The Life and Death of Cities

Abstract

Here we explore in detail how and why, according to Jacobs, a living city is the principal social context within which innovation takes place. This chapter outlines and interprets Jacobs’s fundamental contributions to the theory and mechanics of economic development. We also identify the forces internal to the urban process itself that may retard development and contribute to its decline.

This chapter draws in part from Ikeda (2020).

For Jacobs, cities spearhead innovation, and innovation drives economic development. In a living city, stasis is not an option. If it doesn’t constantly innovate and increase its diversity, a city will begin to die. As we saw in Chap. 2, it is this urban-centered approach to economic development that Nobel Laureate, Robert Lucas, found so suggestive in Jacobs’s work (Lucas 1988).

This chapter explores in detail the mechanics of Jacobs’s theory of economic development, as presented in her 1969 book The Economy of Cities. We see how the generation of diversity serves to increase the scope and complexity of a city’s division of labor and knowledge. Entrepreneurial forces draw upon the expansion of potential complementarities—“effective pools of economic use”—to discover new kinds of work and novel outputs. She argues that forces internal to the urban process may sometimes retard this development and initiate a “dynamics of decline.”

1 Cities and Economic Development

In a living city, under the right rules of the game, both population and per capita Gross Domestic Product (GDP)—the value of all final goods and services produced in a region in one year—tend to grow. But for Jacobs, this kind of growth alone does not constitute economic development. Similarly, falling per capita GDP and a shrinking population are only symptoms of a failure to diversify and innovate, much as a rising body temperature or loss of weight are the symptoms of illness and not the underlying cause. The causes of both development and decay are more fine-grained than standard macro-measures indicate.

Economic development implies not simply change, but in some sense “change for the better.” Now, there is a long tradition in economics that takes our preferences as given and not open to question, and so regards what constitutes “better” as purely subjective. In this subjectivist view, “better” may bear no relation to anything objectively measurable at all. That said, to the extent that subjective betterment is related to material well-being, which is in turn related to the output available for us to consume, per-capita GDP or something similar could approximate subjective well-being. But as I mentioned, for Jacobs, such macro-measures are too crude to reveal the important underlying factors. More relevant would be a measure of the degree of diversity of its urban space (Chap. 4) and the extent of the division of labor, or what she calls “new work,” because these provide the effective pools of use to draw on for experiment that are the precondition for creativity and innovation of all kinds.

Measured economic growth such as GDP has two sources. One is the production and consumption of “more of the same things,” while the other is the production and consumption of “more different things.” Both can increase material well-being. Economic development for Jacobs refers to improvements to our material well-being because we do things differently from before or because we broaden our consumption of novel goods and services. I argue, along with Jacobs, that this kind of development, in both its consumption and production aspects, has a deeper and more lasting impact on socioeconomic progress than simply making and consuming more of the same things. Therefore, our focus is on the causes and conditions that promote or retard change of this kind.

I begin, as Jacobs does in The Economy of Cities, with an analysis of how cities first emerged in the Neolithic period, circa 10,000–4500 BCE. It may seem odd to frame a discussion of economic development relevant for today in terms of events some 12,000 years ago, especially since material welfare rises significantly only after 1800 CE.¹ But in its own way, the Neolithic period was one of rapid social change and innovation compared to the previous 300,000 years or so of Homo sapiens’ existence. It saw the emergence of agriculture and animal husbandry as well as the beginnings of writing, numbering systems, precision calendars, regular long-distance trade, large-scale engineering, institutionalized government (Childe, 1951). Most importantly, it was in the Neolithic period that the first large settlements and proto-cities emerged in the Near East (Childe, 1951; Bairoch, 1988). By some estimates, the population of the world in the period between 10,000 BCE and 5000 BCE rose four- to tenfold, from around 1–5 million to 10–20 million.² For these reasons, studying the Neolithic age can shine a revealing light on the nature of the city and its significance for modern economic development.

That economic progress is tied to urbanization is uncontroversial. As Edward Glaeser observes, “There is a near perfect correlation between urbanization and prosperity across nations” (Glaeser, 2012: 7). To gauge the level of material prosperity, look for cities. But this leaves unanswered the question of whether cities are the cause or the consequence of early cultural and economic development. Here, Jacobs’s conclusion is sharply at odds with the conventional view of her day.

The belief that cities are historically the consequence and not the cause of substantial accumulation of capital and increasing material wealth has led to the conventional belief that cities must have been preceded by smaller villages that were in turn preceded by even smaller, isolated settlements originally founded by bands of hunter-gatherers.³ According to this view, Homo sapiens scratched out a nomadic existence for tens of thousands of years, living on wild food until they eventually established small, permanent settlements about 12,000 years ago and gradually learned how to practice farming and to domesticate animals. In time, they turned that knowledge into surpluses of agricultural products until they had accumulated enough to support a nonagricultural labor force that could build the physical infrastructure and to establish the basic social infrastructure that are the necessary preconditions for larger, more complex settlements. These larger settlements then became convenient places to trade surplus goods to outsiders, and the greater wealth accumulated in this way could be used, by sometime in the fourth millennium BCE, to construct the first real cities with walls, streets, monumental buildings, and irrigation systems, as well as codified laws, a permanent government, and a priestly class (Childe, 1951).

According to this conventional view, a city is essentially the same social phenomenon as a small village, only on a larger scale and with many more people and buildings—what economists call a “luxury good,” collectively affordable only after a settlement’s real income has become high enough. This is in line with the “more of the same” version of economic growth. In that narrative, cities enter the picture long after we had begun the practice of agriculture and animal husbandry, corresponding roughly to the Chalcolithic era and the early Mesopotamian city-states of the late fourth to the third millennium BCE. Significant economic development must therefore precede the appearance of cities, which are the epiphenomena of agriculture.

We should note here that it is also widely accepted, even among those who adhere to this conventional view, that one of the most important functions of a city is to serve as a market, even if it may have originated as a non-commercial site, such as a shrine or fortress (Weber, 1958; Mumford, 1961). The assumption here being, however, that the construction of those sites necessarily rests on a solid base of developed agriculture and husbandry.

Jacobs’s alternative thesis sees cities as an originating cause of economic development, including agriculture. But it must resolve a paradox: How can a city be both an originating cause of and the product of robust economic development.⁴ How can a city, a large, diverse, economically and socially vibrant settlement that presupposes a very high level of social cooperation, itself be the source of those very things?

2 The Problems of Discovery and Diffusion

I think it is useful to frame her argument in terms of the concepts of discovery and diffusion. That is, economic development, creating new things or making existing things in a different way, requires us to overcome two problems. The first is how to acquire information from a variety of perspectives and to see it in a novel and useful way. This is the problem of discovery.

This can take a lot of work or a lot of luck or both. But it doesn’t have to. Why not?

To begin with, in a dynamic world where our knowledge is imperfect, we encounter a stream of opportunities large and small, often appearing as problems, not all of which we notice. But if we are placed in an environment in which new opportunities are regularly presented in a clear or obvious way, other things equal, it would be easier to discover and find ways to solve or use them. Ordinary people under these dynamic circumstances can, by choice or necessity, make more discoveries or become better able to foster their creativity. These opportunities emerge with frequent contact with many people with diverse knowledge, skills, and tastes. It is also important that these contacts take place in relative peace and safety because, as we know, proximity of many diverse people offers occasions for violent conflict, which can obscure gains from trade and association. What robust discovery requires is a “clash of culture” in which the clashers resolve their differences without violence, constructively, and ideally to their mutual advantage. As we have seen, economic freedom, the ability to associate without compulsion, is vital here because then following our self-interest means we are more apt to learn to tolerate differences with others and to practice (behavioral) trust and follow norms of fairness (Henrich, 2015).

The second problem we have to solve, or our social environment has to enable us to solve, for ongoing economic development is to maximize the likelihood that the useful knowledge we actually discover can spread easily to those for whom such knowledge—for example, of new goods, markets, techniques, concepts—would be valuable. This is the problem of diffusion.

Such diffusion can happen either because of or despite the existence of rules, norms, or conventions regarding intellectual property. That is, preventing others from profiting without permission from our discoveries is usually necessary to encourage us to make those discoveries in the first place. So it would be good if there was some way to capture enough benefit at reasonably low transactions costs to make it worth our while to do so.⁵ At the same time, however, a lot of economic development is the result of word of mouth, imitation, and various kinds of behavior that might be called “free riding.” Competition that results from copying someone who exploits a net gain from trade has well-known benefits for material prosperity. It is precisely the practical impossibility of a fully specified, clearly defined, and enforceable system of property rights that leaves room for this kind of beneficial competitive free riding. (This could get us into a very complicated discussion regarding the optimal framework of property rights that I need not engage in here.)

Neither the problem of discovery nor the problem of diffusion is likely to be easily solved by nomads or farmers in small, isolated settlements. A person in those circumstances would have little to innovate with and few sources of new information with which to make a discovery. Hints, clues, and new ways of looking at the world would be relatively rare. Innovation and invention would take a level of creativity and independence far beyond the norm of the community, especially in places where dealing exclusively with familiar persons and ideas almost always trumps dealing with the new and unfamiliar. And even if extraordinarily creative and independent-minded individuals were to make an important discovery that their kinsmen were willing to adopt (e.g., three-field crop rotation or a new way to organize production), in the absence of regular, peaceful dealings with distant settlements, whose inhabitants are likely also quite resistant to change, how would that discovery be diffused? Who, with limited contact with outsiders, would be able to take on the highly risky task of spreading the good news, and why would they want to?

In this light, the conventional assumption that rural growth must historically precede cities can itself seem paradoxical. Cities don’t foster economic development only in its later stages. According to Jacobs’s reasoning, economic development beyond a rudimentary level cannot proceed unless reasonably large, diversely populated settlements appear much closer to the beginning of the Holocene era (i.e., about 11,500 years ago). This implies hunter-gatherers must have become urban dwellers before developing agriculture as we know it.⁶ An assessment that anthropologists David Graeber and archeologist David Wengrow appear to share:

Our world as it existed just before the dawn of agriculture was anything but a world of roving hunter-gatherer bands. It was marked, in many places, by sedentary villages and towns, some by then already ancient, as well as monumental sanctuaries and stockpiled wealth, much of it the work of ritual specialists, highly skilled artisans and architects. (Graeber & Wengrow, 2021: 164)

Jacobs’s counterintuitive hypothesis becomes more plausible if we imagine the urbanization of hunter-gatherers as the product of trade. Some archaeological evidence indeed indicates that hunter-gatherer groups in the Middle East during Neolithic times traded with one another in large settlements.⁷ People in the Neolithic period are no different from Mark Zuckerberg or Oprah Winfrey in that all strive to improve their situation, as they see it, through mutually beneficial exchange. In the early Neolithic period, before the emergence of true cities, the potential gains from trade must have been enormous, but the uncertainty and danger of coming face-to-face with strangers outside one’s own thick social network must have been very great as well. Other things equal, under these circumstances, just as important as with whom or what one trades is where one trades. As with real-estate markets, the most important factors would seem to be location, location, and location.

Jacobs’s contribution to this line of thought is significant, and she presents it as a hypothetical history of a settlement called “New Obsidian.” First, an ideal trading location is accessible to members of multiple hunter-gatherer groups (Jacobs, 1969a: 19). Places like these usually have certain physical characteristics, such as proximity to waterways or well-traveled overland routes with low transport costs, and they must be perceived as relatively safe. Next, she discusses how persons from hunter-gatherer (HG) groups begin to trade. To do so, two hunter-gatherer groups, HG1 and HG2, may initially use an intermediary from another group, HG3, with whom some members of HG1 and HG2 may already be familiar and whom they both (cognitively) trust⁸ and who arranges the trade. If trade among these groups proves successful and regular, other hunter-gatherer groups with weak ties to HG1, HG2, or HG3 might then test the new trading area to see if it is an attractive option. As traders from these groups return for more frequent and extended visits, ties strengthen and they may then build structures and dwellings that become more permanent with time. In this way, the trading area evolves unplanned into a settlement with an ever-growing population of socially distant people from diverse, strongly tied hunter-gatherer groups gradually connecting with one another via weak ties. These proto-cities are “market cities” in the sense of the sociologist Max Weber (1958), with their genesis in trade.

A settlement may also evolve into a market city after having originally been established for other (e.g., ceremonial or defensive) reasons. So what later becomes a living city need not have originated in trade, but to become a living city, trade and eventually innovation must be the essential elements.

[C]ities are places where adding new work to older work proceeds vigorously. Indeed, any settlement where this happens becomes a city. (Jacobs, 1969a: 50)

Thus, it is no contradiction to point out that ancient Romans planted or imposed settlements across Europe as outposts (e.g., Milan, Paris, London) that later developed into living cities.

As noted in Chap. 2, Jacobs defines a (living) city as “a settlement that consistently generates its economic growth from its own local economy” (1969a: 262). In her sense, then, these early settlements were proto-cities, but not only because they contained historically large numbers of people living fairly close together.⁹ What the trading settlement did have that hunter-gatherer groups lacked, in addition to a large population, was an enormous and increasing diversity of knowledge and skills on the supply side, and expanding tastes and expectations on the demand side, that diverse, socially distant traders and their families brought with them. Here was an unprecedented opportunity to make new connections and utilize existing connections in unforeseen ways (“multiplexity”). Here emerged action spaces, where a wide diversity of social networks could arise and intersect. Some social ties might weaken and dissolve, or sometimes become a source of disadvantage, but overall, the rate at which advantageous new ties and new networks formed among strangers would have been much higher, resulting in growing and increasingly complex networks and complementary relations.¹⁰

James Coleman (1990) points out that through such “relations of trust,” useful complementarities among diverse human capital are formed, as we saw in the previous chapter. Typical urban dwellers under these circumstances encounter more people in a year than they likely would in an entire lifetime as a nomad or villager. They will also encounter more opportunities to buy and sell, make friends or enemies, trust or distrust, than they could have elsewhere; and in the process, their knowledge, attitudes, beliefs, skills, expectations, and tastes will likely change faster and more dramatically than they would have thought possible (and perhaps desirable). In this environment, things don’t stay the same, inside the minds of the individuals or in their environment. There are several dimensions along which that change can take place—psychological, moral, and of course cultural—but Jacobs focuses primarily on the economic (although she does later develop the moral dimension in her Systems of Survival (Jacobs 1992)).

For example, people will find new uses for already-existing goods. Jacobs suggests that leather pouches used to carry precious volcanic stones to be sold in New Obsidian make, with some local modifications, fine purses that could then be exported, adding value to pouch production. Thus, the “new work” of pouch-making for local products creates opportunities for local innovations, such as decorative pouches for export: “Some of the new local work must also be a precursor of new exports” (Jacobs 1969a). People will discover new ways of doing old tasks as well as new tasks altogether, new kinds of work, based on their exposure to the diversity they see daily around them. Crucially, this tends to raise the value of their own labors even as it devalues lines of work that are replaced by the new. But the expectation of increasing value productivity through greater contact with a diverse range of people, etc., is what has attracted and continues to attract many to urban life, although things may not always happen in the way we expect them to. In Jacobs’s view, it is when the settlement is able consistently to generate net increases in wealth in this fashion that the settlement becomes a great or living city. This is, again, the starting point of all major economic progress and social change. As Jacobs puts it: “Opportunity, not necessity, is the mother of invention” (Jacobs 2000: 90).

3 Solving the Problems of Discovery and Diffusion

A living city with its high population density,¹¹ diversity of knowledge and tastes, and dynamic social networks and markets that give coherence to these disparate elements solves the problem of discovery and diffusion. In this urban context, innovation depends much less on the lone creative genius working against astronomical odds.

It is sometimes said that markets economize on altruism by harnessing the power of self-interest. Creative genius, like altruism, is also rare and markets economize on it, too. Richard Florida (2005) argues that if cities today wish to rejuvenate, they need to pursue policies that attract creative people. I believe he is partly right. But the marvel of the living city is that it makes people extraordinary, by locating them daily within a matrix of networks and action spaces in which information and opportunities, conducted by weak social ties, come at them from many different and often unexpected directions. Decreasing average social distance and increasing Jacobs Density make it more likely that useful novelty diffuses to those who value it, even if they don’t know the innovator personally (and whether or not they pay for it). A developing economy means more work and a greater variety of work, increasing the options of city dwellers and lowering the cost of trying new things. As Glaeser (2012: 25) notes: “An abundance of local employers also provides implicit insurance against the failure of any particular start-up.” City dwellers experience these things at lower expected cost than their rural cousins.

Jacobs demonstrates this by suggesting how agriculture and animal husbandry likely historically emerged unplanned within the boundaries of a city.¹² She first explains how a large trading settlement might be established by hunter-gatherers, which then grows and develops spontaneously, as I sketched earlier in this chapter. I also mentioned that one of the locational advantages of the city is that it lowers the cost of transport, so goods can be traded there from other locations more conveniently than before. But location does a great deal more than simply lower transport costs.

Jacobs (1969a) uses the example of seed from distant areas, perhaps with significant variations in size, nutrition, or heartiness, which are brought together in unprecedented proximity in a large trading settlement. The chances of deliberate, or more likely, accidental mixing of different varieties of seeds are thus much greater there than in a smaller, less “cosmopolitan” settlements. Also, those responsible for storing wild seed grain, itself new work invented in the proto-city, are, out of self-interest, much more likely than isolated farmers to have the opportunity to notice the different characteristics of the seed varieties. Moreover, unlike farmers in rural settlements, experimentation becomes more practicable since failure need not lead to starvation. Indeed, seed-stewards only need to notice differences that appear in the normal course of business, and they have profit motive to do so. They become experts in a new specialization of seed stewardship; an expertise they pass along, intentionally or not, to rival seed-stewards, whose economic interest is, among other things, to keep a sharp eye out for new developments.

The important lesson here is that little of this need be done deliberately. The seed-stewards-turned-hybridists were not aware that they were advancing agriculture, but that is what they did. New businesses, new work, and systematic hybridization becomes in this way an unintended consequence of urban life.

Jacobs tells essentially the same story about animal husbandry. Some former hunter-gatherers specialize in feeding and minding, say, wild goats and keeping them for their owners until they want them. Again, a new business and new work is thereby created. In a small village, whoever tends goats would rarely, if ever, see so many varieties of goats at one place and time. In the large, dense, and diverse settlement, they could not help but notice differences in quality, size, and temperament. In time they might, out of sheer convenience to themselves and their clients, add the work of slaughtering to their business. When this happens, some wild-goat owners who leave their animals with the goat-keeper for care themselves transition from customers to suppliers of wild goats for the keeper’s breeding and slaughtering business. With so many goats at their disposal, the keepers find themselves in a position to pick and choose which goats to slaughter and which they will retain for breeding. (They will also likely need specialized tools and labor to engage in the new endeavor, again necessitating new goods and new work.) As in the case of seed-stewards, purely out of self-interest, goat-keepers will probably choose the most difficult-to-manage goats first and retain the more docile and easier-to-care-for goats for breeding. After a few generations of goats, a breed of domesticated goat emerges. Again, in the milieu of urban diversity and density, accidental breeders and their competitors advance animal husbandry without intending to.

The knowledge of and benefits from these discoveries spread rapidly through dense social networks of the city. In this way, social networks and market incentives make discovery and diffusion closely bound processes. Without the lines of contact that bring new opportunities to urban entrepreneurs, far fewer discoveries would take place. And knowledge quickly diffuses over dense social networks because people are entrepreneurially alert to profit opportunities that can accrue through them.¹³

Agriculture and animal husbandry emerge as spontaneous orders within a living city, which, as we have seen, is itself a spontaneous order. The new knowledge and skills that seed-stewardship and the goat-keeping create would have been far more difficult or even impossible to discover or, if discovered, more slowly spread or easily lost, in a region of smaller, non-commercial villages. The urban processes described here simply cannot be replicated consistently in a less complex, less dynamic rural setting. A city is, indeed, not simply a scaled-up hamlet, village, or town. It is a fundamentally different social phenomenon.

Although perhaps historically interesting in themselves, these provocative theories of the spontaneous origins of the city and of the unplanned innovations that happen within it tell us something about the nature of all living cities, including those of today. For instance, to be incubators of ideas and generators of innovation, cities require an ever-changing variety of knowledge on the supply side and of a broadening of tastes and expectations on the demand side. And to accommodate diversity, it is critical to have flexibility in land-use to provide space for and adjustments in the actions that constitute that diversity. Action spaces expand, and along with them so do dynamic social networks and rising Jacobs density.

All this presupposes the existence of substantial economic freedom.

4 Economic Freedom and Social Networks

I am using the term “economic freedom” in the sense used by the authors of the Economic Freedom of the World Annual Reports at http://www.freetheworld.com/index.html. The four cornerstones of economic freedom are:

• Personal choice

• Voluntary exchange coordinated by markets

• Freedom to enter and compete in markets

• Protection of persons and their property from aggression by others

Economic freedom promotes market formation by lowering the costs of trading, but it does far more. First of all, not much diversity-generating discovery and development happens unless people feel secure in their person and belongings, and feel free to pursue gains from trade where and when they see them. Indeed, the original market areas, the proto-cities, cannot get off the ground unless members of socially distant groups trust, are trustworthy, and are permitted to trade with one another. By enabling extensive trade, economic freedom also enables the formation of norms of behavioral trust and reciprocity that promote weak ties and bridging social capital, which in turn promotes dynamic, robust, and long-term economic development. And to the extent that trusting produces net gains for both trusters and trustees, it bolsters the willingness of people to trade and trust even more.

Trade between strangers, where there may have been a history of hostility between their respective groups, may not result in friendship or strong ties, even if they have been trading for a long time. But that they are trading at all instead of shunning or fighting each other means their desire to improve their situations through peaceful association has overcome to some extent their mutual aversion. And while their levels of behavioral trust may be barely high enough to overcome their uncertainties, that they have reached an agreement at all indicates a mutual understanding of what constitutes a fair trade and perhaps a recognition of other common values. Over time, their tie may strengthen and their cognitive trust may grow, possibly leading to multiplex interactions and more and diverse socially distant partners.¹⁴ But to get this virtuous spiral going means someone has to make the first move, an act of behavioral trust, a leap of faith. And to keep it going requires traders to keep being trustworthy once it does.

There is, of course, no guarantee this will happen, and it’s not hard to find examples where it has not. But in modern times they are far outweighed by instances where it has, for otherwise how could the historic levels of wealth creation and global trade over the last several centuries have taken place? In the modern world, economic freedom, limited as it is by political power, has been essential for economic development and the discovery and diffusion of knowledge that characterize the process of innovation.

With this understood, what are the mechanics of innovation according to Jacobs?

5 The Process of Innovation: Parent Work and New Work

Those mechanics rely in part of the concept of the “division of labor.”

The principle of the division of labor is most famously articulated by Adam Smith, the titular “father of economics,” in his book published in 1776, An Inquiry into the Nature and Causes of the Wealth of Nations, a.k.a. The Wealth of Nations. Smith describes how the daily output of a group of workers working independently—pin-making in Smith’s example—can increase astronomically if they divide production into several parts with each worker specializing in one or two tasks. Smith observes that the division of labor increases the daily output of ten workers from perhaps 200 pins to 48,000 pins—a factor of 240 times!¹⁵ Jacobs takes Smith’s concept and puts a more dynamic spin on it.

Jacobs sees innovation and the creation of new work as growing out of existing “parent work” in the division of labor (DOL). Innovations appear at the margins of the current DOL as offshoots of existing specializations. Characterizing it, Jacobs says: “To be sure this process is full of surprises and hard to predict – possibly it is unpredictable – before it has happened…” (1969a: 59). Being essentially creative, innovation is inherently unpredictable.

New work represents a dramatic departure from parent work. That is because, while an innovation may depend on the intelligence, awareness, and connections of those working within an established business, the new product or service they create tends to serve the demands of a very different clientele from that of the parent business or perhaps even of the industry in which the parent operates. Henry Ford went from working on ships to selling automobiles. Amazon.com went from being an online bookseller to now serving as a platform for a multitude of products with home delivery, as well as a producer of original movies and television series, none of which anyone, including founder Jeff Bezos, could have foreseen. So if you are trying to understand the salient aspect of this essentially dynamic process, narrow categories such as “local services” or “light manufacturing” are not helpful (1969a: 61).

For this reason, while the new work may originate within an established firm, it is more likely to break away or spinoff from the parent if there is economic freedom to do so. Ford, for example, was a young mechanic for a Detroit firm that made marine engines before breaking away to design and produce his first working automobile, with local carriage makers providing his auto-body frames (Glaeser, 2012: 46). Some exceptional businesses do reinvent themselves repeatedly over time to supply a shifting customer base or to enter new markets (Google, now Alphabet Inc., and Apple Inc. being well-known current examples). But radical innovations are also the initiative of marginal individuals or small groups short on capital. Indeed, while there is a tendency to equate entrepreneurship too narrowly with start-up companies, it does reflect a common perception that supports the spin-off model.¹⁶

Without a wide diversity of people, places, and things readily at hand—that is, “effective economic pools of use” or “co-development”—that will serve to complement and support new start-ups, new projects may never get off the ground. Other things equal, diversity inspires and enables innovation. As we will see, diversity generates knock-on effects in the local economy as employment and investment rise in the new local businesses, and in the suppliers of inputs for those businesses, even as they decline in other established businesses (locally or abroad).¹⁷

We have seen that the freedom to move into and out of existing spaces or to convert existing spaces to new uses is crucial. Flexibility of land-use means businesses have the freedom to easily repurpose space with expected changes in demand- and supply-side conditions, and it allows for a greater accommodation of differences in human capital and tastes. Contrariwise, land-use rigidity retards adjustment, innovation, and creative urban development. If the innovation that drives economic development consists chiefly of new organizations that spring up among the old, where both the old and new might prosper or die, then the legal-institutional framework must be flexible enough to let this happen; if, that is, economic development rather than preserving privilege or mere redistribution is an aim of public policy (Cozzolino 2018). And beyond the regulatory environment, the customs, norms, and social networks operating within this environment should also welcome, or at least tolerate, new ways of doing things, new products, and new services. Just as importantly, they should accommodate new consumption behaviors and lifestyle choices of those whose diverse interests and tastes drive the dynamic demand side of economic development. We need to be allowed, and to allow ourselves, to experiment with and adopt new tastes and attitudes, and to welcome diverse outsiders into our community networks. The urban environment should, as I emphasized in Chap. 3, tolerate, even encourage, trial and error, success and failure, and the messiness that comes with it.

Tolerance in each of the aspects of social change described here can help keep the inevitable clashes of ideas and cultures between new and old that arise in a dynamic environment from bursting into violent conflict. In fact, shunning force, collaborating with strangers, and being (peacefully) competitive are three values of the “commercial syndrome” Jacobs develops in Systems of Survival (2002), which investigates the differences in the ethics that should guide behavior in the market and government.¹⁸

6 Economic Development via Import Replacement and Import Shifting

For a more detailed but succinct description of this process, see Ikeda (2020) or the appendix to Jacobs (1969a, 1969b), which contains some helpful diagrams. Readers seeking a concise summary of Jacobs’s theory of economic development should also see Charles-Albert Ramsay’s Cities Matter (2022).

Central to Jacobs’s development theory is the combination of “import replacement” on the supply side of the market and “import shifting” on the demand side. In the story of the origin and evolution of New Obsidian, they are the dual engines of the economic expansion in a city’s DOL.

6.1 The Division of Labor as a Spontaneous Order

Before looking into those details, however, it is important to keep in mind that the DOL of a city is a spontaneous order. To quote Adam Smith:

This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature, which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another. (Smith, 1981: 25)

As defined in Chap. 2, a spontaneous order is an unplanned, largely self-regulating set of complex social relations that effectively adjust to changing conditions over time (Hayek, 1967). Recall that like the individual, the household, or a business firm, the city is a natural unit of economic analysis, unlike the political construction of the nation-state. The process of economic development for Jacobs takes place in a living city in relation to other cities.

We have seen that for Jacobs, economic development occurs by “adding new kinds of work to other kinds of older work” (1961: 51). “Break away” or spin-off activity adds new work that begins as part of a specialization within the DOL of an existing firm. Someone thinks of a new way of doing an old task or discovers a way of taking the skills and resources used in that task and doing something different with them, perhaps something very different, that takes production in a new direction.

Examples Jacobs uses include the way 3M Company, originally a Minnesota-based supplier of industrial sand, gradually adjusted to market demand via trial and error to manufacture vastly different products, ranging from adhesive tape to reflective sheeting, all of which were logically (but unpredictably) derived from some aspect of the production of industrial sand; or the way bicycles were first manufactured in Japan by local entrepreneurs who discovered they could assemble all the necessary inputs from local suppliers of replacement parts for bicycles imported from abroad (a good example of exploiting an effective economic pool of use) (Jacobs, 1969b). Thus, expanding complementarities of production in some areas of a local economy increases the extent and complexity of the DOL and creates sources of potential new products some of which may be exported.

6.2 Innovation as a Process of Import Replacement and Shifting

Delving into this more deeply, an urban economy expands when the rate at which new DOLs emerge exceeds the rate at which old divisions and specializations recede. While in retrospect the new goods and services created at some margins of production are logically traceable to the older parent work, these new goods and services and their location in the increasingly complex and extended DOL are, as Jacobs observes, unpredictable. We can see in retrospect the logical steps by which adhesive tape evolved from the process of producing industrial sand, but we can’t predict beforehand that it would happen. Existing parts of the DOL, qua effective economic pools of use, inspire new extensions such as texting apps or the creation of online content, while other parts wither away, such as manufacturing CRT monitors or teaching handwriting. And the more extended and complex the DOL, the more opportunities there will be to stimulate new work and new divisions and specializations. Paraphrasing Adam Smith, the scope and complexity of the DOL is limited by the extent of the market (Smith, 1981: 31).

Routine, non-innovative growth occurs when businesses make, and their customers consume, more and more of the same kinds of goods and services. Development through innovation is different. At the level of the individual firm, innovation tends typically to build gradually on old work. At the level of the city, however, economic development happens in discontinuous, sometimes explosive leaps, as alert copycats rapidly diffuse successful discoveries over urban networks. This is as true of the modern city as it was for the Neolithic city. Economic development through innovation takes place as the result of diversification and differentiation by producers and consumers. This is where imports and exports play key roles.

Recall that in Jacobs’s story of the New Obsidian, wild food is at first imported by hunter-gatherers who bring wild goats with them to the settlement. Caring for them requires, in addition to the goats, other inputs such as someone to tend them, water and feed, and a sturdy pen to hold them all. When the goat-keeper adds domesticating and butchering to the business, this adds new work and new and more complex divisions of labor to the existing system. It also means that less of the same wild food needs to be imported into the city—some imports will be replaced by local production. The new product, say butchered meat or a new breed of goat, is added to the shopping list of locals. Since the new product is likely an improvement over the original, having been vetted to better suit local demand, it may then turn out to be attractive to consumers in other cities who do not yet have access to the new breed. In this way diversity of tastes shape the demand side of the process. Along with the extended DOL, the export of new products brings added wealth into the city.

Part of the new wealth, according to Jacobs, will increase the demand for consumable goods and services produced both locally and abroad. An increase in local production means a greater demand for inputs including labor, which in a regime of economic freedom will be met from both local and foreign suppliers, and an extension of the local DOL. Jacobs well understood that exports (i.e., the value of what a city’s inhabitants sell abroad) must ultimately equal imports (the value of what they buy from abroad). So, with exports growing and consumption of cheaper local products replacing some imports, locals will use the difference in those values to import more goods, including some they had not imported before. This is a process Jacobs calls “import shifting” and it is a natural and important complement to import replacing:

[T]his process of replacing present imports, and buying others instead, is probably the chief means by which economic life expands, and by which national economies increase their total volumes of goods and services. (Jacobs, 1969a, 1969b: 148; emphasis added)

In summary, the stages of economic expansion are: (1) exporting local products and resources to buy imports, (2) using local pools of diversity to entrepreneurially replace some imports with locally produced goods, thereby (3) increasing the extent and complexity of the DOL, generating additional income and more potential complementarities, (4) exporting more local production, (5) increasing imports and shifting to new kinds of imports, (6) so that in time, some of these imports are themselves replaced, beginning the process anew.¹⁹

Jacobs uses a simple schematic to express the basic relations (Jacobs, 1961):

$$ D+A\to nD $$

That is, to the existing DOL in an economy (D), is added a new activity (A) engaged in new exports or replacing some imports with local production, which generates new work in some new part of the DOL (nD) forming what she terms a “new generality” from which a larger more complex DOL emerges. (There is a much more detailed schematic explanation in the appendix to Jacobs (1961).)

As noted, many of the new imports that residents shift over to will be goods and services they will not have purchased before. On the demand side, then, a significant consequence of import shifting to novel goods is that locals will be further exposed to foreign cultures, customs, and perhaps ways of thinking that could expand their tastes to products they might previously have eschewed or overlooked. Also, the new kinds of work added to the existing DOL may require certain tools, materials, and know-how not available locally, and so locals will have to import those too (until they can be replaced locally) and learn the skills to use them. Moreover, some of these “imports” will arrive embodied in the human capital of immigrants to the city. The importation of novel goods and services in all forms, again, sets the stage for further rounds of input replacement and shifting, greater complexity of the local DOL, rising exports, and growing local wealth, and so on. (These interrelated processes are another example of “reciprocating systems” mentioned in Chap. 4 in reference to the four generators of diversity.)

When local entrepreneurs imitate successful innovators, it also expands local output, employment, wealth, and consumption, but this does not directly contribute to local innovation.

In living cities, the import-replacing and shifting process repeats again and again. There is no upper bound to this process, no limit to the size, wealth, and complexity of the living city,²⁰ as long as we are able to utilize our resources and resourcefulness to stay ahead of the problems we create. Once again, the ever-growing complexity of the local DOL lays the groundwork, the effective economic pools of use, for future innovation. These pools of use accumulate, and beyond some threshold become rich hunting grounds of entrepreneurial discovery that sets off import replacement and the export of new products.

Of course, cities can also decline—the title of Jacobs’s most famous book is after all The Death and Life of Great American Cities—owing either to forces within the urban process itself (i.e., endogenous factors), which I discuss a little later in this chapter, or to policy interventions (i.e., exogenous factors), which is covered in Chap. 8.

6.3 A Digression on Tariffs

Jacobs is careful to distinguish what she calls “import replacement” from the familiar-sounding but very different policy of “import substitution,” which she describes as “a short-lived fiasco of the 1970s” (Jacobs, 2000: Loc. 1198). Import substitution is a policy of erecting legal import barriers and protections to shield local, usually politically connected, businesses or industries from foreign competition. While Jacobs cautiously supports tariffs to protect distressed regions, she does so because she believes this offers them limited, imperfect shelter against changes in the exchange rate of a national currency. I will say something more about this because it has led to misunderstanding; it will also allow me to introduce her reasons for recommending the breaking up of nation-states into city-states.

Jacobs believes that tariffs can stimulate the process of economic development in regions of a nation-state that are subject to “false feedback” from the rate at which that country’s currency exchanges with the currency of another country. If a nation-state consists of regions with industries that are in significantly different stages of economic development or states of health (e.g., agriculture, manufacturing, finance), and if some of those regions are dominant in the sense that their exports are a plurality of the country’s total exports compared to exports from the other regions, then the dominant regions will largely determine the exchange rate between that nation-state’s currency and those of the countries with whom it trades. That is bad for the less developed, less healthy regions according to Jacobs.

If a country, say the United States, has a “strengthening dollar” (e.g., the number of Euros it takes to buy a dollar is increasing) then that means foreigners have to spend more Euros for any American product priced in dollars, which effectively adds to the prices foreigners have to pay for all American goods, including those goods sellers are struggling to sell in poorer regions. It also means, other things equal, that buyers in those poorer regions are more likely to import more, including goods that might have otherwise been sold in their region, because the prices of foreign goods are now effectively cheaper because a dollar will now buy more Euros than before.

In the absence of a devolution of nation-states into smaller, more economically relevant regional- or city-states with their own currencies, Jacobs recommends governments in less-developed regions be permitted to impose protective import tariffs when the dollar becomes stronger (and presumably lower them when the dollar becomes weaker). This is currently forbidden under the United States Constitution. As I explain in the Appendix to Chap. 6, there are good economic reasons to doubt that protective tariffs of this nature will achieve the objectives Jacobs set forth, reasons that have to do with ignoring knowledge limitations and the political-incentive effects set into motion by protectionist policies. In other areas, Jacobs is keenly aware of knowledge problems (see Chap. 7), but she often overlooks perverse incentive effects of policy interventions (see Chap. 8).

But even for Jacobs, erecting a protective tariff is really a second-best policy. Her best recommendation is to devolve nation-states, as orderly and early as possible, into autonomous regional- or city-states which could then issue their own local currencies, thus removing any false feedback from a national currency because there would be no national currency (Jacobs, 1984: 168). Still, Jacobs seems to ignore another perfectly good solution to the false-feedback problem, one that may be more realistic than dissolving nation-states, as attractive as that may be. That is to enable or even encourage the natural evolution toward a global currency, whether the dollar, the Euro, a cryptocurrency, or whatever. With a truly global currency, used in every city and region of the world, the need to exchange one currency for another would disappear altogether and along with it the false-feedback problems Jacobs complains of. Instead, changes in the relative prices of regional goods would make the necessary adjustments as they normally do, falling when demand decreases relative to supply, rising when demand increases relative to supply.

Jacobs does recognize that economic development cannot take place unless locals are reasonably free to import and export as they see fit, which is something tariffs interfere with (Jacobs, 1984: 168).²¹ And to reiterate, for Jacobs, far from being a problem to be removed, imports and the ever-diversifying tastes they stimulate and the opportunities they offer for entrepreneurial replacement help to drive the process of economic development.

6.4 The Inefficiency of Economic Development

A final thing to bear in mind, mentioned in Chap. 3, is that, because the essence of economic development is a creative and radically unpredictable process, the standard categories of efficiency and inefficiency are not really relevant. Moreover, greater static efficiency via what economists call “economies of scale and of scope,” or a more extensive division of labor within an already existing production process, will produce “more of the same” and contribute to measured gross domestic product. This is not especially helpful for economic development based on discovery and innovation. And while the DOL by itself is a useful device for achieving operating efficiency under a given set of tastes, technology, and resources, its power to promote ongoing economic development is limited. All further increases in efficiency, once existing work has been suitably divided into specialized tasks, will depend upon the addition of new activities, new work, and the increasing organized complexity of the DOL (Jacobs, 1969a, 1969b: 82–83).

For Jacobs, a better measure of the development of an economic system would be the ratio of new work to total work. She would therefore replace the norm of economic efficiency with the norm of new work,²² which is measured by how much the DOL multiplies and becomes more complex over time (Jacobs, 1969a: 57). Jacobs suggests using the ratio of the “value of new products” to the value of all projects produced in a city over time as a proxy (Jacobs, 1969a: 94). This deserves further consideration, although to my knowledge it has not been tested.

7 The Self-Destruction of Diversity

A living city contains powerful forces for expansion, but what might lead to its decline? The next two chapters look at how certain attempts to consciously direct overall urban development can have negative unintended consequences for urban life, and Chap. 9 investigates whether some projects to rebuild or revitalize a city could be successful. Here, however, we outline Jacobs’s claim that forces internal to the very process of economic expansion can lead to a dynamics of decline; in particular, that a neighborhood or district may become a victim of its own success. It goes like this….

A lively location filled with successful innovators tends to attract imitators. Other businesses and residents will want to move into spaces currently occupied by established users. Investors and developers will want to follow the same “formula for success” by building or retrofitting spaces there to accommodate uses already proven to be successful. The demand for space will increase and, other things equal, raise the average cost of real estate in the area. As a result, “cheap space in old buildings” begins to disappear as they are expensively renovated, removing one of the four generators of diversity. The rising cost of space particularly discourages younger people with new ideas and lots of energy but little capital, the very ingredient that probably sparked the initial experimentation and creativity, from moving to or staying in that location.

The first of these powerful forces is the tendency for outstanding success in cities to destroy itself – purely as a result of being successful. In this chapter I shall discuss the self-destruction of diversity, a force which, among its other effects, causes our downtowns continually to shift their centers and move. This is a force that creates has-been districts, and is responsible for much inner-city stagnation and decay. (Jacobs, 1961: 242)

This tendency homogenizes land-use. Large, well-established firms that are less likely to innovate with new concepts will be better able to afford the area and so displace smaller, independently owned establishments.

Whichever one or few uses have emerged as the most profitable in the locality will be repeated and repeated, crowding out and overwhelming less profitable forms of use. (Jacobs, 1961: 243)

Smaller “start-ups” that merely copy successful uses will also contribute to the homogenization. The result is an endogenous self-destruction of diversity, reducing potential complementarities and local pools of economic use. Less imaginative, copycat competition homogenizes the land-use diversity that initially enabled risky trial and error. While some independent proprietors may remain, fewer new ones will appear.

In their introduction to a collection of Jacobs’s shorter works, Zipp and Storring describe this process at work in Jacobs’s own West Village neighborhood:

So the Village endures, but as a bright and blurry clone of a past self. With astronomic rents came chain stores, fashion boutiques, luxury condo conversions in glass and steel. They have crowded out hardware stores, bodegas, diners, bookstores, small manufacturing shops, the unpredictable and the odd. Real estate speculation, long a New York obsession, has finally chased out most everything else but rarefied shopping and eating and looking. The diverse mixture of people with plans both humble and grand that Jacobs celebrated can find little purchase in this meager city soil. (Zipp & Storring, 2016: xvii)

Ironically, it is the very entrepreneurial competitive process that helped create the original liveliness of an area that can drive this result.

This process represents what some might call a “market failure.” This is a term I resist using here because what economists mean by market failure—that is, a market equilibrium that is inefficient—is entirely different from what Jacobs is describing—that is, an endogenous process that results in a decline of innovation, not efficiency, in a particular location. Thus, a district or city may have a growing per-capita GDP, at least for a while, and be full of expensive residences and high-end stores, and yet be “declining” in terms of creativity and innovation, as public and private spaces become increasingly monocultural. Other examples in New York would be the now posh district of Soho, which, in the 1970s, was the home of artists and serious art galleries but today, especially along the main thoroughfare of West Broadway, has taken on all the glitz (though not the glamour) of Madison Avenue. What to do?

The key policy response, according to Jacobs, is to ensure there are other locations in the city where the conditions for generating diversity obtain, so entrepreneurial energies stifled by homogeneity and high real-estate prices can take root elsewhere in the city (Jacobs, 1961: 255). If all that energy and resourcefulness can find other, congenial locations—neighborhoods or districts that have adequate generators of diversity—the city as a whole might avert the self-destruction of innovation. In the longer term, perhaps expanding areas of potential development to include so-called “suburban sprawl” may be a practical way to nurture innovation and creativity. After all, the basements and garages where some legendary rock bands and tech geniuses got their start were in the ‘burbs. In any case, without local outlets like these, entrepreneurial innovators will look elsewhere for cheaper, more workable places, stunting local innovation and draining life from the city.

Finally, one of the most important endogenous causes of urban decline is over-specialization in a particular industry, giving rise to a city’s heavy dependence on a single, dominating use or industry. When demand or supply conditions change, this heavy dependence, along with stakeholders with a vested interest in resisting change, makes adjustment extraordinarily difficult. Wealth and imports decline and declining with them are import replacement, import shifting, new exports, and so on, generating a spiraling dynamics of decline that takes a very long time to reverse, if ever. Detroit’s decline in beginning in the 1950s might be a good example (Glaeser, 2012: 49). (But despite its severe challenges, Detroit lately may be slowly reviving, evidently largely through the efforts of devoted locals—billionaires, small businesses, and ordinary citizens—using their local knowledge to strategically invest in plentiful cheap space (Agar, 2015).) Dynamics of decline can also occur as the result of public policy—for instance, when protectionist tariffs and quotas on imports favor local industries and stifle innovation and development, when rent regulations stifle residential construction, and of course when urban planning is insensitive to, as Jacobs phrases it, “the kind of problem a city is.”

8 Concluding Thoughts

As we have seen in these last two chapters, Jacobs takes an alternative perspective that includes the essential roles of cities, of entrepreneurial discovery, of the non-market foundations of economic development (e.g., trust and social networks), and of demand- and supply-side diversity. Hers is a vision of a dynamic process in which diversity and density give rise to discovery and development, enabled by economic freedom and tolerance. In this process, innovations emerging from parent work depend crucially on co-development within a process of entrepreneurial import-replacement, taste-broadening import-shifting, and expanding exports. Discovery and innovation are rooted in an ever-growing range of complementarities in the division of labor, and their diffusion is reliant on dense and complex social networks that emerge and adapt dynamically. Measured increases in GDP are a result.

Regarding policy, because of problems of knowledge and political incentives, public authorities should beware of interventions that discourage new and valuable uses of space that hinder people from adjusting locally to changes in tastes, technologies, and resources, and adjusting in the longer term to changes in demographics, environment, and geography. The inherently unpredictable and evolutionary character of economic development cautions against large-scale projects, especially when ill-informed and politically motivated public authorities are making the big decisions and when the need for creative adjustments will inevitably arise. Chapters 7 and 8 explore these themes.