Review: The Economy of Cities

Read aguanomics http://www.aguanomics.com/ for the world’s best analysis of the politics and economics of water Most people know Jane Jacobs as the best representative of the movement to save cities from cars. She was seen as the main opponent to Robert Moses’s attempt to turn Manhattan into a (bigger) parking lot. By trade, Jacobs was a journalist, but she made her mark with The Death and Life of Great American Cities (1961), a masterpiece of urban sociology that generations of car-obsessed planners have ignored at their peril. In that book, Jacobs draws on experience of living in New York and common sense as she explains the ways that people build social bonds with strangers and neighbors, and how those bonds create the “social fabric” that defines vibrant, resilient and prosperous neighborhoods (more on bonding).

For a long time, I though these significant contributions to be the totality of Jacobs’s work, but I was wrong — in the most pleasant way, it turns out, as she wrote many other books. Her last, Dark Age Ahead (2007) was an early, and quite accurate, warning against the rise of illiberal forces. I enjoyed it immensely and turned to her for more to read.

The Economy of Cities (1969) appealed to me not just because of the topic, but also its vintage, as I was born in that year. The book turns out to be another excellent read, mostly because it brings Jacobs’s original perspective to an important topic: how do cities grow and develop?

Before I move on, let me make a short note about this book’s relative obscurity. Although I am hardly an expert of urbanism or urban economics, I would have expected to hear more about the ideas Jacobs discusses in this book, but it seems that those ideas have now become so firmly entrenched that they are no longer credited to her.*

And Jacobs herself was not the first to talk about the economies of cities. Adam Smith was probably also not the first, but his 1776 characterization of economies of scope and scale has stood the test of time:

As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market. When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for.

There are some sorts of industry, even of the lowest kind, which can be carried on no where but in a great town… [snip] In the lone houses and very small villages which are scattered about in so desert a country as the Highlands of Scotland, every farmer must be butcher, baker and brewer for his own family. In such situations we can scarce expect to find even a smith, a carpenter, or a mason, within less than twenty miles of another of the same trade… [snip]

As by means of water-carriage a more extensive market is opened to every sort of industry than what land-carriage alone can afford it, so it is upon the sea-coast, and along the banks of navigable rivers, that industry of every kind naturally begins to subdivide and improve itself, and it is frequently not till a long time after that those improvements extend themselves to the inland parts of the country.

Smith’s observations on the size of the market more or less integrates an important element missing from basic economics, i.e., the importance of space and the transactions costs that arise with distance.** It is from this simple idea that Jacob’s begins her book with her most controversial (?) idea, i.e., that cities predated agriculture and drove the agricultural revolution of 10,000 years ago.

There’s very little evidence and no written records to support this idea, but I find it far more plausible than the commonly held idea that “farmers produced surpluses and thus enabled specialised trades and a bureaucratic class to arise.” Against this series of steps, Jacobs supposes that “cities” — basically villages whose specialized traders and craftsmen stayed put — existed alongside hunter-gather societies, each playing a complementary role to the other. Given this start, Jacobs then makes the entirely plausible guess that specialization in handling animals would lead to breeding, and specialization in handling seeds and other foods would lead to the selection of those with higher yields or more attractive qualities, with such “innovations” then being exported from the villages back into the wilds — and eventually the fields that would be defended by city-dwellers rich enough to build walls, hire guards and so on.

This insight alone is worth reading the book, but there are more!

One important implication of “city-led innovation” is that it rebukes governments that focus on “rural development.” Jacobs’s advice would be “leave them alone to follow and learn from cities,” but many governments subsidize, direct and protect rural areas in a crude attempt to “develop.” Such strategy not only wastes resources and encourages corruption, it also harms innovation in both cities and rural areas! (Note that this pattern is not falsified by China’s post-1980 “rural-led” development, as the Party would not have dared to give economic freedom to cities first.)

Her next major point is that cities need to innovate if they are to survive. This means that “company towns” are likely only to last as long as their companies. In the book, she mentions how Detroit was a dynamo compared to Pittsburgh because it had so many industries to Pittsburgh’s steel-dominated economy. With another 45 years of history, we no see how Detroit failed when its car industry stumbled and Pittsburgh has “come back” through diversification. It’s not easy to stay king of the hill!

Part of this thought that Jacobs spends some time on is the way that various players in supply chain must be competitive to service world-class firms, which means that they are also likely to be exporters, and thus the source of extra profits, jobs and prosperity. It is thus that Jacobs, with justification, highlights cities as the specialized engines increasing the Wealth of Nations. (Some might claim that countries can grown rich on agriculture, but the richest countries have stepped away from that sector.) She called this dynamic “import replacement” — meaning that local firms would cut out distant suppliers to local producers/exporters. Her definition is realistic as the way cities grow and more realistic as a description of how to encourage than “import substitution,” which depends on preventing foreign firms from supplying intermediate goods, in the hope that local firms would be able to fill the gap.***

“Looking into the future” [from 1969], she sees cities as “mines” for resources, presaging today’s industrial ecology and circular economy by decades. This insight is perhaps easy for her, as her understanding of cities as ecosystems would naturally lead her to consider how they might reuse waste.

Cities don’t grew because they have ports or river access (water access is not even a necessary condition), as the key to growth is a mix of older and younger industries that can export goods based on imported materials and innovate new goods and services as older enterprises decline.

Bottom line: I give this book FIVE STARS. Read it for the sheer pleasure of joining Jacobs on an exploration of how our urban economies evolve.

* This contemporary review [pdf] notes her iconoclastic insights. This piece discusses how economists put her ideas (“Jacobs externalities”) into play.  Google scholar shows either 89 or 7000k+ citations of this book. I checked a few and she was not cited, so the algorithm is confused. I’d love to see a decent list of economists who have cited her.

** In our daily lives, it’s easy to see how urban sprawl and congestion increases the transaction costs of  commuting and communicating with others in cities, which is why sprawl is bad for market efficiency and innovation. For some people, cars promise to “collapse space” but most of that promise has been lost in traffic jams caused by everyone else pursuing the same idea. It’s that dynamic that underpins my claim that cities should be for people, not cars, a position of whose righteousness I experience every time I ride my bike through Amsterdam.

***  Import substitution is often linked to failure and poverty in poorer countries. Note how import replacement does not prevent countries from defending their local industries from (subsidized) competition for a transition period before absolute free trade.