It is cities not nations that should be the unit of economic analysis. Cities produce the balanced weave of 5 economic development forces (markets, jobs, technology, transplants, and capital) that builds wealth and human flourishing. Beyond the range of a city proper, these five forces begin to unweave and project their forces in unbalanced proportions. The regions these forces enter benefit the cities but not so much the region with unbalanced economic development forces. The first region, supply regions, are the result of feeding city markets raw material, the second region, abandoned regions, are the result of people leaving to seek jobs in cities. The third region, clearance regions, are where city technology improves the land yield and thus feeds cities but displaces the region’s residents. The fourth region, transplant regions, where a company sets up shop by transplanting a factory or plant so as to save money but does not integrate into the local economy. And lastly capital for regions without cities sets up inappropriate development that can best be described as a white elephant.
A sixth type of region, Jacobs calls bypassed places. When a region loses all ties to a city it falls into subsistence and often extinction. The people there will lose all their technology as it wears out and if they survive, they will return to the stone age. As evidence, Jacobs points to the many primitive tribes around the world and especially in Polynesia. Based on their state of development at first contact with Europeans they must have come from a much more advanced civilization in the distant past to make it to many of the islands (for example Easter Island). Yet the people who were “discovered” by western explorers were incapable of traversing the great ocean distances. This means that they lost the skills and knowledge to do so. Jacobs also gives an example of “Henry,” a hamlet in the mountains of North Carolina that was suffering the same fate when it was re-discovered in the early 1920s. For a bypassed region to develop it needs to re-establish contact and trade with a city of its own culture. If it’s cultural civilization has fallen then the fate of the people in that region is not good. The exploitation, destruction, and often genocide that happens when a different cultured city discovers wealth in a bypassed region is a matter of obvious historical record. “To remain bypassed and ignored by alien cities can be a mercy.”
Jacobs’ main point in the book is that cities, not nations, should be the primary unit of economic development analysis. Cities affect the regions around them more profoundly for good or ill than national policies. National policies that can appear as successes or as failures are determined by the state of the city in which they are applied: a developing city will make the national economic development policy work but a stagnant or declining city will make it fail. Likewise in the regions between cities. Their success or failure will depend on the state of the nearby city or cities.
Jacobs’ major second point is that “national or imperial currencies give faulty and destructive feedback to city economies and that this in turn leads to profound structural economic flaws, some of which cannot be overcome no matter how hard we try.” In macro-economics a free-floating currency will adjust in value automatically depending on the relative demand for imports and exports. Since exports pay for imports, their relative value must balance out. As a country exports goods or services, they are bought by foreigners, who in the final analysis can be thought to pay in the domestic currency. As a country imports goods or services, they are bought by locals, who in the final analysis can be thought to pay in the foreign currency. If exports exceed imports, there is less national currency in the hands of foreigners, and it becomes more valuable thus making the nation’s exports more expensive for foreigners. The greater the discrepancy between exports and imports the more valuable the currency and thus the more expensive that nation’s exports will be. In this theory the national currency acts like a negative or corrective feedback loop that balances imports and exports. “Currencies are powerful carriers of feedback information, then, and potent triggers of adjustments, but in their own terms. National currencies register, above all, consolidated information on a nation’s international trade. When net international exports of goods or services rise, relative to those of other nations, the currency, being in demand, rises in value; when exports fall off, it declines in value.”
An example of a corrective feedback loop in a city: “when new enterprises in a city multiply and diversify rapidly, the information feeds back in the form of crowding, inconvenience and increasing competition for city space; it triggers off the appropriate correction: some enterprises move out of the city into the region, although still within reach of the city services and markets they require.”
The 5 economic development forces that emanate from cities work together in concert as a positive feedback loop. They can make a city grow because success breads more success. However, the 5 forces do not work in concert out side of the City’s region nor necessarily between cities. Therefore, the biggest problem with a national currency is that it is a very powerful blunt instrument. It is powerful because it will send messages of adjustment and these messages will be acted upon; it is blunt because it sends the messages to all cities in a nation equally. Jacobs makes an interesting analogy. A national currency is like having one set of lungs for several different people who are doing different things. A national currency would average out the oxygen needs of a sprinter and a sleeper resulting in the sprinter not getting the oxygen they need and the sleeper would hyperventilate in his sleep. Similarly, a national currency averages out the sum of the exports to imports of all cities. With this information the cities will always be getting the wrong economic signal and will therefore adapt to the perceived reality – and that will be precisely the incorrect thing to do too.
Cities and their regions should have their own currency. “Individual city currencies indeed serve as elegant feedback controls because they trigger specifically appropriate corrections to specific responding mechanism.” Many cities had this advantage in the past; today only Singapore has it completely. Hong Kong is close but its currency is pegged to the US dollar and has only made some adjustments over time. Generally these city states have no need for tariffs or export subsidies because “[t]heir currencies serve those functions when needed, but only as long as needed. Detroit, on the other hand, has no such advantage. When its export work first began to decline it got no feedback, so Detroit merely declined, uncorrected.”
Three economic development difficulties arise for multi-city states that share one currency. In the first case if the country is predominantly rural then monetary policy will be skewed in favour of the dominant rural industry to the detriment of cities and the economic forces that they create. The result is that poor rural countries continue to hobble their cities’ economic development and remain poor despite all sorts of schemes and foreign aid. The only way Jacobs sees is through tariffs on city produced imports. This is the way that a young and predominantly agrarian United States economically developed its northern cities. It was framed as coming to the aid of American manufactures. European imports were restricted and the process of import replacement with homegrown production began mostly in the north. However, the cost was a civil war as the primarily rich and agrarian south resented the lost imports from Europe. Jacobs claims that the south rich on past successes was even more backward from an economic perspective than the north and would have needed their own tariffs on northern manufacturing to compete. Instead, they tried to secede – hoping to stay backward and rich.
In the second difficulty, if the case is that monetary policy is skewed in favour of cities over the rural then the reverse is true the rural cannot develop because the currency signals are going to city production. But this is also bad because there is one dominant city (or a dominant city develops by luck of timing. Since all cities are at different stages of development and develop different goods and services. Monetary policy will favour the largest city to the disadvantage of other cities and doubly so to the disadvantage of the rural parts of the country. Monetary policy, being a blunt instrument likely favours no one or it favours one city at the expense of all the rest. When this last possibility happens, it is politically very hard to say no to the dominant city; and if the political will did exist to do so then monetary policy would simply create a new dominant city. Canada is an example of this case: Montreal was the dominant city for most of Canadian history but the quiet revolution (a political force) depreciated Montreal and Canada’s second city was favoured and became dominant: Toronto. Today western alienation is the result privileging Toronto.
The third difficulty arises with the advent of a dominant city in a nation. The more important it grows the worse it is for all others and yet to hinder the “economic engine of the nation” is to force decline on the whole nation. As such countries are exploiting machines that privilege a dominant city at the expense of the rest of the country. This is a sign of a country’s decline.