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Cities and the Wealth of Nations by Jacobs, Jane Reprint edition (1985)

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  • By Clint Ballinger on October 10, 2012

    [This review is a paper I wrote in the mid-1990s as an undergraduate for a general audience, so please excuse any undergraduate tones or mistakes in it! I think a few years later I added a few citations. I can definitely see how Jacobs' work was already influencing my approach to the social sciences here. I thought it worth postin part just because of some of the quotes in the 80s on Jacobs work by Coase etc. All of Jacobs' work has been immensely influential on me and is largely the reason I entered academics. As well-known as she is, she is still vastly underrated as a social thinker.]Jane Jacobs and the City: An Economic Maverick in Method and Substance Abstract mathematical models have rendered modern economic theory almost meaningless. Only a few lone heretics challenge the dogma of prevailing mathematical methods. One of the most unique among these is Jane Jacobs. In The Economy of Cities and Cities and the Wealth of Nations, she proposes an economic theory based on simple observations and real world examples, offering an important yet neglected alternative to current theories. Her methods and ideas are innovative, suggesting new ways to understand and possibly reduce poverty. Jacobs' work deserves greater recognition and should serve as an important model for today's economists.Jacobs is an iconoclast who developed as a writer through years as a journalist in New York City. Her plain language and numerous examples, drawn from all parts of the world and all types of industries, economies, and political philosophies, lend strength to the universality of her conclusions. Nevertheless, Jacobs' ideas have been largely ignored by mainstream economists, and when mentioned, largely misinterpreted.Mainstream economists overlook or misinterpret Jacobs for several reasons. Jacobs' 1961 book on urban issues, The Death and Life of Great American Cities, was highly innovative and successful. However, success resulted in the pigeonholing of Jacobs into the role of "urban specialist," and her later books were largely reviewed and discussed only among urban planners. As University of Toronto economist David Nowlan notes, "Economists generally do not read Jane Jacobs."(1) Michael Walker, of the conservative Fraser Institute in Vancouver, is typical of the few economists who have. "She has wandered into an area she does not understand," he says.(2) Her ideas are unorthodox in both their content and their non-formal presentation. However, Jacobs is admired by a few important economists, also known as mavericks. One, Robert Lucas, economist at the University of Chicago, declared he was "following the lead of Jane Jacobs" in what became his Nobel Prize-winning work on human capital.(3)A few other noted economists share Jacobs' aversion to esoteric abstract exercises, such as the 1991 Nobel Prize winner in economics, Ronald Coase, known for a non-mathematical style and criticism of the orthodoxy of current________________________________1 Qtd. in Brian D. Johnson , "A Call for the Revival of the City State," review of Cities and the Wealth of Nations, by Jane Jacobs. Maclean's, 4 June 1984, 36.2 Ibid., 36.3 Qtd. in Sandra Martin, "An Urban Legend." Maclean's, 20 October 1997, 86.(page)-----------------------------------------------------------------------------------------------------------------------economic methods. Coase, like Jacobs, has no Ph.D., which might explain the willingness of both to attack existing economic consensus. For Coase, the current "blackboard economics" amounts to "fiddling while Rome burns."(4) Coase cites another famous economist, Alfred Marshall, founder of the "Cambridge School" of economics, on the use of mathematical models (5):{1}Use mathematics as a shorthand language rather than as an engine of inquiry. {2} Keep to them until you have done. {3} Translate into English. {4} Then illustrate by examples that are important in real life. {5} Burn the mathematics. {6} If you can't succeed in {4}, burn {3}.Jacobs succeeds brilliantly in {3}, {4}, and {5}.Both Coase and Jacobs are, as Jacobs says, "suspicious that some basic assumption or other is in error" in current economic models and methods, "most likely an assumption so much taken for granted that it escapes identification and skepticism."(6) Michael Rothschild, author of the successful and original 1990 book Bionomics, has ideas similar to Jacobs. He says, "Once an elaborate theoretical edifice has been lovingly crafted by generations of respected scholars, it is terribly difficult to admit that it's just plain wrong." (7) In Jacobs' view, the assumption taken for granted, or "theoretical edifice," is the historical idea of a "national" economy. She believes the idea of a national economy is a red herring causing economists' theories, from Adam Smith and Karl Marx to John Maynard Keynes and Milton Friedman, to prove insufficient and destructive guides to real world economics. Jacobs points out that nations have been of little use as economic entities:"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."(8)Instead of nations, Jacobs believes cities are the true engines of the economy and that economic understanding can come only from examining processes that make cities healthy or cause them to stagnate. She believes what she calls "import-replacing," a special type of innovation through local production of formerly imported products, to be the basis of thriving cities. Import-replacing promotes incremental but lasting growth by causing innovation.___________________________4 Qtd. in Gordon L Brady, review of Essays on Economics and Economists, by Ronald Coase. Southern Economic Journal 63 (January 1997) : 816.5 Ibid., 819.6 Jane Jacobs, Cities and the Wealth of Nations (New York: Vintage, 1985), 29.7 Michael Rothschild, Bionomics: Economy as Ecosystem (New York: Henry Holt, 1990), 183.8 Jacobs, Wealth, 31-32.(page)-----------------------------------------------------------------------------------------------------------------------The role of cities in innovation and the maintenance of healthy economies has received little attention. Economists recognize that villages, towns, and cities export and import some quantity of goods (here "import" and "export" mean in and out of a city, not country). Yet most do not distinguish between the subtleties of where and why this process goes on, nor how it is different among big cities and towns, active cities and stagnating cities. Instead, mainstream economics focuses on formalistic problems of supply and demand "chasing each other around, tails in their mouths" as Jacobs describes it.(9) However, this line of inquiry has done little to explain the mysteries of recurring recessions and depressions, inflation and deflation, and economic misery in many parts of the world. Jacobs' focus on centers of production and innovation is a more fruitful approach with more meaningful results.In The Economy of Cities, Jacobs observes that through successful exporting cities earn enough to import. More importantly, she says, cities that replace imports earned through trade with locally produced copies or substitutes increase their economic complexity while freeing capital to import still more items. Production of copies and substitutes by numerous small companies sparks development not only of greater size, but more importantly, of greater complexity, giving a city a wider variety of jobs and increasing technological assets. This process cannot occur in a city that is not actively trading. Once started, this cycle causes a city to remain healthy, or a town or village to grow into a city. If interrupted, a city will stagnate or a town will stop growing. The importance of Jacobs' work lies in the identification and definition of these processes and ways of protecting them from interruption. Understanding and nurturing import-replacing, Jacobs argues, is essential to creating a thriving global economy. Jacobs' example of Detroit's economic development and subsequent decline illustrates how powerful growth through import-replacing can be, and how quickly a city can die when import-replacing stops. This example also demonstrates Jacobs' historical method of analysis.Detroit's growth began as a small port and flour-processing center. Near the flourmills small shops made and repaired mill machinery. Some machine shops also manufactured passenger boats and small ships, also for the flour trade. These two industries alone probably would not have been enough to cause significant development in Detroit. However, Jacobs notes that Detroit was also successfully replacing imports and rapidly adding new kinds of work to older industries. The market for its ships grew, and because of its wide range of machine shops there existed the ability to develop steam-engine driven ships, some of the first in the world. By the 1860's, marine engines themselves were a major Detroit export, causing many further additions to the Detroit economy, including the refining and smelting of metals. But soon the local supplies of ore ran out, illustrating the key of import-replacing. By now the Detroit economy was so complex and had developed so many new exports that it no longer needed refining and smelting in its economy. Forced to innovate by the loss of an old industry, Detroit's complex economy was the perfect setting for further economic development. This development soon came with the automobile and explosive growth thereafter.(10)Sadly for Detroit, this is the period when import replacing stops. When Detroit stopped innovating by replacing imports with local production, it began a period of severe decline. Detroit focused all of its energy and creativity on automobile production, not realizing that it must continue, as it had in the past, to diversify its economy through import-replacing. It could afford, for a while, to import vast amounts of products in exchange for its chief export of automobiles. However, its economy never tried to copy these imports for local production, which would have created new industries unrelated to car production.(11)________________________9 Jacobs, Wealth, 28.10 Jane Jacobs, The Economy of Cities (New York: Vintage, 1970), 123-124.11 Jacobs, Economy, 124-125.(page)-----------------------------------------------------------------------------------------------------------------------Other cities did try to copy or improve on the cars they formerly imported from Detroit. Some, such as Japan, were successful. Although having few resources, Japan became an economic leader through import-replacing. Because Detroit had no new industries to add to or replace car production, its economy declined painfully fast. Detroit is an example of both the power of import-replacing to build a city, and of how quickly the interruption of import-replacing leads to stagnation and decline. Growth through import-replacing may seem simple or trivial. Nevertheless, it explains the technological breakthroughs and increases in efficiency that are the hallmark of modern and developing societies.If Jacobs is right, and innovation stimulated by trade, or import-replacing, is the basis of growing cities and a healthy economy, then what can inhibit this process? Jacobs identifies two major factors, "faulty feedback" and "transactions of decline."Feedback is the term used for the information a system (economy, company, group or organism) receives regarding its own actions. Proper feedback is essential to self-correcting actions if any system is to remain stable. An important economic example concerns the balance of trade. Recent news has contained reports on the United States "trade imbalance" - that the United States imports more than it exports. In theory, when a nation's currency loses value the decline should help correct this condition of imbalance, improving the economy. This balancing effect happens because exports automatically become less expensive to foreign buyers and imports become more expensive, thus working as both an export subsidy and a tariff. This mechanism lasts only as long as a trade imbalance exists, a perfect form of feedback control for an economy.Nations can control currency valuation through manipulation of interest rates. Interest rate and currency decisions are based on a national "average" of needs. However, a nation is a mix of a few productive city regions with many areas in some stage of subsistence or decline. Jacobs believes that making economic decisions based on a national average is destructive to the most productive parts of a nation, cities, disrupting their delicate economic process of import-replacing. Disruption occurs when interest rates are decided in the interest of many stagnating and declining, rural and subsistence areas, combined with a few healthy regions. The needs of the many less productive regions tend to be the opposite of the few productive regions.(12) To explain this process Jacobs offers the analogy of respiration.Respiration is also a feedback-controlled occurrence. As humans perform more activity, low oxygen levels cause their lungs to breathe more quickly, and as oxygen levels rise their lungs breathe more slowly. But imagine, although it sounds strange, numerous people, all independent, yet somehow attached to only one central brain-stem breathing center. Now imagine some of these people are asleep or reading, while others are swimming or playing tennis. Clearly, strenuous activity would quickly cease. Still closer to the economic reality would be "an elephant attached to three sheep, two puppy dogs and a rabbit." The average feedback would soon prove fatal for some. The analogous effect on nations is a deadening to many areas and the growth of a few "elephant" cities.(13)Feedback sheds light on the success of city regions that control their own currency, such as Singapore and Hong Kong. Singapore is urban, and very small. In the early sixties it had many economic problems, including high unemployment and a low standard of living. When Singapore separated from Malaysia in 1965, it became a tiny independent city-state. At this time it became feasible to fine tune monetary and macroeconomic policy for the benefit of this tiny urban nation, independent of a large rural hinterland. It could, in effect, breathe on its own. The growth since then has been spectacular, making Singapore one of the most prosperous of Asian "nations." (14) Large nations, empires, and trading blocs, on the other hand, suffer from a lack of accurate feedback information, and their urban areas do not benefit from the fine-tuning of macroeconomic policy that Singapore enjoyed. National policy, in an attempt to please the whole nation, ultimately undermines the import-replacing process of cities and thus the economic engines of the nation.A second process that interrupts import-replacing Jacobs calls "transactions of decline." These are simply any expenditure by national governments or international organizations, such as the World Bank, that do not lead to trade-based innovation. Military expenses are a good example of a transaction of decline. These ultimately deplete the capital of cities and interrupt the import-replacing process.(15)Jacobs does not believe import-replacing and industrial complexity can quickly be forced on an economically depressed region through large-scale development schemes.(16) She emphasizes that economic growth must start small, eventually leading to an import-replacing city, and then to a healthy region. Taipei and Tokyo are good examples of how the growth of small local industries such as plastics and bicycle manufacture slowly leads to vigorous and healthy economic regions.In contrast to Taiwan, which has received little outside aid, large-scale development schemes in areas such as Southern Italy and many African nations have failed. They continue to have poor economies and suffer high unemployment. Jacobs notes that these areas also lack thriving cities that are increasing in industrial complexity through growth caused by import-replacing. Development schemes sometimes give some short-term relief, but do little to initiate the cycle of import-replacing that has been the basis of economic growth in countries such as Taiwan, Japan, or the United States. Not only do they not serve their stated purpose well, large-scale development schemes are extremely expensive and often disrupt the cultures they are intended to help because they are of the wrong scale and too advanced technologically. They sap capital and jobs from healthy areas, worsening overall economic situations.(17)_____________________________12 Jacobs, Wealth, 156-181.13 Jacobs, Wealth, 158-163.14 Cedric Pugh, "International Structural Adjustment and its Sectoral and Spatial Impacts," Urban Studies (March 1995) : 281-282.15 Jacobs, Wealth, 183.16 Jacobs, Wealth, 105-123.17 Jacobs, Wealth, 93-104.(page)-----------------------------------------------------------------------------------------------------------------------Examples such as Detroit and Singapore serve to illustrate the analytical methods Jacobs uses to construct her innovative theories. Unfortunately, because they are unorthodox, they are not widely acknowledged, and there has been little discussion of her economic ideas, either pro or con. Robert Wagner is typical of the established view.In 1984, Robert Wagner was a fellow of the Institute of Politics at Harvard University. Reviewing Cities and the Wealth of Nations, he blames Jacobs' "use of evidence" as being "far from rigorous."(18) Criticizing her idea of the central place of cities in the growth of economies, he says "my own sense is that cities are on the receiving end as much as on the passing end of economic change. This was the case with the Industrial Revolution; today it is the case with the rise of service industries and the decline of manufacturing." (19) Having previously criticized Jacobs' thoroughly researched book for not being "rigorous," Wagner refutes one of her central ideas only because he has a "sense" that it is not right. His perfunctory response is typical of the lack of serious consideration given Jacobs' ideas in the academic community. Furthermore, contrary to Wagner's assertion, the Industrial Revolution happens to be a highly relevant example of the economic change created by the accumulation of innovations caused by the demands of city trade. Manchester and Glasgow, two centers of the Industrial Revolution, developed and declined in much the same way as Detroit.(20) Cities were not at the receiving end of the Industrial Revolution, but at the "passing end," initiating and developing the technology that caused the Industrial Revolution.It is interesting that Wagner also mentions the rise of service industries and the decline of manufacturing in his 1984 review. Fifteen years earlier Jane Jacobs predicted, in The Economy of Cities, that "Manufacturing work will, I think, no longer be the chief activity around which other economic activities are organized, as it is today.... Instead, services will become the predominant organizational work, the instigators of other activities, including manufacturing.... Service organizations ... are likely to be larger than manufacturing organizations."(21) Both the Industrial Revolution and recent large increases in service industries not only do not refute Jacobs' ideas, they support them.There are signs that current research is finally beginning to recognize Jacobs' theories. Two researchers, one from Harvard and another from the University of Chicago, conducted a study of 170 large metropolitan areas comparing Jacobs' model of a healthy city with two more conventional models. They found that the "overall results" were "quite favorable to Jacobs" over the other two models.(22) A 1994 study showed that large cities subsidize their nations, instead of draining resources from them as is commonly believed.(23) Jacobs' idea of the primacy of trade in innovation finds support in a 1998 study published in the Quarterly Review of Economics titled "Is Learning by Exporting Important?"(24) These small steps do not put Jacobs in the mainstream. Nevertheless, they demonstrate that many of her ideas, written in the 1960's and 1970's, were before their time, only now being accepted and studied by mainstream economists. If accurately predicting future developments and insights can be used as a yardstick to measure theories, then Jacobs' measure up well. Understanding Jacobs' theories and methods may provide society with new insights into global poverty and new tools to fight it. Furthermore, Jacobs demonstrates the possibility for economists to emerge from a mathematical morass into a more promising intellectual landscape of discursive, historically rooted approaches to economic theory. She points the way towards the creation of healthy economies and a better world through an understanding of the fundamental role of cities in a vigorous, thriving economy._____________________________________18 Robert F. Wagner Jr., "City Lights," review of Cities and the Wealth of Nations, by Jane Jacobs, New Republic, 2 July 1984, 29.19 Wagner, 31.20 Jacobs, Economy, 86-96; also see Sir Peter Hall, Cities in Civilization (New York: Pantheon, 1998), ch.10, ch.11.21 Jacobs, Economy, 245-246.22 Elizabeth Corcoran and Paul Wallich, "The Rise and Fall of Cities," Scientific American, August 1991, 103.23 H. V. Savitch, "Global Challenge and Institutional Capacity, or, How We Can Refit Local Administration for the Next Century," Administration and Society (July 1998), 251.24 Cleridos K. Sofronis, Saul Lach, and James R Tybout, "Is Learning by Exporting Important? Micro-Dynamic Evidence from Colombia, Mexico, and Morocco," Quarterly Journal of Economics (August 1998), 903-947.(page)-----------------------------------------------------------------------------------------------------------------------Works CitedBrady, Gordon L. Review of Essays on Economics and Economists, by Ronald Coase. Southern Economic Journal 63 (January 1997) : 816-819.Corcoran, Elizabeth and Wallich, Paul. "The Rise and Fall of Cities." Scientific American, August 1991, 103.Hall, Sir Peter. Cities in Civilization. New York: Pantheon, 1998.Jacobs, Jane. Cities and the Wealth of Nations. New York: Vintage, 1985. _____. The Economy of Cities. New York: Vintage, 1970.Johnson, Brian D. "A Call for the Revival of the City State." Review of Cities and the Wealth of Nations, by Jane Jacobs. Maclean's, 4 June 1984, 36.Martin, Sandra. "An Urban Legend." Maclean's, 20 October 1997, 84-86.Pugh, Cedric. "International Structural Adjustment and its Sectoral and Spatial Impacts." Urban Studies (March 1995) : 261-285.Rothschild, Michael. Bionomics: Economy as Ecosystem. New York: Henry Holt, 1990.Savitch, H.V. "Global Challenge and Institutional Capacity, or, How We Can Refit Local Administration for the Next Century." Administration and Society (July 1998) : 248-273.Sofronis, Cleridos K., Lach, Saul, and Tybout, James R. "Is Learning by Exporting Important? Micro-Dynamic Evidence from Colombia, Mexico, and Morocco." Quarterly Journal of Economics (August 1998) : 903-947.Wagner, Robert F. Jr. "City Lights." Review of Cities and the Wealth of Nations, by Jane Jacobs. New Republic, 2 July 1984, 29-32.

  • By Kindle Customer on May 23, 2017

    This is an fascinating book on the one fact that most economists overlook: economies are centered around cities and their immediate hinterlands, not around larger territories such as states, provinces, countries, or continents.

  • By Joni Painter on August 30, 2017

    I just love Jane Jacobs' viewpoints. She has so much common sense and she is able to cut through long-held misconceptions concerning the ways cities generate wealth. This otherwise boring topic takes on real life in this book. Although she passed away in 2006, her ideas span time.This book in particular examines the ways nations acquire wealth. According to Jacobs it is generated on a very basic, local level and percolates to the top. The top-down theory doesn't work. It has never worked. This book points out the fallacies of some of the most common ways municipalities attempt to pump life back into an ailing economy. These downfalls are unremitting military production, unremitting subsidies to poor regions, and heavy promotion of trade between advanced and backward economies. These three things have been the undoing of every major empire from the Roman empire onward to today.This book was a real eye-opener for me on many levels. It changed the way I think about the way cultures thrive or fail.

  • By Norman on August 22, 2013

    Enjoyed reading this classic on capitalism, we have coma a long what from the principals in this book, Capitalism works

  • By A customer on April 3, 2003

    Some of your other reviewers have said that they believe this book is outdated.That is, I can't help but think, the reaction of internet babies, who are spoiled by the 24 hour round-the-clock updating of bloggers.This is a printed book that gives evidence of having been written at a certain moment in history, and in a certain portion of the planet. So what? That is true of all great books, and the question for us is whether we can (a) appreciate that context while (b) taking from them something lasting.The answer, for this book, is decidedly afirmative.

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