Last time Jacobs claimed that all multi-city national sovereignties that share one currency create a structural problem that limits the feedback that cities get and that causes city to act incorrectly to fix development problems. The essence of the problem is that a common currency will necessarily give the wrong economic feedback to all the cities that share it due to monetary policy always being a blunt instrument – that is monetary policy is always universal for the whole nation even though the cities within the nation are all different.
In addition to the structural monetary difficulties that nations impose on their cities, the politics of nations seem to always engage (or try to engage in) three types of “transactions of decline”. “These policies and transactions, no matter what the motives for them, are all killers of city economies. They fall into three main groups: [1] prolonged and unremitting military production; [2] prolonged and unremitting subsides to poor regions; [3] heavy promotion of trade between advanced and backward economies.”
Poor societies can at best marshal warbands; medium wealth societies can maintain a limited multi-year but seasonal campaign; only rich societies can maintain standing armies; and in modern times only ultra-rich societies can maintain a military-industrial complex. Jacobs believes that The USA achieved this level in 1941 when lend-lease to Brittan started. “Military production gives export work to cities…, and this work, along with its multiplier effect [all the ancillary jobs and production it creates], creates booms.” There is no doubt in Jacobs’ mind that a new war or existential crisis creates growth in the country. “It takes a few years for a city…to assimilate the multiplier effect from soaring export work.” That is to arrive at a new normal level of production. At this point economic growth stops. At this time, the stimulus of war does not stimulate any new growth. If the war ends and production stops then there is economic decline, the economy contracts. If the war continues and production stays the same, on the balance of probabilities there will be no economic development because the new stuff produced is not for trade and therefore import replacement does not take place. An article of faith for Jacobs is that if you are not economically developing you are stagnating or declining in the direction of the stone age. A city dependent on war production has greater limits on its possibility to develop economically and the same is true for the nation; the more war production is distributed across the cities of the nation. The nation or empire must continue to expand war production in order to continue growing economically – but even as it grows the nation will be in decline from an economic development perspective. Growth without development will doom a nation to a precipitous fall. “[T]o the extent that city earnings support unremitting military production, the programs subtract from cities imports they have earned and translate these, into production imported by settlements that don’t and can’t replace imports.”
Three economic development indicators are 1) economic life becomes more urbanized, 2) as city trade expands it jolts nearby cities to life too, 3) an increasing in the variety of goods and services is observed. Their absence can be indicators of decline. “Cities, not war production, incubate economic life.”
Charity like war production increases the richer a society. Only an ultra-rich society can afford a permanent poverty industrial complex. “Welfare programs…grants and subsidies to bring standards of living and services in poor regions into line with those of prospering city regions unfortunately also work out as transactions of decline. If they are unremitting, they too drain city earnings unremittingly. If they are at all generous, then if anything they are even more voracious feeders on cities than military programs.” The process is the same as in the military case. An initial endowment (during an emergency for example) will generate a boom but once it’s multiplier has been absorbed decline starts again and the only solution left is to increase benefits in order to maintain growth. Proposals such as a basic income guarantee will produce economic growth for a few years and then the economic growth benefits will fade but the economic development benefits will have been devalued from the start because increasing demand for what is already produced constitutes economic growth that crowds out economic development.
Cities “require continually repeated inputs of energy in two specific forms: innovations, which at bottom are inputs of human insight; and ample replacements of imports, which at bottom are inputs of the human capacity to make adaptive imitations.” Welfare, grants, and subsidies skim off the top of that human ingenuity and transfer it in directions more likely to be inert. “When welfare subsidies and their analogs, agricultural subsidies, are first undertaken by careful and responsible governments, they are affordable. Yet remarkably soon—present experience suggests with in two generations—the economy of a welfare state itself becomes perilously insecure….Subsidies, precisely because they are transactions of decline, are economic time bombs. They help buy tranquility as long as they can be afforded—but no longer. When they must be drastically curtailed, or when inflation renders them meaningless, societies that have depended on them become distraught socially and politically”.
Lastly trade between unequal (in terms of development) trading partners is never good for the backward side and is at best a break even for the advanced. The backward economy is backward because it is importing things that it cannot hope to replace domestically and therefore is dependent and cannot develop. The advanced economy may use the imports as part of its production but if it gives out credit to backward economies then it is essentially taking from its store of wealth that could be used for economic development and transferring it in an inert direction.
We seem to be stuck in the trap of transactions of decline. However, Jacobs proposes a possible (but purely theoretical way out). What is needed for economic development is vibrant import replacing cities. But nations hobble cities with monetary policy and transactions of decline all of which are meant to improve the situation for the people in the nation. Yet, Jacobs claims all these policies do is keep the nation together so it will collapse together. She suggests that the only way out of transactions of decline is to “run away”, that is to allow separatist regions to go off on their own – this could be the impetus needed to awaken stagnating cities and it would prevent the wide adoption of transactions of decline. “The equivalent for a political unit would be to resist the temptation of engaging in transactions of decline by not trying to hold itself together…. A nation behaving like this would substitute for one great life force, sheer survival, that other great life force, reproduction.” Jacobs gives two examples Singapore and Norway.
In Jacobs’ first book on economics, “The Economy of Cities,” she defined economic development as really new work. She started this book with a working definition of “a process of continually improvising in a context that makes injecting improvisations into everyday life feasible.” In the last chapter of “Cities and the Wealth of Nations,” she further refines the definition of economic development as “an improvisational drift into unprecedented kinds of work that carry unprecedented problems, then drifting into improvised solutions, which carry further unprecedented work carrying unprecedented problems…” Jacobs’ describes this as “an esthetics of drift.” Economic development cannot be planned or willed into existence. Governments that set targets or campaign to increase economic development are at best growing the economy but not developing it.
Economic development is like the growth of a child. Children naturally pick up new skills as they play. Societies do too. Children can be taught new skills but until they put them to use they are latent; similarly society can educate its population and this will help grow economically but until new unprecedented work is created it won’t be economic development. The aesthetics of drift means that people just stumble on to the new unprecedented work. Jacobs quotes from “Aesthetic Curiosity—The Root of Invention,” an article by Cyril Stanley Smith that claims “Necessity is not the mother of invention—only improvement…. Innovation and discovery require aesthetically motivated curiosity….down through history most of man’s inventions have first appeared in decorative rather than practical applications.”
Three things governments do that hinder drift are 1) any kind of producer tax such as Value Added Taxes. These tax the additional value put into each step of a production line. In so doing they reduce the possibility of experimentations and innovations. 2) National and international product standards. standardization limits the value of diversity and foreclose possibilities outside the standards. 3) national or internationally mandated solutions to problems. Any problem that is national or international in scope exists because cities were prevented from innovatively addressing it locally. 4) national monopolies tend to be less creative and crowd out competition often making innovation undesirable from the monopolists perspective.