Market Urbanist Book Review: Cities and The Wealth of Nations by Jane Jacobs

No one writer of the last 60 years has influenced urban planning and thinking as much as Jane Jacobs. It seems like just about everyone who has ever set foot in a major city has read The Death and Life of Great American Cities and most professional urban planners have embraced at least part of her ideas. But that was not the only book she wrote and the others deserve attention from urbanists.

First published in 1984, Cities and the Wealth of Nations was her last book to focus on cities and her second concerned with economics. Conceived at the height of 1970s stagflation, Jacobs brought her considerable polemical skills to bear on macroeconomics and elaborated on the observations in The Economy of Cities.

In that book she theorized that economic expansion in cities was driven by trade, innovation and imitation in a process she called “import replacement”. In this one she extended the idea, arguing that cities and not nation-states are the real basic units of macroeconomic life. She also examined how the economic expansion affected regions in differing geographic proximity and how import-replacement and the wealth generated by it can be used in ways that ultimately undermine the abilities of cities to create wealth, which she called transactions of decline.

Import-replacement is one of Jacobs’ more controversial ideas, partially because it seems similar to a discredited development policy called import substitution and partially because her evidence is largely anecdotal, as Alon Levy wrote back in 2007.

Nevertheless it’s the centerpiece of Jacobs’ economic theories. And dismissing her work based on a lack of conventional credentials ignores her entire rise to fame and influence.

Two important things distinguish import-replacement from import-substitution. Substitution is a national policy pursued by governments with taxes, tariffs and subsidies while replacement is a process that comes from entrepreneurial imitation and innovation. Another important distinction is that substitution is about national imports but replacement applies to all imports, including domestic ones.

Another important consideration in favor of replacement is explanatory power. Conservatives and libertarians are often puzzled by the way low tax, limited government states like Kansas fail to prosper but California seems to do everything to hinder prosperity short of Maoism but produces millionaires by the dozen. For Jacobs the answer is clear: California has import-replacing cities and Kansas has none.

Import-replacement could also have a more testable predictions than conventional macroeconomics. New York City in the 1990s, for example, would be a good place to test it. Another good test would be Japan, which, as Noah Smith points out, is where macroeconomic theories go to die.

From import-replacement and city-led economic growth she turns to the effects of city economic expansion outside the city’s regions, writing that it “unleashes five great economic forces of expansion: city markets for new and different imports; abruptly increased city jobs; technology for increasing rural production and productivity; transplanted city work; city-generated capital” and these forces can work in an unbalanced way on some regions. The introduction of technology that improves rural productivity without transplanted city work or a market for a different kind of labor would result in widespread unemployment; the infusion of city capital and new city markets could turn an area into a colonial economy or “supply region” as Jacobs terms it and so on.

The section describing the effects of cities on outlying regions is both incredibly relevant as well as the best written portion of the book. We are introduced to the failures of much lauded programs like the Tennessee Valley Authority, Puerto Rico’s Operation Bootstrap and other “economic development” programs that compete with one another around the world to offer businesses the best subsidies and tax rates – a global race to the bottom for a shrinking group of firms large enough and self-sufficient enough to move to areas lacking an import-replacing city’s creation of new enterprises.

She also argued that currency fluctuations are a feedback system for city economies, subsidizing exports and taxing imports when they fall and vice versa when they rise. But a national currency, with cities of different sizes and at different points in the import-replacement cycle, distorts the feedback. However, the strength of the British pound in the nineteenth century, or the post-war Deutschmark, both of which were strong and export-based suggests this is not how currencies work.

In the last section of the book she describes transactions of decline, where the extensive subsidies, both welfare and military spending, used to hold large nations together hasten their dissolution. Jacobs wrote that these transfers would not only deprive cities of the capital needed for import replacement, but they would inhibit the regions receiving the transfers from becoming import-replacing.

Perhaps the weakest aspect of Cities and the Wealth of Nations is what Jacobs leaves out. She brings up the rising cost of housing in the United States, but attributes it to stagflation and leaves it at that. In my opinion, exclusionary zoning and post-war suburbia is a transaction of decline. Another thing I’m disappointed with is the thinness of her exploration of “symbiotic enterprises”, which were also mentioned in The Economy of Cities. She wrote about the industrial towns of northern Italy, where little businesses cooperated as much as they competed. They were major components of all the import-replacing episodes she wrote of, are much better documented and form a tantalizing connection to the ideas of economists like Wilhelm Röpke, EF Schumacher and thinkers like GK Chesterton and Hilaire Belloc.

Overall, Cities and the Wealth of Nations was persuasive, provocative and well-written. Jane Jacobs makes numerous astute criticisms of conventional macroeconomics and raises numerous points and ideas that deserve the attention of researchers. To their shame they have mostly ignored them.