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The Wealth of Nations

In response to:

City Lights from the November 7, 1985 issue

To the Editors:

Peter Bauer is one of the world’s foremost economists and a fitting reviewer for Jane Jacobs’ Cities and the Wealth of Nations, which is recognized by many as a seminal economic work [NYR, November 7, 1985]. But rather than dealing with the nub of Jacobs’ thesis—that the city and not the nation is the relevant economic unit and thus the key to development—he has chosen instead to use this review as a platform for his own theories. I have read these theories in his own books and am much impressed with them, but he does Jane Jacobs and your readers a great disservice by setting up straw men in her book for his theories to knock down.

One of Bauer’s main quarrels is with the view that “commercial contacts with the West have harmed rather than benefited [backward regions],” a view he assumes Jacobs holds.

But nowhere in her book does she imply that backward regions should forego trade with advanced regions. She does not say, as Bauer claims several times in several ways, that for backward regions “external commercial contacts are damaging, or that they would have fared better if they had not produced cash crops.”

Quite the opposite. Time and time again, Jacobs in her book shows how external contact with affluent areas has provided the impetus for development: this is how backward Venice did it in the sixth century, how colonial American cities did it in the eighteenth century, and Southeast Asian cities in the twentieth. But what she does say, and she could not say it more clearly, is that the cities which become successful are those that do not limit their trade to wealthy regions:

It is fatal if backward cities confine themselves to that kind of trade, for such trade is only a springboard for embarking on a different kind of intercity trade: trade with cities in much the same circumstances and stage of development as themselves. This means that backward cities must trade most heavily with other backward cities. Otherwise, the gulf between what they import and what they can replace with their own production is too great to be bridged.

If Bauer disagreed with this springboard theorem, we might all have profited from his perspective. But he did not deal with it at all, preferring the ground he himself has well traveled before. So he has given us a spirited defense of colonialism, attacking Jacobs for her presumed view that “colonialism has been a major factor holding back poor countries.” (In fact, she points out how colonies like Hong Kong benefited from that same springboard effect in their trading relationships with their colonial masters.) And he seems to be criticizing her for failing to realize that tariffs often benefit groups in the city at the expense of the rural population, apparently oblivious to her view that “in large nations or small, tariffs victimize rural economies lying outside of city regions.”

But Jacobs doesn’t think they need to. Tariffs, she explains, act to counter the poor feedback received by cities tied to national economies. Distinguish between the city and national economy by allowing the city to issue its own currency—which she argues provides automatic feedback on its economic health—and the tariff becomes unnecessary.

Sadly, few cities have their own currencies, yet all need feedback. Tariffs may be a poor second to a city currency; they may harm consumers and the rural areas; they may have a host of other drawbacks (such as inviting retaliation), but they have as their virtue the occasional success: American, Swedish, and Japanese cities, as Jacobs points out, and as Bauer does not refute, all avoided economic stagnation and prospered because of the tariff.

Bauer is himself a provocative and refreshing writer, with much to say of substance about development. I find his theories reconcilable with Jacobs’, and I commend him to your readrs. But Bauer, the economist’s iconoclast, in his review of Cities and the Wealth of Nations shows himself to be first and foremost an economist who rushes to defend his discipline from Jacobs’ “scathing criticism.” In his rush, he has presented Jacobs’ remarkable theories without delving into them, instead using his finely honed powers of analysis on the axes he wanted to grind.

Lawrence Solomon

Toronto, Ontario

Peter Bauer replies:

I am baffled my Mr. Solomon’s reaction to my review of Jane Jacobs’s book. So far from ignoring her propositions and preferring to rehash my own views, I set out her arguments at great length, as can be readily verified from the first two and a half pages of the four-page review. (Moreover, I commended much of her book.) Nor did I rush to the defense of economics, as is clear from the concluding two paragraphs of my review, which show my very critical stance toward the subject.

I should have thought that Mrs. Jacobs’s discussion of “supply regions” and in particular her references to Uruguay and Zambia (pp. 63–64), which she writes were heavily dependent on distant markets for meat and copper, substantiate that she thinks that insofar as they do not give rise to import-replacing cities, such regions suffer and that contacts with more advanced regions are apt to damage primary producers.

The extensive quotation from the book in Mr. Solomon’s letter encapsulates the basis of two of my criticisms of the book. The first of these is the inappropriate abstraction in treating cities as if they were single decision-making units or homogeneous entities whose components have the same interests. Mrs. Jacobs rightly takes economists to task for this practice in their treatment of nation-states, yet she commits the same error in her own discussion of cities. Second, she is apt to ignore prices and costs when the recognition of their relevance is critical. This applies to her advocacy of trade between backward cities and to her treatment of import substitution. Why is it that the people of Accra, Lagos, and Nairobi, who are conscious of the factors of price, cost, and quality, trade with those of Western cities rather than with one another? The answer, as I noted in my review, is that they have little to offer one another, and what little there might be is obstructed by high costs of transport, lack of public security, political hostility, and officially imposed trade restrictions.

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