs’ set of analogies to reframe her often overlooked city economy model. As he puts it, in the case of the ecological analogy:

“Organized energy comes free from the sun, but its trajectory within an ecology will depend on the complexity of the system. The two extremes could be taken as a desert and a rain forest. A rain forest and a desert at the same latitude would have about the same amount of solar energy arriving per unit area. In the case of the desert, it is essentially a sterile conduit; the energy comes in during the day and is dissipated at night. Little is captured; it is a throughput operation. The opposite is the case for the rain forest. much energy is captured through the photosynthesis of its plants.”

According to Ellerman, this would be translated in economic theory as follows: the flow of organized energy equates to money in the economic system, funds which have a multiplier effect on the local economy depending on a number of factors, before being dissipated. However, he notes that Jacobs equates organized energy with “embodied knowledge and know-how.” This difference illustrates why imports, not exports (which would matter most if organized energy equated to money in the analogy), are key in Jacobs’ system, in which “development is a conceptualized form of social learning.” Incoming goods, the products of foreign know-how, are vectors of developmental learning. And exports of commodities and services fund these imports. What separates economic rain forests from economic deserts in Jacobs’ system would be “the way imports are used” (or the path they follow), whether they are “primary, intermediate, final, or producer goods.” When imports feed into the somewhat enclaved export economy (i.e. overspecialized), they have a lesser effect then when they are dissipated in local consumption.

Ellerman’s reframing diverges from the usual Jacobsian argument for local diversity by depicting the city economy’s boundaries as an open system governed by evolutionary dynamics. It may also open up the possibility of considering Jacobs’ writings as a contribution to evolutionary economics. For example, following Geoffrey Hodgson’s taxonomy in Economics and Evolution (1993), part of Jacobs’ system could be characterized as phylogenetic and non-consummatory, that is, as exhibiting an open-ended process of evolutionary selection among a population of firms and individuals.

But Jacobs’ economic thought does not consistently involve the application of evolutionary logic to the processes she attempts to uncover. Her analogies primarily serve to help us think of city economies as complex systems, within which she chooses to highlight specific properties.

Solving problems of “organized complexity”

The paradigm of “organized complexity” she explicitly embraces in The Death and Life of Great American Cities, appears to also run through her economic thought. Jacobs borrowed the concept from mathematician Warren Weaver and appears early on in The Death and Life of Great American Cities to characterize the “kind of problem a city is;” which, in Weaver’s words, “[a]s contrasted with the disorganized situations with which statistics can cope, show the essential feature of organization”. The prevalence of this paradigm in her economic writings is probably what drew Friedrich Hayek’s attention to The Death and Life of Great American Cities. It has also has been highlighted by author David Warsh in The Idea of Economic Complexity (1984).

Cover of Cosmos + Taxis issue dedicated to Jane Jacobs (2017)

More recently, in 2017, the publication Cosmos + Taxis dedicated an issue to Jane Jacobs. And as Pierre Desrochers and Joanna Szurmak note, despite academic interest in Jacobs’ work being at an “all-time high,” her economic theory has yet to be studied from the perspective of the “paradigm which shaped her worldview.” I would suggest that the study of “feedback mechanisms” in Jacobs’ economic writings may be an effective first step in addressing this deficiency, while also highlighting her critical discussion of urban policies.

Positive feedback relationships are a central mechanism in the study of complex systems, as they help explain self-reinforcing behaviors and path dependency. Jacobs repeatedly identifies feedback mechanisms while investigating how city economies evolve in a national setting and drew wider conclusions about to promote long-term city growth. Whether feedback is “accurate” or “faulty” in Jacobs’ terms depends for the most part on whether or not the feedback conveys correct information about the quantity of imports a city economy can “earn” from its local production. As a conceptual tool, Jacobs’ uses feedback mechanisms to expose leverage points in economic systems. Just as The Death and Life of Great American Cities was targeted at ongoing urban renewal projects, her economic writings often involved a critique of policies.

In Cities and the Wealth of Nations, she argues that the unity of nations as political units often rests on “faulty feedback to cities,” for instance national currencies which act as “powerful carriers of feedback information” on the demand for a city’s exports. She hypothesizes that national currencies, because they provide consolidated information on a nation’s international trade, provide feedback best tailored for the city which weighs the most in the nation’s economy. Such feedback accrues over time and helps explain what she calls the “elephant city-region pattern,” where a city gains a definitive edge over the others, which in time may require subsidies – subsidies returning their own faulty feedback to cities which cannot make the adjustments to expand from their own local activity. This grim outlook on the future of cities within nations prompted her to argue in favor of the independence of Quebec in The Question of Separatism: Quebec and the Struggle over Sovereignty (1980).

Likewise, Jacobs targeted development schemes developed by the World Bank. She pointed to the inherent weaknesses of Robert McNamara’s development strategies for addressing “basic human needs” (literacy, nutrition, reduction in infant mortality, and health) of poor populations. She argued that because economic development is a process, it cannot be thought of as a “collection of things” which can be bought or provided. The “basic human needs approach” ignored the necessity for solvent markets to support increased agricultural yields and the populations that were being displaced. As they could no longer rely on agricultural work to sustain themselves, displaced workers failed to find jobs in nearby city economies, where labor markets had not evolved alongside the increased agricultural yields through a succession of appropriate feedback mechanisms triggering the needed corrections. And she made the same argument against technology transfers in the “Green Revolution” of the 1960s and 1970s.

The mechanism of feedback relationships is one example among others of Jacobs’ usage of systemic concepts to draw boundaries around the city economy as a system and elaborate on its behavior. Further examination of Jacobs’ use of these concepts within the paradigm she adopted may reveal a consistent link between her analysis of cities as economic units and the policies she is tended to critique. In short, future attempts at more comprehensive interpretations of Jacobs’ economic thought might benefit from stepping away from the urban focus of The Death and Life of Great American Cities while considering more carefully her later economic writings.

Cédric Philadelphe Divry is a graduate student at PHARE, University of Paris 1 Panthéon-Sorbonne. His work examines conceptions of cities in the history of economic thought, in particular during the mid-19th century urban renewal of Paris and in the economic writings of urban theorist Jane Jacobs (1916-2006).

Other posts from the blogged conference:

Cities and Space: Towards a History of ‘Urban Economics’, by Beatrice Cherrier & Anthony Rebours

Economists in the City: Reconsidering the History of Urban Policy Expertise: An Introduction, by Mike Kenny & Cléo Chassonnery-Zaïgouche