The Economy of Cities

The Economy of Cities, by Jane Jacobs

The received wisdom in urban history (at least as of the writing of this book in the late 1960s) was that cities evolved from towns and villages, which in turn evolved from agricultural-collective-type organizations or hamlets. Jacobs challenges this view and cites archeological evidence of cities developing before their surrounding rural villages and towns developed.

The main idea behind Jacobs’s theory of how this could have happened is that cities, as dense gathering places for people, are places where new work and therefore new economic value is most readily created. The various chapters of the book explore different manifestations of this principle.

Concentration of people and goods leads to new opportunities

A city arises because of proximity an economic asset, such as a concentration of a natural resource, a good harbor, etc. Of course it cannot produce most of what it needs, but since others come there to benefit from the economic asset, it becomes a natural mixing point for various things to happen:

In preindustrial times, different variants of food (seeds, livestock) would naturally mix there. Citizens (in the literal sense: inhabitants of the city) would become the stewards of these, breeding and selecting and developing what would later be called agricultural husbandry. Before long, it would be more profitable to outsource the agriculture to plots farther away from the city where land is less dear, so the villages would really arise more like factory towns arose after the first industrial revolution.

Over time, cities replace their imports as they develop the local expertise to make them. This frees up capital that was previously spent on imports to create new work inside the city. If this capital can be put to work to create new products or value that can then be exported from the city, its economy will grow further. If not, the its economy may stagnate. Import replacement creates a fixed amount of new local value, but its side effects (export creation) can initiate a further cycle of import replacement of something else.

By contrast, agricultural expansion tracks the growth of city jobs, not of rural jobs, because technology tends to make existing agriculture workers more productive, reducing the need for agricultural labor even as cities’ demand for agricultural products increases. (Denmark in the early 20th century, for example, was capable of producing lots of food, but had no market for it, hence its economy could not expand by that means. The explosive growth of London provided this market, which fueled the development of Copenhagen as a city that then started doing its own import replacements and in turn providing a larger domestic market for Danish agriculture.) In this sense, every city has ancestry in one or more older cities.

Creation of new work

Cities naturally become places where new work can arise from old. The first brassieres were made by a dressmaker who didn’t like the way her dresses draped over clients; she later got out of the dressmaking business and focused on brassieres. When bicycles were first imported to Japan, there was no local capacity for manufacturing them; but as repair shops arose and got better, they incrementally developed into manufacturing capacity.

Being a supplier with a large dynamic market also stimulates serendipitous new work. 3M was originally a provider of sand abrasives that tried to get into the sandpaper business, but its adhesives failed to stick the sand to the paper. However, in experimenting with adhesives, they invented masking tape, Scotch tape, and so on. Without the motivation to expand the market for their original products, these accidental innovations wouldn’t have happened.

The rise of such new work enables new industries that rely on that work. Henry Ford initially sourced all of his components from different manufacturers in Detroit, thereby being able to promise his customers that they would always be able to obtain spare parts when needed. Over time, he developed the capacity to manufacture the most commonly needed parts himself, eventually moving towards more vertical integration.

(A subtle note is that mass-production-style hyperdivision of labor, in and of itself, may increase efficiency up to a point but does not create new work. However, sometimes the isolation of specific subtasks ends up pointing to a new use for that subtask outside the scope of the main task of which it is a part, so division of labor can be thought of as paving the way for potential later creation of new work.)

Sometimes this cycle starts from a completely different place. Detroit was originally an agricultural town, where mills arose to service regional wheat cultivation. The local shops that made mill parts found they could also make parts for ships plying the nearby Great Lakes. From that new branch of industry developed independent shops producing upholstery, paints, varnishes, and so on. When the agricultural basis for Detroit collapsed or was co-opted, these new industries more than filled its place, and played a role in enabling the future economy of the auto industry.

Finally, this kind of diversity allows for an export-oriented economy: once you have enough suppliers to make more of your product than the local market can consume, you can start exporting it. In an export economy, the city trades something it values less (the exports) for something it values more (capital for use in future growth or to raise the local standard of living), the canonical wealth-creating transaction.

Resiliency through “inefficient” diversity

The built-in “inefficiencies” of cities make them resilient. Cities that hyperoptimize efficiency in a single industry can go bust if that industry commoditizes; cities that have a variety of smaller industries can find other uses for those industries. Hyperoptimizing also calls for making a few large (“efficient”) investments rather than many small ones, but the latter gives more resiliency since it makes small amounts of capital opportunistically available for the incremental creation of new work.

Returning to the 3M example, the adhesives innovations wouldn’t have happened if 3M had been the abrasives division of, say, a paint company rather than being a separate company: there would have been an economic disincentive to expend any effort on a new product such as sandpaper at all.

Indeed, to the extent that some of these smaller businesses begin as spin-offs from larger companies (Jacobs called them “breakaways”), when a single large company becomes too successful it can stifle this dynamic, as Eastman Kodak did in Rochester by buying up many of its suppliers and subsequently doing everything possible to discourage “spin-offs”. Jacobs was writing in 1969, and did not see the demise of Rochester in the 1990s when digital photography decapitated Kodak, and with it, Rochester; nor the demise of the American auto industry, and Detroit with it, in the 1970s and 80s.

A city with a diversified supplier economy also makes it easier to start new businesses based on that economy, which is another way of creating new economic value. In the 20th century, starting a new publishing house in New York was relatively easy because all of the component labor was locally available. In Silicon Valley, all kinds of technical talent is available for startups to pick from. In Shenzhen, the concentration of the world’s best manufacturing supply chains makes it relatively easy to manufacture a new high-tech product.

In parallel with the “beneficial inefficiencies” of big cities, Jacobs calls attention to their beneficial impracticalities: things that become troublesome as the city scales. In a healthy city, such a situation will create a demand for technological solutions; but a healthy city is one with lots of small businesses and opportunistic small amounts of capital, providing the kindling for such a fire. The alternative is a city in which a few large companies dominate and serve the needs of a (probably small) cadre of well-paying customers. (Wealthy Romans had hot water and indoor plumbing, but most middle-class Romans had slaves carry water in and out in vessels.) In Jacobs’s words, “When humble people doing lowly work are not also solving problems, no one is apt to solve humble problems.” This is probably why we have so many startups dedicated to shaving a few minutes off of quotidian tasks of middle-class white people and so few startups actually solving real problems that real people who don’t work for such startups actually have, the so-called “unglamorous” problems.

Finally, Jacobs addresses population, and the idea that high population (or high density) results in more poverty. She gives example after example of non-dense rural counties that not only haven’t improved when people emigrated to cities, they have become poorer. Prosperity is not an automatic effect of density, but neither is poverty, and in fact cities are more likely to provide non-stagnant opportunities for getting ahead. (Certainly the current citizens of India and China believe this, given the monumental urban migrations happening continuously in both countries; Latin America seems not far behind.)

A corollary of all this is that one cannot place production capacity in somewhere that doesn’t have access to this economic infrastructure (market, suppliers that enable spin-offs and creation of new work, etc.) China tried to populate villages with factories as part of the Great Leap Forward, and failed, because there was no economy in village for the factories to plug into.

Finally, although the term “disruption” wasn’t used at the time of this book’s writing the way it is used today, Jacobs identifies it as the tension between those “whose interests are with already well-established economic activities, and those whose interests are with the emergence of new economic activities.” She argues that to avoid stagnation from the established interests, governments must act to protect the naturally-weaker position of the “disruptors”. In the case of the Internet, this has been somewhat true in that it has largely been maintained as a common utility, even though privately operated; the dominance of a few large tech companies in 2020 may be working against this.

Afterthoughts

I realize I’ve read a number of books that provide validating examples of “creating new work” in action, even though their narratives are not specifically situated in cities. A good recent one is From Betamax to Blockbuster, which describes the rise of the VCR: the entire home video distribution industry (rental and sales) arose out of “new work creation” by people in businesses such as music distribution and magnetic media duplication.