Economic Ideas that Matter/Jane Jacobs

Dear Friends,

Judith Schwartz turns to Jane Jacobs for ideas that matter when it comes to economics. See her Miller-McCune article below.

Best wishes,
Staff of the E. F. Schumacher Society

http://www.miller-mccune.com/business_economics/what-jane-jacobs-can-teach-u
s-about-the-economy-1537

What Jane Jacobs Can Teach Us About the Economy

Late urban champion's notions about decline and imports newly resonant during this recession.

By: Judith D. Schwartz | October 24, 2009

How is that economic stimulus package working for you? Think TARP was worth those billions? Perhaps our financial system is back from the brink, but just how far — or how long until we're staring down that same precipice — is not clear. Aside from healthy investment-house bonuses and the fact that General Motors still exists, most have seen little change. While our
financial pundits are still scratching their heads over why our financial structure plummeted so spectacularly let alone what to do about it, many economic thinkers are turning to urban pioneer Jane Jacobs.

Who?

Most know Jane Jacobs as the ultimate champion of cities, who stood up against neighborhood demolition and saw a vibrant ballet where others saw urban squalor. But three years since her death — and a year into a downturn marked by bailouts, foreclosures and sky-high unemployment — her economic vision has come into the spotlight.

"People in economic policy and development are looking carefully at Jacobs' work," says David Boyle, an author and researcher at the New Economics Foundation, a London-based independent economic think tank. "She's been very influential, but subtly so. People aren't always aware of where the ideas come from. This is true from the right and left."

In the landmark The Death and Life of Great American Cities, Jacobs called out the folly of urban "improvement" projects that left city districts barren. (Who guessed that people liked to see their neighbors, and that vacant courtyards and hallways invited crime?) In the same way, her 1984 book, Cities and the Wealth of Nations, zeroes in on how well-intended subsidies can deplete growth and block innovation. Wealth, she argues, is not merely a matter of assets but rather the capacity to 1) engage those assets in production and 2) adapt to changing circumstances and needs.

According to Jacobs, the engine of economic life is "import-replacement." What this somewhat clunky term means is making the products you have been buying. For example, much of New England, where I live, is rich in hardwood forest. But there is no large-scale furniture manufacturing here. Aside from what a few artisans produce for a mostly upscale market, it's imported: Our tables, chairs and bed frames are made from fast-growing trees in Southeast Asia, shipped over and stained to look like oak, maple or cherry. If made here, we'd no longer be dependent on furniture from elsewhere; workers here would apply their own innovations to create their own products and techniques and we'd have more products to trade with other places.

This process, replicated over and over and on a large or small scale, invigorates the economy. Workers gain skills, capital gets invested in new equipment, trading partners emerge, consumer taste gets more sophisticated, etc.

This does not happen when a large corporation plunks a factory down in a derelict neighborhood or rural outpost. But that has been the favored approach to perk up an area's economy. The upshot is that the population becomes reliant on one industry that may not be appropriate for the setting. Supplies get shipped in from elsewhere and other wealth-producing activity
languishes.

"Jacobs pointed out that to boost an area's economy, the normal plan is to bring in a branch of some big business. But then you have an industry without roots. They're not using local accountants and local printers," says Susan Witt, executive director of the E.F. Schumacher Society in Great Barrington, Mass., which, since its inception in 1980, maintained a close working relationship with Jane Jacobs. "It's through those roots that you get the economic multiplier effect of small businesses. And a branch or factory based elsewhere can leave as easily as it arrived."

Michael Shuman, research and public policy director of the Business Alliance for Local Living Economies, says research suggests that subsidies to attract and retain development are not effective at jumpstarting economies. One unpublished study he led recently looked at the three largest economic development programs in 15 states and found that fewer than 10 percent of companies involved devoted even a small majority of expenditures to local businesses; in most cases 90 percent of the money spent went out of state.

"The economic developers I speak to no longer even try to defend these subsidy strategies," Shuman says. "They've run out of excuses except for the fact that the politicians like them. Politicians get more mileage from one big deal that brings 1,000 jobs than an entrepreneurship program that generates 10 jobs in 100 local businesses. Even when the rhetoric has shifted to the importance of local, in terms of where the money goes, it's still following an old and entirely discredited mode of economic
development."

As for the stimulus bill, Shuman says it has "the worst features of economic development on steroids. If in a typical year, millions [are] spent on pork, this year more than a trillion is spent on pork." Even if the stimulus package is a success, he says, the program "could have been more successful with less money if we had followed Jane Jacobs' ideas" of local resilience
through import-replacement.

She wasn't omniscient, and her modern acolytes aren't claiming that. "Where was Jane Jacobs wrong?" Shuman asked. "What she didn't anticipate was the Internet. The argument that cities were the only important economic engines is weakened considerably by Web-based businesses, which have diversified and strengthened rural economies. Another thing she didn't entirely anticipate was climate change, which makes trade as a tool of growth a little more suspect."

Cities and the Wealth of Nations came out 25 years ago. But the dynamics described are eerily familiar. Take, for instance, what Jacobs called "transactions of decline" — trade encouraged to prop up the economy. An example she uses is ongoing, entrenched military production. This appears productive, but it sucks the oxygen out of the economy. Innovation and
entrepreneurship (import-replacing processes) slow down, there's less inter-city trade to spark new products and ideas, and the economy loses complexity and the ability to adapt. Entire regions become dependent on military spending; they need a war for growth to occur.

The real estate market crash followed a similar trajectory, says Sanford Ikeda, associate professor of economics at SUNY Purchase. "Look at all the incentives in the run-up to the bubble," he says. "People were encouraged to take more risk than optimal, and [many were] making money on unproductive transfers. Not only is this not productive, but it's an obstacle to growth."

One could look at the derivatives market in the same way, as all the entrepreneurial energy goes into the transactions themselves rather than productivity.

The economic downturn has prompted many to question assumptions about growth. "There is a new focus on what happens on the local level, on import-replacement businesses and what it takes to encourage them," says Schumacher's Witt. "Chambers of commerce are putting more into networking and training for small businesses. There's less talk of tax incentives.
These are all Jane Jacobs concepts."

Judy Wicks, founder of the White Dog Café in Philadelphia, and the founder and chairman of the Business Alliance for Local Living Economies, says her business decisions have been informed by Jacobs' economic vision. "I took seriously the notion of 'local supplies with local labor for local consumption,'" she says. "I asked, 'What are we importing that we can make
locally?' That's what builds community wealth. Instead of starting another White Dog in another location, I started a Black Cat because there was no store nearby that focused on locally made and fair-trade products."

Jane Jacobs was an advocate of decentralization; her belief that economies function on a regional, as opposed to national, level has helped spur recent interest in launching local currencies.

But her suspicion of bigness was pragmatic rather than ideological: In her view, the larger and more complex the institution or economy, the less accurate the feedback it provides. And accurate feedback is crucial for a system to self-correct. One way to look at our financial near-crash is as the result of crisscrossing feedback loops: mixed messages coming from GDP,
foreign exchanges, the stock exchange, housing sales, the data from different parts of the country contradicting each other so that when policy adjusts for one area it destabilizes another like a seesaw that veers up and down but never finds equilibrium.

With so many layers in our financial system, feedback gets lost.

"A large economy is floated by so many factors," says Mary W. Rowe, who runs the New Orleans Institute for Resilience and Innovation, and for several years directed Ideas That Matter, a Toronto institute based on Jane Jacobs' work. "The more opportunity you have to see feedback, the better you can course-correct. This is what the sustainability movement is doing-tightening up feedback loops so that people are aware of [a product's] real costs, such as the environmental impacts, and true costs, of their production, consumptions and disposal."

One advantage of local, as opposed to centralized, production, is that there's more transparency, she says. Efficiency, in the sense of economies of scale, does not always promote wealth and productivity, she says. "You don't want so much control in one place. Most innovation happens on the grassroots level."

It's easy to lapse into theory with economics. But money matters get very real when people are losing their jobs. Could these ideas — import-replacement, adaptation, small feedback loops — help put people back to work? Wicks says yes: "If we start making products at home then we can start dealing with the problem of unemployment."