Continuing with her 1969 book “The Economy of Cities,” Jane Jacobs first establishes that new work is the definition of economic development. Expansion and efficiency are sequels that come later. New work is often the result of a new solution to a real current practical problem. Cities are the source of a great many new practical problems as well as their solutions. It is these new solutions to old and new problems that create new work and thus economic development accumulates in a virtuous cycle of continuous improvement.
“Practical problems that persist and accumulate in cities are symptoms of arrested development…. Many evils conventionally blamed upon progress are, rather, evils of stagnation.” Stagnation is often a result of a power elite trying to hold on to power. The power elite may be a political class or an economic sector. Anything that stops or hinders the creation of new work is a force for stagnation or de-development. On the other hand, any force that tries to stop or hinder expansion or efficiency gains in the beginning is unhelpful for development. However such forces may be helping to foster the conditions for economic development indirectly after a point. Economic expansion and efficiency gains follow a J curve in relation to how they hinder economic development. The greater the efficiency or the economies of scale the lower the cost to produce a good or service – this is good for the company and the consumer but it is bad for the economic feasibility of local economic development and therefore the long term growth of the city.
For Jacobs, a city is a developing settlement of any size. Towns and villages, in her words, are not developing. Even some large settlements that we would call cities may not really be developing and would not, in her language, be cities. The very beginning of a city is, by definition, a reciprocating system built on the exporting of goods and services and the local industry that supplies the export industry.
Jacobs makes an embryological analogy to economic development along the lines of a debate between preformation and epigenesis. There was a debate in the field of embryology as to how an embryo develops. The preformation view “erroneously believed [in]…a process of enlarging what was already there. The proponents of epigenesist believed that development…was a process of gradual diversification and differentiation of tissue from an initially undifferentiated entity….I am arguing,… an ‘epigenesis’ theory of cities: the idea that a city grows by a process of gradual diversification and differentiation of its economy, starting from little or nothing more than its initial export work and the suppliers to that work.”
The reciprocating system of a city economy has four parts or sectors: 1) Local goods and services for consumers (C); 2) Local goods and services for producers (P) – these two (C and P) make up the local economy. 3) The settlement’s work for export (E); and finally the imports earned from export work (I).
The reciprocating system’s first process starts when a local supplier of goods and services for producers (P) starts to actually export some of that work as more or new work and then receives some new imports (I). The new imports are an addition to and therefore a growth of the local economy. These new imports can go to any of the three other sectors (C,P, and/or E). In every case each of the new imports increase the size and diversification in whatever sector they enter. Jacobs calls this increase in size and diversification of (C,P, and E) resulting from the new imports (I) initially developed by new work in (P): the Export-multiplier Effect: “a city’s growth of local work owing to growth of its export work.” This first process should continue as long as long as economic development is desired. Successful results from trial and error should get more likely as the economy diversifies. We do not currently have any useful statistics on export growth from new local work. We currently lump all exports (from new work and from expansion of old work) into one lump national sum. We should distinguish the two sources and measure it on an inter-city level.
New work in the form of export expansion is the first necessary step. It earns imports that diversify the local economy and provide expanded opportunity to create new work. However it is a small step compared to the second process which leads to really explosive growth: replacing present imports earned with export with new local production: new local work. Present exports will continue to buy imports but not the same one that can be produced locally – this shift in imports further diversifies the local economy. This is not necessarily a loss for the trading partner that lost some of its export market nor is it just shifting production location; a zero net increase in the world. This may be the worst case scenario when stagnation is rampant. However, more than likely (especially in the beginning) new work creates and expands more ancillary and support work everywhere the original new work is felt plus there are the benefits of new imports. “Although cities do not import less when they replace imports than they otherwise would, they do import less from some places as they shift to new purchases form others. What happens to cities that lose exports when their customer cities begin producing the same things for themselves? Stagnant cities lose out.* [*As they also do when they lose export work that has become obsolete,] They fail to develop new exports that compensate for the losses. Creative cities do develop new exports that take the place of the old.”
In the second process or reciprocating system “…a city builds up its imports and thus becomes capable of replacing many of them. By doing so it becomes capable of generating more exports. It thus builds up imports and becomes capable of replacing many of them. By doing so it becomes capable of generating more exports…and so on.”
Each round of import replacement leads to a multiplication of exports. This, Jacobs calls the Import-replacing Multiplier Effect. It is more potent than the Export-multiplier Effect, “…because all shifted imports go to swell the local economy. An equivalent amount of imports earned by export growth do not. After a city has experienced an episode of import replacing and import shifting, its local economy is thus much larger than it was before the episode: not only larger absolutely but also larger in proportion to its exports and imports.” [emphasis in the original]
This second process is what makes a city grow large, dynamic and vibrant. It requires its people to be creative and they must have the freedom of scope to exercise that creativity. “…if a city stops generating new exports after an episode of import replacing, it will not earn many more imports to replace. It will not have the grist, so to speak, for another episode. Anything that halts the export-generating process of a city ultimately kills the import-replacing process too.”
Unfortunately we do not measure the Import-replacing Multiplier Effect either. We collect data on the type of activity (construction, manufacturing, sales, income, etc. or sometimes basic and non-basic) but we should also collect data on the actual destination of a good or services. Since we know where everything is produced, this would let us know if production is locally directed or export directed and we would know what is imported. Intercity trade within a state is not really studied – and it should be.