Forget who (and a search in my e-mail, found no "hits" for Jacobs), on lbo wanted a review of the new Jane Jacobs book.
TNR Online | Economies of Truth by Robert M. Solowhttp://www.thenewrepublic.com/051500/solow051500.html
Looks like a negative review. Mike Davis gave it a good one in the latest Village Voice Literary Supplement.
Economies of Truth By ROBERT M. SOLOW Issue date: 05.15.00 Post date: 05.08.00
The Nature of Economies by Jane Jacobs Modern Library, 190 pp. (Click here to buy this book)
The only other book by Jane Jacobs that I have read is The Economy of Cities. I liked it. She was in favor of human-scale neighborhoods, street life, creative messiness, and--most especially--diversity. (Ethnic diversity, too, I suppose; but in context mainly the proliferation of small enterprises that complement each other.) She was against company towns, uniformity induced by zoning, buildings unfriendly to passersby, sterile orderliness, and excessive bureaucratic planning generally. It was an attractive vision of urban life. But I also seem to remember a liking for broad generalizations, sweeping readings of history, and excessive certainty about complex issues. Unfortunately, those tendencies have become more obtrusive in Jacobs's new book. The form of the work does not help. Jacobs has cast the book as a "didactic dialogue" among four friends and the father of one of them. The text is all stilted conversation, pedantic monologues, and the occasional cutesy touch. If Socrates had talked like Hiram Murray IV, Plato would be unremembered today. What a book is really about can sometimes be deduced from what it is against. Jacobs is clear about that. She says in her foreword that her basic premise is that "human beings exist wholly within nature as a legitimate part of the natural order in every respect." Yet economists, industrialists, and politicians assume that "reason, knowledge, and determination make it possible for human beings to circumvent and outdo the natural order." We have this, again, on Hiram's authority, as early as page ten: "[N]ature affords foundations for human life and sets its possibilities and limits. Economists seem not to have grasped this reality yet." Not a single economist I know--and I know a lot of them--thinks that human beings can circumvent or outdo the natural order. Most of them would have a hard time even figuring out what that phrase could possibly mean. If you observe something that had been thought impossible (that is, outside the natural order), you may begin by being skeptical about the observation; if it is confirmed, however, you will revise your beliefs about nature. I will try not to keep saying this, but Jacobs and her characters display a vast ignorance of what "economists" think and do. Early on, for example, the insufferable Hiram explains that "the law of diminishing returns is truthful and harsh, but it explains little about economic life in the absence of the converse law, which we might call the law of responsive substitution, meaning that people seek or contrive substitutes for resources that have become too expensive." You would never know from this speech that every student of economics is lectured and textbooked nearly to death about the ubiquity of price-induced substitution: between chicken and pork, between aluminum and stainless steel, between imports and home goods, between labor and leisure. This ignorance is symptomatic. A book about the nature of economies ought to have a minimal grasp of the discipline it claims to be overturning. This one does not.
hat is the nature of economies, and what should economics be about? We are not told in so many words, but have to pick up the implied answer by osmosis. Jacobs is enthralled and persuaded by the way in which evolution creates new species, and alters organic form within species. Generally, she says, a specialized form emerges from a more general form because it provides a better adaptation to the local and current environment. This progressive differentiation is an ongoing process, not a one-time event. And "environment" in this context is not limited just to climate, terrain, and other such inorganic facts. Whole collections of species co-evolve, changes in some providing the opportunity for, and the payoff to, adaptive changes in others. Species form a developing web. One can see why Jacobs is so delighted by this way of describing evolutionary development. It bears a clear family resemblance to her way of describing healthy economic development in cities or--as she likes to say--in settlements: the proliferation and the (limited) growth of small-to-medium sized firms, finding niches opened by changes in consumer demand, and grasping opportunities to supply one another, exchanging information along with goods and services. This is certainly one important, interesting, and satisfying route to economic development. If this is what economies do, then presumably economists ought to study this process. But here a problem arises that does not seem to occur to Jacobs and her characters. This sort of naturalist thinking by analogy has built-in limitations. Suppose you see things through Jacobs's eyes: the proliferation and the development of interdependent manufacturing and service enterprises looks a lot like the proliferation and co-development of plant and animal colonies and species. And you can stop there; or you can try to go one step deeper and understand more. If you take the next step, you will see that there is absolutely no reason to presume that the detailed mechanisms underlying economic dynamics are the same as those that describe ecological dynamics. On the contrary. There are convincing reasons to expect them to be different. Economic behavior is largely conscious, forward-looking, theory-infested, goal-directed, sometimes when the goal is distant and indirect. The behavior of plants and other animals is much less so, or not at all. By the way, I am not certain that Jacobs is much better informed about ecology. The works that she cites are mostly journalism or popularizations. She would find that what working ecologists actually do is mainly narrow, technical, and dreary. Many of their methods are in fact borrowed from economics.
t is interesting that economists and ecologists often use similar mathematical tools in doing their work. This is partly because those are the mathematical tools that we have, and partly because fitness-driven evolution and conscious but myopic goal-seeking work along similar lines, though their content and significance can be very different. Mussels tend to wipe out other species in certain intertidal zones. Understanding how they do so will not help anyone to understand why some industries take hold and flourish in East Asia, while others merely cling precariously to existence and still others disappear. There is no harm in thinking of industrial succession and survival as an evolutionary process energized by the pressure of selection. The mistake is to believe that this thought comes anywhere near exhausting the intellectual problem. Economic dynamics on this scale is not to be understood without recourse to culturally induced norms of entrepreneurial behavior, the lore of investment banking, the content of popular business-school courses, and many other things not characteristic of mussel populations. "Development depends on co-development," says Hiram (in italics). I think that every development economist already knew that. More to the point, the statement offers no clue at all about where to look for the operative mechanism. In economics, the vocabulary emphasizes "externalities," and "forward and backward linkages," and input/output tables. But Jacobs does not seem to be interested in actual economic (or, for that matter, ecological) analysis. She is content to stop with the naturalist analogy itself, and with the comfort and the satisfaction it brings. Perhaps that is just as well. At least it makes for a useful respect for the sort of small- and medium-scale, indigenous, adaptive, knowledge-based enterprises without which, for example, we would all be eating Wonder Bread. That may be all that Jacobs wants from us. Hiram, however, is more ambitious. And when he tries to pass from generalities about ecology to the understanding of economic behavior, the result is often not good.
e launches, for example, a confused and poorly informed disquisition on the relation of local (neighborhood, city, region, nation) economic activity to exports and imports. This is a topic that has been discussed for at least 200 years, beginning with David Ricardo or even earlier, and most recently in a new book by Paul Krugman, Anthony Venables and M. Fujita, called The Spatial Economy: Cities, Regions and International Trade. These authors do not stop with a few little parables. Instead they try to model explicitly the interplay of persistent forces like scale economies, transportation costs, and demand patterns in determining the geography of economic activity. You would think that a few useful thoughts about patterns of trade might have occurred to the likes of John Stuart Mill, Alfred Marshall, Jacob Viner, Bertil Ohlin, James Meade, and Gottfried Haberler, to name just a few. But Hiram (and, even more oddly, his father, who is described as an economist) seems to have overlooked this. The focus on exports and imports may press the wrong buttons, especially in a local context. Imagine a small isolated island, with some pattern of economic activity, but no outside contact. You would not think to speak of imports and exports, and the annual economic report would show none. Now draw an arbitrary line down the middle of the island, and divide it between East Island and West Island. All of a sudden there are "exports" and "imports," even if there has been no change at all in the pattern of economic activity. The volume of measured imports depends on the essentially arbitrary location of the boundary. The more basic question is: why is the composition of economic activity not uniform over the face of the earth? Why is there specialization or geographical division of labor at all? The obvious reason is local variation in climate, terrain, transportation possibilities, the availability of natural resources, and so on. Equally important is the presence of "increasing returns to scale." It is a technological fact that some kinds of production can be carried on most efficiently at fairly high volume, high enough so that more is produced than the local market will absorb at a price that covers costs. So regions specialize; they sell part, and maybe most, of their output to other regions, and in exchange they buy the products of other regions. In the modern world, moreover, specialization may also arise from purely historical happenstance. A city begins to produce hair dryers for some accidental reason. It has no fundamental cost advantage over other regions. But it moves down its learning curve, gets a slight jump on technological improvements as they arise, attracts complementary businesses, and pretty soon it has built up a cost advantage that an upstart region would find hard to overcome. Regions import consumer goods, of course, but also raw and semifinished materials which are then worked up and reexported. Hiram invents the term "import-stretching" to describe this process. But it is just the commonplace operation of "adding value." It happens all the time, whether or not "imports" are involved; intermediate goods pass from one firm to another. Good old Hiram regrets that statistical agencies perversely do not calculate and report the economic indicator that he wants: the ratio of import-stretching to the sum of import- stretching and resource use. But the numerator of this ratio is in actual fact calculated wherever it is reasonably convenient to do so: the aggregate of value-added within a region is called the gross product of a region. The Department of Commerce does it by state. It would be rather too expensive and intrusive to calculate it for a city or an even smaller unit. As for the denominator, imports are hard to measure except where there are barriers to trade. How would one measure the total flow of imports into Hoboken? If Hiram's father, who lives there, gets a haircut in Jersey City, he is importing a service. Should we care? Then Jacobs introduces yet another murky concept of dubious interest. She calls it "self-refueling." This seems to mean the act of "capturing" additional imports, either by increased processing of existing imports into reexports or by replacing some current imports with (not necessarily identical) local production, so that different imports can be financed out of unchanged exports. What this has to do with fuel, and why it is either good or bad (or how much would be the right amount), is never made very clear. Some diversification of local production is, of course, likely to help raise the sustainable standard of living. Too much diversification risks dissipating the advantages of scale. The ability to compete with producers elsewhere is a useful indicator of the efficiency of the local industry. On none of this does Jacobs's book offer any novelty; but it makes up for that with obscurity. In the end, I do not think that The Nature of Economies tells us much about the nature of economies, beyond the pun itself. The collection of analogies does not add up to very much. Some of them are superficial, for the reason already mentioned. Some may be deep--that is, they may reflect some behavioral equivalence--but there is no way to know which ones. What we get is a reminder that one element of the quality of life, probably more so at a fairly high level of income, is the health of mutually supporting, small-scale, local, market-oriented productive activity. Promoting the health of this sector of the economy may require presumptions and institutions different from those typical of large-scale capitalism. (It may be possible, though certainly not easy, to recreate some of this activity tucked away inside a larger firm.) Those truths are easy to overlook in the care and feeding of a modern economy, and Jacobs does well to keep reminding everyone. Yet there is no sign that she has asked herself the questions that should preoccupy someone with this particular mission. Working against the artisan and niche producer are the economies of large-scale production. I can not guess what may be possible with future technology; but for now it is clear that cost per unit falls with increasing plant size in many lines of production. This does not go on forever; in most cases, unit costs begin to rise again as the plant gets big enough to be unwieldy. In some industries, "optimal" plant size will be pretty large. Are there regulatory and other forces in our economy that tend to favor excessively large plants or place unnecessary obstacles in the way of smaller establishments? Could some regulations actually favor excessively small businesses? More generally, what is the proper domain of large-scale production? Where is it genuinely efficient? What would constitute a fair or level playing field on which the relative advantages of small-scale and large-scale production could compete for the allegiance of workers and consumers? How could public policy favor its creation? Not you, Hiram. Let someone else talk. Please.
ROBERT M. SOLOW is Institute Professor Emeritus of Economics at MIT. He won the Nobel Prize in Economics in 1987.
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