BOOK REVIEW

TITLE: “City & Wealth of Nations”

AUTHOR: Jane Jacobs

PLACE OF PUBLICATION: New York, United States

PUBLISHER: Random House, Inc.

DATE OF PUBLICATION: 1984

NUMBER OF PAGES: 245

CONTENTS:

1. Fool’s Paradise
2. Back to Reality
3. Cities’ Own Regions
4. Supply Regions
5. Regions Workers Abandon
6. Technology and Clearances
7. Transplant Regions
8. Capital for Regions Without Cities
9. Bypassed Places
10. Why Backward Cities Need one Another
11. Faulty Feedback to Cities
12. Transactions of Decline
13. The Predicament
14. Drift
OVERVIEW:

Jane Jacobs is best known for her classic and hugely respected
critique of modern urban planning, The Death and Life of Great
American Cities. But, after that work, she expanded her writing
into macroeconomics and the analysis of economic growth, and
believed that she'd found a better explanation than previously
advanced for how economies grow and develop.

Cities and the Wealth of Nations, along with The Economy of

Cities and The Nature of Economies, is part of her presentation of
that analysis.

This sort of book is tricky, both to read and to discuss. Jacobs was
a brilliant woman, keenly observant, and with a broad-ranging
understanding of the nature and mechanisms of cities. Her work
on urban planning is justly famous; among other things, she
presents the most cogent and comprehensive argument against
strict zoning that I've ever seen. She generally argues for
complexity over simplicity, always a difficult thing to do well but
frequently the source of the best analyses. However, none of
those properties make her a macroeconomist, and economics,
particularly macro, is a notoriously difficult field.

Very smart people are capable of sounding persuasive and well-

informed on just about any topic to which they turn their attention.
That doesn't, however, make them right. It shows that they know
how to construct an argument and avoid obvious logical errors,
but it doesn't mean their assumptions and background
knowledge are sufficient to the topic. It's therefore always worth
approaching brilliant people writing outside of their field with
some skepticism. The easy markers of inaccuracy will be missing,
but deeper problems may be lurking and difficult to find on a
simple reading.
BACKGROUND:

Cities and the Wealth of Nations was first published in 1984 and
therefore probably written in 1982 and 1983, right at the end of the
stagflation crisis in the United States. Jacobs opens the book with
a history of both demand-side and supply-side economics,
concluding by using stagflation to show that both have failed to
explain modern economics. In 1982, when Paul Volker and the
Federal Reserve still were keeping the funds rate at high levels to
fight stubborn inflation despite a national recession, that
conclusion appeared inescapable. However, just two years later,
inflation had collapsed and the Phillips curve now seems
revalidated as a tool for macroeconomic analysis. Both demand-
side and supply-side economics have developed explanations for
stagflation that do not require overturning the rest of their theory,
and Keynesian analysis in particular now appears redeemed by
the results of Volker's persistent application of classic Keynesian
remedies through the early 1980s.

The broader problem here is that macroeconomics is

complicated, hard to discuss with any scientific rigor, and prone to
significant hindsight reinterpretation. It's depressingly easy to come
up with plausible-sounding theories, easy to discredit them in the
light of the current crisis, and very difficult to determine whether
the resolution of that crisis supports your new theory or renders it
unnecessary.

It’s an iconoclastic look at macroeconomics that presents a city-

centered theory of economic growth that doesn't fit into either
classic demand-side or supply-side economics, written at the
height of a crisis that seemed to discredit mainstream economics
but, in retrospect, probably didn't. And it's written by a brilliant
thinker and gifted author, but possibly outside her area of primary
expertise. There are a lot of warning signs there, but also a lot to
intrigue.

The theory itself is expanded from The Economy of Cities:

Economic growth happens primarily through cities, and

specifically through a cycle of city import replacement. A city
starts by making some set of products for export to other cities and
using the profits from that export to import products of interest
from other cities. As its wealth increases and a wide selection of
imports builds up, city industry finds local ways to make things that
were previously imported from elsewhere, possibly more efficiently
or more creatively, by applying knowledge from other local city
industries to the new market. That investment leads to building up
a new city industry, which eventually becomes another export
market for the city. The profits from that export are used to buy
more imports, which eventually in turn become candidates for
local replacement.

Import substitution has a very bad name in macroeconomics due

to some spectacular failures of government policy, primarily in
South America, so it's worth reinforcing here that by import
substitution Jacobs does not mean ham handed government
attempts to assemble local industry like a Lego set while forcing
consumers to purchase from it. She discusses at some length why
the approach taken in some South American countries to
encourage development of local industry was doomed to failure.
Instead, import substitution here is a dynamic, unpredictable, and
creative process of repurposing local talent and established
support industry to find innovative ways to make or improve
products previously made elsewhere, something that happens as
part of a free-market process and with only an unpredictable
subset of the goods that a city is importing. It's a process that relies
heavily on cross-pollination between industries and creative
repurposing of infrastructure for one industry for use in another
industry.

SUMMARY:

Cities and the Wealth of Nations goes beyond that analysis of the
economic lifecycle of a city to talk about the regions surrounding
cities, how they feed into and are influenced by the city
economy, and then to talk about non-city regions and the
groupings they fall into. It is a reconstruction of macroeconomics
around the city, rather than the country, as the fundamental unit.
And, in the process, there is a lot of fascinating analysis, ranging
from the economic effects and questionable morality of farming
technology improvements in the absence of meaningful city work
for displaced workers through the failure of transplant industries to
the perils of extraction economies.

Much of what Jacobs say here lines up well with things I've heard
from other economists, such as the dangerous dead-end trap of
resource extraction economies. Other parts, particularly the
devastating analysis of the perils of agricultural improvement
happening in isolation from change in the rest of the economy, I'd
not seen elsewhere and found very thought-provoking.

One of the most interesting parts, and one that seems particularly
timely given the current Euro crisis, is Jacobs's look at the effects of
currency on her model of city economic growth. If a city has its
own currency (true either for city-states or for countries small
enough to only have one full city large enough and healthy
enough to follow Jacobs's model), the exchange rates of that
currency tend to have beneficial signaling properties for the city.
As the city becomes more and more successful at export, its
currency tends to rise in value because it's running a trade surplus,
which both encourages imports (which become cheaper) and
which eventually push the city into innovating or diversifying
because the exports become more expensive and less
competitive. When it is in a cycle of import replacement and
development of new export industries, when exports have fallen
and innovation is just starting to take root, its currency tends to
drop in value, both encouraging people to buy locally (and
support the new innovative industries) and providing a boost to
new export business. The changes in exchange rates act as a
brake on cities becoming too successful exporting a single
product, since that leads to a stronger currency and therefore
falling exports while simultaneously providing a rich variety of
imports around which to innovate.

Jacobs argues that national currencies that span multiple cities

destroy nearly all the benefits to this innovation cycle. At best,
they tend to be neutral, not responding to the city economic
cycle at all. This can lead to cities continuing specialization in a
single product for far too long, since the currency never sends a
signal that innovation is required by making exports more
expensive. This makes the city both fragile and unstable over time;
leading (in Jacobs's analysis) to unstoppable collapse when
something finally undermines the too-specialized export industry.
Detroit is her example of this. It also means there's no natural
mechanism to encourage fledgling local industries via a weak
currency, which acts as a natural import tariff. One can substitute
real import tariffs, but since those are a political act they tend to
be distorted by lobbying and to last far longer than they should,
protecting industries beyond the point where that's useful for early
innovation or protecting the wrong industries entirely.

Even worse, a national currency can send exactly the wrong

message. If the national economy is doing well but some cities are
doing poorly, the continued strong currency provides no
assistance to fledgling import substitution and can make it difficult
for local innovative industry to get established in those cities. If the
country is running largely on a limited export business (or, worse,
on resource extraction), there's a political incentive to keep the
currency weak, but this prevents cities from importing a wide
variety of goods that provide fodder to the next cycle of
innovation.

Jacobs follows this reasoning to argue that, in an ideal world, we

would have far more currencies than we do, and speculates that
single national currencies have a tendency to undermine
formation of healthy city regions and encourage creation of single
mega-cities that dominate national economies to the exclusion of
other cities. I'm not sure how much I buy this analysis, but it comes
at currencies from an interesting angle while still supporting some
of the analyses of the benefits of multiple currencies that I've read
elsewhere.

EVALUATION:

As one can see from the length of the review, there's a lot packed
into a relatively small book.

There are whole topics I've not touched on, such as the benefits of
city trade with other cities at their same level of development
rather than only with advanced cities.

While there are good reasons to be skeptical of the validity of

Jacobs's overarching theory, its full of specific observations and
smaller analyses that I think are useful even if the overall theory
has holes. Sustained economic growth is hard, and as with her
work on urban planning, Jacobs embraces complexity and tries to
build theories on specific observations instead of idealized
conditions. That is a valuable contribution to the discussion.

COMMENT:

I would recommend reading this book with some skepticism, but if

you're interested in macroeconomics, I would recommend
reading it. If nothing else, it's full of thought-provoking case studies.

Jacobs's point that a country is an artificial economic unit and

that national economic policy is therefore inherently misaligned
with natural economic patterns seems self-evidently correct, and
it's good to take some time and think about what the alternatives
might look like.

REVIEWD BY: Ar.Vismay Wadiwala (B.Arch)

COURSE: M.Arch (City Design)

SUBJECT: Housing Pattern

FACULTY: Ar.Vijal Desai (M.Arch)

University: Faculty of Architecture, SCET, Surat, Gujarat- INDIA.