Last year two American friends, one conservative, the other liberal, independently sent me copies of Mrs. Jacobs’s book because they thought that while I would disagree with much of the argument, I would nevertheless find the book very interesting. They were right on both counts. Assessment of the merits and limitations of the book need have little to do with one’s political position.
Mrs. Jacobs’s principal theme is the part played by cities in economic achievement. She sees cities as the engines of economic advance, providing markets, jobs, capital, and technology for themselves, the regions around them, and other cities as well. Cities do this, she believes, only when businessmen in them engage in what she calls “import-substitution,” that is, “replacing goods that they once imported with goods that they make themselves.” In the case of a food product like jam, “first comes the local processing of fruit preserves that were formerly imported, then the production of jars or wrappings formerly imported for which there was no local market of producers until the first step had been taken.” Or, in another example given by Jacobs, “when Tokyo went into the bicycle business, first came repair work cannibalizing imported bicycles, then manufacture of some of the parts most in demand for repair work, then manufacture of still more parts, finally assembly of whole, Tokyo-made bicycles.”
Because, she argues, “an import-replacing city does not, upon replacing former imports, import less than it otherwise would, but shifts to other purchases in lieu of what it no longer needs from outside,” the import-replacing activity of the city is “at the root of all economic expansion.” According to Jacobs, when a city develops, it creates five forms of growth which transform its immediate region or hinterland:
Abruptly enlarged city markets for new and different imports consisting largely of rural goods and of innovations being produced in other cities; abruptly increased numbers and kinds of jobs in the import-replacing city; increased transplants of city work into non-urban locations as older enterprises are crowded out; new uses for technology, particularly to increase rural production and productivity; and growth of city capital.
To illustrate how these forces affect the region surrounding a great city, Mrs. Jacobs describes how a hamlet outside Tokyo was changed by that city’s growth. Originally, she writes, it was a settlement with few ties to the city; most of its inhabitants lived on subsistence agriculture. But as Tokyo grew, the hamlet could provide new kinds of crops for the city’s markets and ornamental trees and shrubs for its gardens. The young people of the hamlet left it to take jobs in the city. Although demand for farm produce had grown, because there were fewer people to grow crops, new agricultural tools and other labor-saving technologies were introduced. At the same time, transplanted industries from the city arrived, and, finally, city capital helped to finance the building of roads, schools, and irrigation channels.
When the economic forces created by a city’s growth spread beyond a city’s region, Mrs. Jacobs writes, they are usually not in reasonable balance with one another: “The various strands—markets, jobs, technology, transplants and capital—separate from the mesh and take off by themselves” and create “stunted and bizarre economies in distant regions.” For example, during the Forties and Fifties, Uruguay “supplied meat, wool and leather to distant markets, mostly those of cities and city regions in Europe, and it produced little else but wool, meat and leather.” But it was only a supply region for distant markets and lacked an import-replacing city of its own. When meat and wool production revived in the postwar economies of Europe, and manufactured substitutes for wool and leather were created in America, Uruguay’s markets contracted. It could no longer afford imports and had not developed the local industries that could replace the imports. Efforts to improve the economy, such as a crash industrialization program, failed, poverty spread, and during the late Sixties there was a civil war in the country.
According to Jacobs, cities help the economies of other cities grow. For example, “almost as soon as Tokyo began exporting bicycles to other Japanese cities, there arose in some of those customer cities much the same process of replacing bicycles imported from Tokyo, rather than from abroad.”
Moreover, because cities must find markets for their initial work in existing cities, “backward cities must trade most heavily with other backward cities.” For example, she argues that Venice, which arose in the sixth century by trading with the much more advanced city of Constantinople, was able to develop “by acting like Constantinople without Constantinople’s economy.” “Any crude city-made goods that Venice might have produced—imitations of Constantinople’s least sophisticated products—would have been of no interest in Constantinople.” So Venice traded with “other backward settlements in not too different circumstances from its own, settlements that needed whatever imitations of Constantinople goods Venice was capable of producing.” These settlements, such as Antwerp and London, in turn began to behave as Venice did, but with other, still more backward cities. In this way, Jacobs thinks that the prosperity of cities helps to explain how their regions prosper and can explain the fortunes of larger entities, including nation-states, even entire continents.
But she also argues that the incorporations of cities into large economic and political units heralds the decline both of the cities and the nations or empires that contain them. This is because cities that are a part of such larger economic units are unable to issue their own currencies and to impose tariffs, measures that would enable them to adjust to changed external conditions and to protect their own promising economic activities in their early stages. For example, according to Jacobs, an economy’s currency is a “feedback control”: when it declines in value relative to the currency of another economy with which it trades, the decline should correct its economy, for its exports become cheaper (thus encouraging sales) and its imports become more expensive (encouraging local manufacturing). A declining currency therefore should work like an export subsidy and a tariff. But, Jacobs writes, while this might be true of city currencies (such as those of Singapore or Hong Kong) “national or imperial currencies give faulty and destructive feedback to city economies.” This is because nations are “not discrete economic units” and “include, among other things in their economic grab bags, differing city economies that need different corrections at given times, and yet all share a currency that gives all of them the same information at a given time.”
For example, the economies of northern and southern Japan are poor relative to that of central Japan, which contains its great cities. Import-replacing cities have not arisen in these poorer regions and are not likely to do so, Jacobs writes, because “by now, potential import-replacing cities in the stunted regions would need tariffs or their equivalent on products from the larger and more highly developed cities.” If the poor regions had their own currencies, she writes, “they could automatically get equivalents of tariffs and export subsidies.” But this would require the creation of “a family of Japanese sovereignties in place of a single unified sovereignty. As it is, the fact of a single unified sovereignty ensures that these regions must remain persistently stunted relative to those of central Japan.”
Cities that are part of nation-states or empires must also contribute, according to Jacobs, to expensive, unproductive activities which she calls “transactions of decline.” For example, military production may create booms by giving export work to cities, but “thereafter any further economic expansion from that source requires the military work itself to be expanded. And once a city, or any other settlement, comes to depend upon prolonged military work as an appreciable, normal part of its economic base, the military production must be maintained indefinitely or the economy shrinks.” Jacobs makes the same point about welfare programs and subsidies to bring standards of living in poor regions more in line with those of prospering city regions. This is because “feeding voraciously upon city earnings as they do,” the poor regions “reduce intercity trade in favor of trade between cities and inert economies; divert earned city imports to economies that cannot replace imports; and reduce cities’ abilities to serve as good customers for one another’s innovations.”
For Jacobs the dilemma of both cities and nations is that
to hold themselves together as systems, nations must drain their cities in favor of transactions of decline and must undercut volatile intercity trade in favor of supplying settlements that can’t replace imports. In response, city economies stagnate. Stagnating, they undermine the wealth, well-being and capacity to develop further of one another, and of their nations as a whole. In the end, both cities and the nation itself come to ruin.
Such a decline, she believes, is now almost worldwide, and is particularly clear in Britain and the United States, which, she claims, began to decline when it subsidized the poor southern states in 1933; further decline took place when the US engaged in heavy military production, and promoted unproductive international trade with passive and backward economies. Devolution of sovereignty to smaller units which could issue their own currency, impose tariffs, and resist the forces behind the transactions of decline would be the most promising way out of this impasse, she writes. But such developments, as she notes, are highly improbable. She thinks the best we can hope for is drift and improvisation.
Mrs. Jacobs writes with confidence, conviction, and vigor. She supports her arguments with apt examples, some of which I have mentioned. A number of her examples are on a small scale, such as her account of the changing fortunes of a small North Carolina community. Although small in scale, they are not trivial or anecdotal, but serve well to refute some theory of development of support her own view. They recall a memorable phrase of Lewis Namier’s: “In a drop of dew can be seen the colors of the sun.”
Other of her examples refer to wider settings and policies, such as the history of the Tennessee Valley Authority, the events leading to the downfall of the Shah of Iran, and the attempts to transform Italy’s Mezzogiorno. The TVA, the public body set up by the US government in 1933 to develop the Tennessee Valley (which includes parts of seven states in the southest), had ample financial resources, and those who directed it were energetic and sensitive. Its first decade was a success:
The fertility of leached, eroded, and misused farmland was rebuilt, barren hillsides reforested, floods brought under control, roads built, hookworm and malaria eradicated, new schools built and transportation to them provided, public parks created for camping, fishing, boating and swimming, model housing tracts constructed, water-supply and sanitation systems built.
Yet it failed in its declared purpose to create a long-lasting improvement in the area’s economy. This was for a long time masked by dubious accounting methods (reminiscent of “creative accounting” in business), including the falsification of reports on the purposes and the environmental effects of the projects.
Such devices are of course familiar. When large third world development projects fail to yield an economic return, their promoters refer to nebulous “social returns,” such as the “demonstration effect” of modernization. In the case of the TVA, Jacobs claims that the project was bound to fail because it had not created a genuine import-replacing city in the area, only an “artificial city region”; as such, the Tennessee Valley had little hope of long-term economic expansion, because
no significant numbers and kinds of city jobs turned up there. In the absence of even a single export-generating and import-replacing city, there was no way that such city jobs could turn up. Far from producing amply and diversely for its own producers and people as well as for others, the region continued to depend on importing almost everything or else going without. It could not be otherwise, given the lack of an import-replacing city.
In about four pages Mrs. Jacobs demonstrates the futility, bizarre anomalies, and the ensuing disaster of the Shah’s attempts forcibly to modernize the Iranian economy and society. As in the case of the TVA, genuine economic development did not take place because import-replacing cities did not arise, and thus there were few new jobs or markets. The Shah tried to develop the country in one Big Push, but “although the Shah’s factories had (at first) all been earned by Iran”—especially its large revenues from oil—“they hadn’t been earned by Iranian city work, and the earning had thus done nothing for Iran’s capacity to build up versatile and productive city economies or, it follows, to generate city regions. Therefore, the purchases had only reinforced the country’s already grotesque and unbalanced supply economy with its dependence on oil.”
Mrs. Jacobs also provides an informative account of some of the influences and interest groups behind this doomed attempt, noting that the technocrats who took part in it were known locally as masachuseti—those “equipped with an education and outlook popularly associated there with the Massachusetts Institute of Technology, where indeed many of the Shah’s economic and technical experts had been trained.” (Incidentally, some MIT experts were also on hand in the attempts to transform southern Italy and Sicily by huge and rapid injection of capital. Here the result was not disaster but merely waste.)
Some of the numerous insights strewn throughout the book reflect eternal truths, effectively and persuasively restated by Mrs. Jacobs, for instance, her insistence that neither doles nor windfalls, such as the discovery of minerals, can sustain material progress. This is indeed writ large in history, from the inflow of the gold and silver of the New World into sixteenth-century Spain to large-scale foreign aid today.
Mrs. Jacobs emphasizes that the cities of Europe have throughout history contributed much to its material prosperity. She might have noted also their importance for culture and art in antiquity, the Middle Ages, and the Renaissance. This is still recognized in expressions such as “civilized” and “urbane.” By contrast, it is reflected also in the celebrated passage in the Communist Manifesto in which the commercial activity of the bourgeoisie is said to rescue those trapped in “the idiocy of rural life.”
The insights in Cities and the Wealth of Nations raise it well above most of the familiar contemporary academic and political literature on economic development and economic change. Unfortunately, it exhibits regrettable and unexpected shortcomings: regrettable, because they make obscure the insights or divert attention from them; unexpected, because they go counter to much of the book’s approach.
As I have noted, Mrs. Jacobs introduces many telling examples in support of the major and valuable theme of the book that economic change must be seen not as the result of applying a formula but as a process that is worked out through many decisions over time. Yet the time perspective is often strangely distorted. For example, as I have said, Mrs. Jacobs insists that large entities, particularly nation-states and empires, are doomed to stagnation and decay. She cites Rome and Byzantium as examples. Rome was a major power for six centuries and Byzantium lasted for more than a thousand years; not bad for human arrangements. Her reference to Byzantium recalls Gibbon’s unfortunate observation that the East Roman Empire “subsisted for 1058 years in a state of premature and perpetual decay.” And was the smothering of cities really the cause, or even a major cause, in the disintegration either of Rome or Byzantium?
When dealing with the contemporary scene, on the other hand, Mrs. Jacobs’s time perspective is greatly foreshortened. She observes that the countries and regions of the third world that produce cash crops are backward compared with the West. This is adduced as evidence that cash crops such as rubber, sugar, and rice do not promote material progress, and that commercial contacts with the West have harmed rather than benefited these areas by relegating them to the role of “supply regions.”
In reality, since the 1890s cash crops have transformed life in much of Asia, Africa, and Latin America. Between 1890 and World War II, the rubber industry transformed Malaya from a sparsely populated region of hamlets and fishing villages into a prosperous country with substantial cities, extensive commerce, and excellent communications where many people lived longer and had a much higher material standard than formerly either in Malaya or in the countries from which they originally came. Of course, these regions have not caught up with the West, which has many centuries of development behind it. But this does not mean that they have stagnated or are doomed to stagnation, or that external commercial contacts are damaging, or that they would have fared better if they had not produced cash crops. These misconceptions suggest a belief in the possibility of instant development, itself an example of the “amputation of the time dimension from our culture,” to quote Ernst Gombrich.
They may also reflect a disregard of the personal, cultural, and political factors behind economic achievement. People in the third world often produce cash crops because this accords with their aptitudes, skills, and the market conditions facing them. This form of production and the associated trading activities often help to promote other forms of activity, including manufacturing, for instance, by promoting habits, skills, and attitudes appropriate to a money economy. Throughout the third world, practically all successful unsubsidized, indigenous industrial enterprises have grown out of trading firms, usually traders in cash crops who were able to raise capital for further investment. To suggest that commercial contacts with the West are harmful to people in the third world is to suggest that they do not know what is good for them when they buy imported goods or grow produce that is exported. But such decisions may make as much economic sense for them as the decision to attempt to replace imports.
The political, social, and economic results of import replacement depend critically on how such replacement comes about. They depend notably on whether domestic production has had to be supported at the expense of taxpayers and consumers or is achieved without such support. If import replacement is supported by the government, the form of this support becomes significant: tariffs, specific control of imports, or direct subsidies differ in their repercussions. Except in regions where personal, social, and political factors congenial to economic achievement already exist (as they did in Europe when the Marshall Plan took effect), subsidized import-substitution is more likely to retard than to advance economic development. For example, in some poor countries subsidies for import replacement have been used to encourage the creation of expensive and uncompetitive industries. All too often such policies try to stimulate local manufacturing by overvaluing the local currency; this makes imports of materials necessary for local production cheaper, but it also raises the price of exports and therefore discriminates against farmers and reduces their incentive to produce export crops. These factors clearly affect the merits of import replacement and could usefully have had more consideration in Mrs. Jacobs’s book.
Throughout the third world, moreover, the most advanced countries and regions (such as India) are those with the most frequent commercial contacts with the West, and the poorest and most backward (Bhutan or Tibet) are those with fewest such contacts. This relationship is a commonplace of history. Precisely because economic advance is a process it must always be pioneered by a limited number of people and begin in certain specified areas and activities. Its outward spread depends on people’s responses to the opportunities that become available to them, on government policies, and on the state of communications. The ways that people will respond to new opportunities are unpredictable. The readiness of African, Malay, Indonesian, and Chinese smallholders to plant many millions of cocoa and rubber trees, which take five or more years to become productive, surprised many observers of colonial economies during the nineteenth century. Conversely, many people are surprised by the continued reluctance of the people of rural India to kill animals when the economic benefits of doing so seem evident to outsiders.
In parts of Southeast Asia (such as Malaysia) the rise of cash crops was followed by rapid and pervasive economic advance, the emergence of a substantial middle class and of many locally owned commercial and industrial enterprises. By the 1940s there were signs of similar though less far-reaching sequences of development in Africa, especially West Africa. They were, however, often inhibited or arrested by the imposition of close and extensive state controls. But this has nothing to do with the production of cash crops as such.
In much of the third world, notably Africa, the prevailing economic policies are designed by the political authorities to benefit groups in the cities at the expense of the rural population, especially those producing cash crops; the rural hinterlands are forced to pay tribute to the politically dominant cities—a relationship the reverse of that described by Mrs. Jacobs as typical. The relatively low incomes in the countryside, then, do not derive from relationships with the West but from the discrepancy in political effectiveness between the rural population and the urban groups.
Mrs. Jacobs writes that unemployment and inflation in the West and backwardness in the third world are closely related, even two sides of the same coin. How so? Unemployment and inflation, in the Western countries, need to be seen in relation to monetary arrangements, such as interest rates, and the supply and demand for labor. The material backwardness in the third world is related to such matters as isolation from more advanced societies, the continuing practice of subsistence farming (or very recent emergence from it), and local mores, culture, and political arrangements. In what sense is the condition of tribal societies in Africa or the economy of rural Southeast Asia related to inflation and unemployment in the West? This is not made clear.
She writes also that cities in the third world need one another and would benefit from more extensive reciprocal economic relationships. How is this to come about? Why is there little economic intercourse between, say, Lagos and Kinshasa, or even Lagos and Accra, in contrast to that between Lagos and London, or that among Singapore, Penang, Hong Kong, and many other cities and towns in Southeast Asia? The explanation is that people in African cities 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.
One can readily sympathize with Mrs. Jacobs’s dislike of large sovereign entities, particularly nation-states. But the validity of her arguments depends very much on the kinds of political arrangements that are in effect. When life is not pervaded by political controls, the incorporation of a city into a large nation-state or even into an empire does not obstruct economic advance. The primary factor is not the size of the entity but the degree to which political goals are imposed on economic activity. The breaking up of large sovereign entities into smaller units would not be decisive even if it were practicable. If sovereign states were to be divided into smaller units, where is the process to stop and what would be the economic relations between the different units? If we follow Mrs. Jacobs’s argument, why shouldn’t parts of the cities themselves, such as Harlem or Beverly Hills, benefit from imposing tariffs or adopting their own currencies? It would not in any case be an improvement if the present state economic controls were reproduced in each unit with further restrictions between the new sovereignties.
Mrs. Jacobs considers it as self-evident that the establishment and extension of empires is of material benefit to the rulers at the expense of the conquered, and that colonialism has been a major factor holding back poor countries. This is certainly not generally or even usually so. Nineteenth-century colonialism in Asia and Africa did not obstruct economic progress there. The poorest and the most backward countries today were not colonies: Bhutan, Sikkim, Tibet, Afghanistan, and Liberia. Conversely, some of the most prosperous areas were colonies, for instance Canada, Australia, Malaysia, Singapore, and Hong Kong—the latter the last remaining British colony of any significance. The third world countries that became colonies during the nineteenth century were extremely backward before then. In many of these, civil wars and tribal wars, and slavery and slave trading, were common.
Mrs. Jacobs rightly argues that the practice of economists of concentrating on nation-states causes them misleadingly to group together rich regions and poor ones within the same nation. But much of her discussion is marred by similarly inappropriate abstraction in treating cities and markets as if they were single decision-making units of homogeneous entities whose components had identical interests. Thus she may write of a city or a market as though it were an organism with a life of its own. The markets of European countries, for example, are said to have set the prices of exports from such backward regions as Uruguay. But the prices of Uruguayan meat and wool emerged from a large variety of independent transactions in many markets, not just Western ones, and she does not adequately address the question of how and why particular prices were set within those markets.
Worldwide economic decline, a major theme of the book, requires a much closer look than Mrs. Jacobs gives it. By most accepted economic criteria, the Western countries have been extremely prosperous since World War II. Though national income statistics may well be misleading, indicators free from their conceptual problems and ambiguities—such as the possession of consumer durables or volume of holiday travel—all reflect unprecedented material prosperity. Yet at the same time unease, dissatisfaction, and conflict are widespread, perhaps more so than in living memory, or in most of history. But material prosperity has never sufficed for contentment, let alone happiness. The causes of recent and present discontents are certainly not decline of strictly material standards of living in the cities or elsewhere.
Mrs. Jacobs’s book is too ambitious. In effect she proposes a theory of economic history, which implies a theory of history. But construction of such a theory is a most daunting task; indeed, it is the pursuit of an ignis fatuus. Observation of phenomena and sequences, reflection on interrelations, drawing of inferences, and collection of findings from different disciplines—these all can yield valuable insights into the process of change, including the advance and decline of societies. They can be used, as Mrs. Jacobs sometimes does, to illuminate and explain events and relationships, and to cast doubt on, or even refute, widely canvassed ideas. But all this is very different from a general theory of history to cover all or most ages, all or most societies, or all or most cities. The futility of attempts to formulate theories of history has been persuasively exposed by scholars and thinkers, Pieter Geyl and G.R. Elton among them.
The first chapter of the book, “Fool’s Paradise,” is a scathing criticism of economists, and indeed of economics as a discipline that Mrs. Jacobs considers useless for understanding reality. But nothing in the central argument of the book depends on this emphatic and prominently placed criticism of economics. There is indeed much to criticize in contemporary economics, especially development economics and, to a lesser extent, in macroeconomics. Since World War II these have often been disfigured or even pervaded by crude lapses perpetuated not only by careless or inexperienced working economists in government and finance, but also by prominent academics.
Mrs. Jacobs’s blanket condemnation of economics is nevertheless unwarranted. To begin with, she largely equates economics with the main trends in development economics and Keynesian macroeconomics, when in fact much of economics is outside these fields. Her own treatment of her main themes would have much benefited from greater understanding of price theory and its applications to import substitution, the terms of trade, or urban unemployment. Surprisingly, Mrs. Jacobs does not ask who it is that inhabits her fool’s paradise. The economists themselves have profited greatly from the large volume of resources made available to them since World War II. Or are the inhabitants of Mrs. Jacobs’s paradise their customers—the governments, the taxpayers, and the private donors who have so readily accepted the claims and pretensions of influential practitioners?
November 7, 1985