Reading Cities and the Wealth of Nations: I

Jane Jacobs's first chapter, "Fool's Paradise," begins with the only significantly dated material in the book, a survey of the geopolitical situation in the early Eighties. It is almost breathtaking to see how much has changed in twenty-two years, and one fears that arguments built on inferences from so different a world will have staled past edibility. But consider:

Macro-economics - large-scale economics - is the branch of learning entrusted with the theory and practice of understanding and fostering national and international economies. It is a shambles. Its undoing was the good fortune of having been believed in and acted upon in a big way. We think of the experiments of particle physicists and space explorers as being extraordinarily expensive, and so they are. But the costs are as nothing compared with the incomprehensibly huge resources that banks, industries, governments and international institutions like the World Bank, the International Monetary Fund and the United Nations have poured into tests of macro-economic theory. Never has a science, or supposed science, been so generously tested. And never have experiments left in their wakes more wreckage, unpleasant surprises, blasted hopes and confusion, to the point that the question seriously arises whether the wreckage is reparable; if it is, certainly not with more or the same.

With the collapse of Communism, the tendency toward ostensible free-market Globalism already underway when Jacobs was writing emerged as the prevailing macro-economic theory, and it is still at work today. But it is no better than any prior theory at ordering the world, and it continues to leave "wreckage, unpleasant surprises, blasted hopes and confusion" in its wake. What has not changed is the first premise of classical and neo-classical economics: prices and unemployment are inversely related. As prices rise, unemployment drops. Jacobs painstakingly traces the history of this law from its inception in the eighteenth century (Cantillon and Smith) to the monetarism of the Chicago School (Fisher and Friedman), chuckling at successive failures to explain "stagflation" - the simultaneous rises in prices and unemployment that took off in the late Sixties. Then she mentions Arthur M Okun. Okun, she writes,

who was an expert on Phillips curves and who had served as chief economic adviser to President Lyndon Johnson, was one of the first Keynesians to become suspicious of his science. After stagflation had emerged he suggested half seriously and half facetiously that unemployment and inflation rates ought to be merged into one single stagflation figure, "the economic discomfort index."

This prompts the Eureka moment. What if stagflation is a "coherent condition"?

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 from Cantillon right down to Milton Friedman and Arthur Okun.

In other words, the discipline that we call "economics" arose in the new economy of the Industrial Revolution. (I am always astonished by the persistent habit, even among educated people, of assuming that human society was created in the Renaissance at the earliest, and that the trends and conditions that have developed since then are "normal," when in fact they're quite the reverse.)

Jacobs can be faulted, perhaps, for introducing her argument somewhat backwardly, beginning the second chapter, "Back to Reality," with a challenge to the macro-economic principle that "national economies are useful and salient entities for understanding how economic life works and what its structure may be: that national economies and not some other entity provide the fundamental data for macro-economic analysis." The challenge is extremely anecdotal, and first-time readers may forget where they are as Jacobs tells the charming history of Bardou, a small town in the Cévennes of France. She uses this to make a point: the national economy of neither the Roman Empire nor modern France had anything to do with the rise of Bardou (as a source of iron) and its subsequent abandonment, almost total - a process reversed in the Sixties. In every case, the up or down of Bardou's economy was wholly determined by events in distant cities: first Rome and Nîmes, then Paris and Lyon. These cities either could use something that Bardou had or they couldn't. First, they needed the iron. Then they didn't need anything, and Bardou staggered through centuries of subsistence farming more or less as if the outer world did not exist. Then the cities developed an appetite for the people of Bardou, who found urban jobs in the wake of the Industrial Revolution.

To hammer home the importance of cities, Jacobs quotes an 1889 lament by Henry Grady, an Atlanta journalist. Attending a rural funeral, Grady was dismayed to observe that everything from the deceased's cheap suit to the shovel used to dig the hole was produced in some Northern city. Once again, the national (American) economy seems to have no direct impact upon local economy. Small, backward towns must import the goods that they need, even if no frontiers are crossed in the process. What do cities do? They start out as small, backward places, too, but they begin to replace their imports with local production. And then, through the innovation that seems inevitable in human activity conducted in groups, cities expand their economies with exports.

In the first place, the replacement of former imports is impossible to achieve economically, skillfully and flexibly - meaning in ways suitable to the time and place - except in a settlement that is already versatile enough at production to possess the necessary foundation for the new and added production work. Cities can build up that kind versatility, often very rapidly, in part as a result of their already existing export work (if it is reasonably diversified), in part as a result of their previous simpler achievements in import-replacing, and in part through the complex symbiotic relationships formed among their various producers. In the second place, city markets - whether of consumers or producers - are at once diverse and concentrated. These two qualities of the local market make production of many kinds of goods and services economically feasible that would not be feasible in rural places, company towns, or little market towns, and most especially so at the time production of former imports is just starting up and getting a foothold in its markets.

If there is one thing that Jacobs fails to take into account, it is the role of the automobile in enlarging the geographical area in which a creative market can function. The most dramatic recent flock of innovations, centered on the personal computer, occurred in suburban Silicon Valley. But there is no questioning the relative concentration of that area. Microsoft's Windows could not have originated in rural tinkering. And who knows for how much longer cars will remain viable modes of transport?

Looking around at the New York City of today, I wonder if it is a city at all. It is certainly a city in the cultural sense, which Jacobs, to her credit, does not explore: at no time does she extol the city as a center of sophistication and intellectual advance. But her theory applies to all human activity, I think, and New York certainly bustles with creative innovation. It's on the material front that the city has lost its way. Later in the book, Jacobs makes the case that no city can really afford to drop production of the basic and not-so basic "necessities" of city life. We all need knives and forks, and we ought to be capable of producing them. That can't a prospective capability: you can't make good cutlery without knowing how, and the only way to know how is to make cutlery. New York has largely shed such basic skill sets, and Jacobs laments how far the deterioration had gotten in 1984. It is probably more severe today. I raise this point now to hint at the intensity of Jacobs's quarrel with global free markets. The fact that knives are more cheaply produced in China is not a good reason for dropping production in New York City.

Another point that Jacobs will make is that nations, in their confusion of economies, inevitably end up with one principal town and a more or less sizeable host of peripherals. Indeed, New York, London and Paris all command their nations' "symbolic" markets - from the arts to insurance - at a time when these are the most innovative. So far, electronic trading networks have raised enough problems to keep the New York Stock Exchange in business. We're not as abstract as the philosophers would like us to be: for far too many human occupations, it's vital to be in the same room as the people you're doing business with. (May 2006)

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