Jane Jacobs’ first economics book, the Economy of Cities, (1967) looked at the processes by which economic development occurs in cities. In her last book on economics, the Nature of Economies, (2000) she takes a high-level look at economics and links it to ecology. In her 1984 book, Cities and the Wealth of Nations, the second of three books on economics, Jacobs argues that cities rather than nations should be the unit of economic development, offers instructions for getting or keeping economic prosperity she illuminates 5 economic forces that come out of cities that promote economic development both for good and for ill across large regions of the world including the home nation.
The notion that states or nations should be the unit of macro-economic study is a hold over from a long discredited economic theory known as mercantilism. Mercantilist theory believed that a nation or empire’s wealth was in its reserves of gold and that its national interest rested in making sure that the nation could raise an army quickly. This capability for raising an army was measured in the size of the treasury’s store of gold. Today this mercantilist assumption is perpetuated in the notion of Gross Domestic Product (GDP) which is often used to measure a nation’s wealth. It is also perpetuated by an incorrect assumption that national economic sovereignty is connected and can influence national economic development. At a national level this assumption is not true.
Jacobs points out that every country has regions within it that lag in development compared to other regions. This should be evidence that national level economic development programs do not work at a national level. Right wing economists point to these failures and say government cannot and therefore should not try to pick winning industries and further that governments should not try to influence the free market. Jacobs would argue that the conclusion we should reach from all that research is that the national level is not the right level to conduct economic development. There is most certainly a role for government in economic development, but it is not at the national level rather it is at the municipal level. The fact of widespread apparently random failures and successes of national economic development schemes points to the city as the unit of economic development – some cities develop others stagnate and others decline. We should therefore study cities to determine what are the conditions for successful development and what are the conditions for declining prosperity.
Because she published the book in the 1980’s the notion of stagflation was on everyone’s mind. Prior to the arrival of simultaneous inflation and economic stagnation all mainstream economic theories posited that economic development was the process of inducing just the right amount of inflation to induce growth without letting inflation runway out of control. The theory went like this: say we increase the money supply (for example, a new gold mine is discovered and brought to production); those who first get the new money expand their purchasing thus stimulating demand for more goods, services and jobs; this demand and the new money create more jobs to supply the goods and services demanded; ideally at the end of the round the increase in money supply should create enough jobs and be close to the increase in goods and services and therefore prices should stay close to stable. Everyone agreed that if you increase the money supply too quickly (i.e. before new, jobs, goods and services could be created) you would create uncontrolled inflation and the art of the central bank’s monetary policy should be to adjust interest rates just so that the money supply increases at a controlled rate commensurate with the growth of the economy. That is, a central bank’s interest rate policy is supposed to keep inflation low (measured as the price level) and the economy growing (adding of jobs, goods, and services) at a steady rate. In the 1970s and 1980, reality showed this to be flawed but central banks the world over still talk and think this way.
Jacobs challenges the assumption that job growth and price inflation are two separate but inversely connected phenomena. Stagflation has shown, contrary to all previous theory, that unemployment can increase with price inflation – and in fact Jacobs claims that is the historical norm. It is more helpful to understand “stagflation as a condition in its own right: a condition of high prices and too little work….The moment we think of it so, we instantly realize that this condition is not abnormal or unprecedented. Rather, it is the normal and ordinary condition to be found in poor and backward economies the world over. The condition is abnormal only in economies that are developing and expanding or have been doing so in the recent past, which of course are exactly the economies which have harbored, among so much else, economic scholars and thinkers….[stagflation is] a normal consequence of economic stagnation, just as backwardness and low productivity are other normal consequences of stagnation….the emergence of stagflation in formerly developing and expanding economies is appalling in its implications and portents. It is not just a problem of inflation to be gotten under control along with a problem of unemployment to be dealt with by mastering inflation, or vice versa. It is a condition in its own right, the condition of sliding into profound economic decline.”
For Jacobs any settlement can grow. Any settlement can engage in a process of import replacing. That is doing locally what was formally imported. This is always and everywhere a city function. This is so because cities are more diverse and concentrated then any countryside. It is diversity and concentration of people that allows for more opportunities to creatively solve problems, get the resources needed (such as attracting people, filling jobs, finding capital, developing technology, and find markets) – that is a five-fold competitive advantage that cities have over the hinterland. Import replacing can start at any sized town but clearly the bigger the settlement the more diverse the import replacing can be. When a process of import replacing is happening, the city is growing. If it is not happening, then at best the city is stagnating or more likely in decline. If the city is not growing, then its immediate countryside is also not growing. Hinterlands always share the same fate as their closest major city. This is why she named this book Cities and the Wealth of Nations. It is the growth of cities by import replacing that animates their whole region and by addition the country. Jacobs laments the notion that development officials try so hard to attract business into settlements that are “too passive to generate industries of their own and who therefore scramble and compete for the insufficient supplies of such enterprises cast up from an insufficient supply of active and creative economies.” This passivity can infect settlements of any size.
“Any settlement that becomes good at import-replacing becomes a city. And any city that repeatedly experiences, from time to time explosive episodes of import-replacing keeps its economy up-to-date and helps keep itself capable of casting forth streams of innovative export work….In real life, whenever import-replacing occurs significantly at all, if occurs in explosive episodes because it works as a chain reaction. The process feeds itself, and once well underway, does not die down in a given city until al the imports that are economically feasible to replace at that time and in that place have been replaced….once replacements start, they stimulate more replacements.”
As mentioned, cities have 5 competitive advantages over non-city settlements. These are economic development forces that extend out to the countryside and help develop it too. “The expansion that derives from city import-replacing consists specifically of these five forms of growth: abruptly enlarged city markets for new and different imports consisting largely of rural goods and of innovations being produced in other cities; abruptly increased numbers and kinds of jobs in the import-replacing city; increased transplants of city work into non-urban locations as older enterprises are crowded out; new uses for technology, particularly to increase rural production and productivity; and growth of city capital.” Outside of cities lie two zones. The first, city zone, or city region, which starts just beyond the suburbs is where all five city economic development forces act. It can include rural, industrial, or commercial and is has second highest levels of diversity and concentration of people and jobs (second only to cities themselves). The furthest zone, Jacobs calls the supply region and is were only one or two city forces reach. Development can happen here but if it does it is dead end development usually resource extraction. A one industry towns, for example, may be rich in good times but their fortunes depend on the fortunes of its industry in a faraway city. Without import-replacement all current industries will become obsolete – that is the fait that awaits any uncreative settlement.