Jane Jacobs begins her Cities And The Wealth Of Nations with a fundamental critique of mainstream economics. Cities – and not nations – she argues, are the fundamental wealth producers, and therefore cities – and not nations – should be the basic unit of analysis for economics and finance.
From this critique flow original ideas on rural development, currency regimes, and the decline of economic empires.
As in her better known classic The Death and Life of Great American Cities, Jacobs radically ignores, or leaves aside, the starting principles of her intellectual predecessors.
Jacobs isn’t held back by the fact that Adam Smith – and almost all subsequent macroeconomists – consider national economies the appropriate way to measure economic growth.
Nearly 30 years after this book was published, I am impressed at just how useful her analysis is for understanding current economic problems. Want to understand why China’s experiment in the 60s didn’t work but what is working today? Want to understand why the European Common Currency may really never work? Wan to understand what types of transfer payments may undermine our economy in the long run (and it’s not the ones you were thinking about).
Jacobs offers much in this book to help us understand these and other big questions.
Cities are the key units of measure, not nations
In economics we typically quote Gross National Product when measuring growth, but that measurement, Jacobs would argue, obscures the preponderance of economic activity which flows not from a nation as a whole but rather from its cities. It makes more sense, therefore to think of the economies of New York and LA as the keys to understanding development.
She points to the historical example of Italian city-states, and the modern examples of Singapore and Hong Kong, to illustrate the mechanism by which cities, not nations, drive trade, innovation, labor markets, and capital formation. The regions surrounding cities become ‘city-regions’ shaped entirely by the urban center. Regions outside of cities, including rural and less populated areas, either conform to the proximate city economy, or get left developmentally backward.
If cities, not nations, drive wealth creation, then our definition and perspective on economic under-development changes. Jacobs argues that less-developed economies typically suffer from a lack of successful cities, or an over-reliance on a single city.
“Show me a poor, underdeveloped country,” Jacobs seems to say, “and I will show you a country with very few or no successful cities.”
Among my do-gooder peers, “rural development” seems like one of those universally admired ideas, like Motherhood, Cross-Fit, and pro-biotic yoghurt. A number of close friends have dedicated significant years of their impressive lives toward this admirable goal.
But viewed through a Jane Jacobs filter, rural development becomes an oxymoron. If innovation, technology adoption, specialization, job creation and capital formation all happen in cities, then attempts to drive rural development work against the natural order of economic life. To the extent rural and agricultural areas become shaped by and therefore satellites to vibrant cities, rural folks may make a living, for some time, albeit generally at a reduced standard of living compared to urban areas. For significant parts of a less developed country to embrace investing in rural development, however, Jacobs would call it madness.
Jacobs goes to significant pains to illustrate the different pace of economic growth in urban and rural areas, and to explain how this difference interacts with national currencies.
Currencies, she reminds us, interact with economic growth as part of a natural economic feedback loop, and – when freely tradable -currencies act as a pressure valve for equalizing values through international trade.
Successful cities spur trade, foster technological changes, create jobs, and create capital, all of which benefit from – and indeed require – an expansive monetary policy to accommodate faster growth. Rural areas, by contrast, typically plod along at a slower pace of change, for which an entirely different – and more restrictive monetary policy – may be appropriate.
The problem with many national currencies, she argues, is that different rates of growth within a single nation between the city and the countryside receive inappropriate signals from the currency.
People in rural areas tied to a monetary policy driven by the needs of high-growth cities will suddenly find everything in a city inordinately expensive, as inflation in some areas outpaces it in others. Urban-dwellers, by contrast, will find their economic life stunted if monetary policy makers favor the needs of rural producers, in essence holding back the faster city-driven growth.
Currency Regimes – the city-state advantage
Jacobs points to successfully developed city-states, such as Singapore, Taiwan, and Hong Kong – that thrived with their own currency – as evidence of her view. Far from representing a disadvantage – due to the costs of currency exchange – a unique tradable currency helps these small countries match economic growth to appropriate monetary policy.
Monetary policy closely matches the high-growth trajectory of the city states, unencumbered by rural areas.
Jacobs offers a memorable metaphor for why unique currencies can enhance growth, whereas national currencies frequently hinder growth:
“National currencies, then, are potent feedback but impotent at triggering appropriate corrections. To picture how such a thing can be, imagine a group of people who are all properly equipped with diaphragms and lungs, but who share only one single brainstem breathing center. In this goofy arrangement, the breathing center would receive consolidated feedback on the carbon-dioxide level of the whole group without discriminating among the individuals producing it. Everybody’s diaphragm would thus be triggered to contract at the same time. But suppose some of those people were sleeping, while others were playing tennis. Suppose some were reading about feedback controls, while others were chopping wood. Some would have to halt what they were doing and subside into a lower common denominator of activity. Worse yet, suppose some were swimming and diving, and for some reason, such as the breaking of the surf, had no control over the timing of their submersions. Imagine what would happen to them. In such an arrangement, feedback control would be working perfectly on its own terms but the results would be devastating because of a flaw designed right into the system.
I have had to propose a preposterous situation because systems as structurally flawed as this don’t exist in nature; they wouldn’t last. Nor do they exist in the machines we deliberately design to incorporate mechanical, chemical or electronic feedback controls; machines this badly conceived wouldn’t work. Nations, from this point of view, don’t work either, yet do exist.”
Currency Regimes – anticipating the EU problem
Jacobs published Cities And The Wealth Of Nations in 1985, prior to the launch of the European common currency, but it’s easy to anticipate how she would describe the European Union crisis of the past few years. Observing the culture and economic activity of Germany, shackled together with the culture and economic activity of Greece, we can imagine her horror.
A single monetary regime for the European Union may or may not ultimately survive the ongoing crisis that began in 2008, but the pain imposed by inflexible currencies could not be any clearer.
Countries like Spain and Greece right now – with high structural unemployment – receive disturbing monetary feedback from the restrictive German control on the European Central Bank. Even if smart Greek observers like this one claim that union remains essential, it comes at great cost. He says it’s worth it, but Jane Jacobs would say it’s not.
Seeds of Decline
Jacobs ends Cities And The Wealth of Nations on a downbeat note, arguing that the vast economic differences between urban and rural areas leads inevitably to the creation of vast, inefficient, subsidies from the former to the latter areas, made in the interest of national stability.
These subsidies come in a variety of forms, but Jacobs claims they contain within them the seeds of inevitable national economic decline.
Given the current political divides in the US, her commentary on the inefficiency of subsidies seems particularly ironic and notable.
Jacobs laments the inevitable and vast transfers of wealth from cities to rural areas, since this saps economic strength from wealth-producing cities and shifts it to lower-growth, under-developed rural areas.
I’m struck by the idea that the conventional wisdom of current political dialogue in the US assumes, unlike Jacobs, that our urban underclass receives an unfair share of government largesse, sapping the vitality produced by a theoretical US “heartland.”
And yet, our national legislative system – guaranteeing an over-representation of people in under-populated states via the Senate – practically guarantees that subsidies will flow from urban to rural areas, not the other way around, as is commonly supposed.
Predictions are hard, but it doesn’t pay to underestimate Jane Jacobs.
Jacobs claims, somewhat dramatically, that the seeds of inevitable national economic decline stem from these unproductive flows of capital from urban to rural areas.
In the hundred-year view, she argues, the United States began its decline in 1933 with the implementation of large scale rural subsidies, while Japan’s decline will date from their similar decision in 1977.
The last twenty-five years have been kind to her ideas in this book, just as her ideas from The Death and Life of Great American Cities seem as relevant as ever, fifty years on.
We ignore her ideas at our own great peril.
This completes my trilogy of Jane Jacobs book reviews.
Please also see my review of Jane Jacobs’ The Death and Life of Great American Cities
And my review of Jacobs’ Systems of Survival – A Dialogue on the Moral Foundations of Commerce and Politics.
Please also see related post: All Bankers Anonymous Book Reviews in one place!
 Universally un-admired ideas, for example, include chemical weapons, Humvees, and Alex Rodriguez.
 Interestingly, although Jacobs does not focus on this example – probably because she published her book in 1985 – China’s last fifty years is almost a perfect illustration of Jacobs’ idea. The catastrophe of China’s 1960s rural development, which set back an entire generation, has been replaced with furious urban development, and the greatest, fastest, boom in human wealth creation the world has ever seen. By a long shot.
 In the US, Jacobs points to the 1930s as the beginning of the era of decline in the US. Rural Farms bills in the US, we can infer, would be the kind of thing Jacobs deplores. In Japan, Jacobs points to 1977 as the year that subsidies to less productive rural areas began in earnest.
 Along with unproductive and excessive military spending.
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