Deep Currents

A colleague of mine was reading up on development theory for a client project and came across a very interesting set of contrarian views about its animating spirit. The piece he passed me was called How Do We Grow? by David Ellerman, written back in 2005. He summarized the life’s work of a scholar named Jane Jacobs, a woman who managed to spend her entire career studying economies without ever being schooled in the conventional theories of economics. I’m no expert on the topic, so forgive me if I’m making any elementary mistakes, but I found myself nodding as I read his description of her ideas, which touch on a wide range of important policy issues.

Five points stood out to me:

• The unit of analysis in discussing economic growth is not the nation but the city and its surrounding area.
• Cities should maximize diversity in their economies in order to enable lateral innovation.
• Specialization is good for efficiency but locks in the existing set of niches and damages the potential for innovation.
• Competition between cities at roughly the same level of development provides healthy stimulation for innovation, but can be damaging when the cities are at radically different stages, since the products of the more-developed city can be too advanced for the less-advanced city to improve.
• The best corporate structure for innovation is one that encourages spin-outs. This can be accomplished through corporate culture, democratic accountability to the workers, or government policy.

The steady march towards urbanization makes Jacobs’ focus on cities especially relevant today. Urbanization brings up a wide range of issues, adroitly summarized by Stewart Brand in his City Planet talk and in his just-released book, Whole Earth Discipline. The developed world’s cities have done most of their growth, while the developing world has the booming mega-cities could easily become tomorrow’s cultural and economic centers of gravity. They are in active development and the way that they grow will make a significant impact on the coming century.

A personal reason I found her ideas so interesting is that they stand in direct contrast to the theory of development that we use at Monitor’s economic competitiveness practice. We advise governments on the creation of economic “clusters,” groups of industries that we’ve deemed complementary, based on HBS professor Michael Porter’s theory that complementary industries should be located in the same city. Jacobs would object to this idea, since it only makes sense if you think the goal of a city’s development should be to find its niche in the current order. Specializing, even by picking a cluster, means favoring a certain set of industries rather than cultivating the widest possible diversity. In her view, that means you’re increasing the potential for doing today’s work at the cost of diminished chances for creating innovations that will provide a competitive edge in the future. According to a study that Ellerman cites, which surveyed the economies of 170 U.S. cities between 1956 and 1987, Jacobs’ theory holds true. I don’t know the details of Monitor’s cluster analysis, but I wonder whether our consultants might be able to learn something from Jacobs.

When I described these ideas to my girlfriend she noted that diversity is often promoted in the developing world as a means of insuring a city against the shifting winds of the global economy. Many developing-world regions will specialize in a single crop, such as coffee or cacao, only to find that some change in the global economy leaves the entire region without income at the same time. Jacobs mentions this as one of the dysfunctional relationships between cities that ought to be avoided. She would argue that diversity is not only good for creating economic security but also for turning an otherwise slow-moving city into an engine of innovation. Gaining security is clearly appealing, but I image that the dream of becoming truly competitive would be even more inspiring. This is the aspect of Jacobs that I found the most subversive: she believes in a world where today’s slum-ridden mega-cities can become tomorrow’s wealthy and sophisticated urban centers. To the extent that Ellerman is right that the current prevailing view is that the developing world’s goal should be to simply increase its efficiency as a supplier to the developed, then this is a very important shift in mindset. Personally, I couldn’t agree more.

There’s one aspect of Jacobs’ theory that I find particularly challenging to connect to practical reality. She points out that inter-city competition for innovation is only healthy when the cities are at roughly the same developmental stage, arguing that competition between ill-matched cities is damaging for those on the lower end of the developmental ladder. That may be true, but are there any levers available to prevent that damage? Of course, one could construct some kind of ranked index of cities’ developmental state and propose a tariff regime that protected less-developed cities from “unfair” competition… and even my unschooled ears hear that as not only impractical but also unsustainable. But if it’s not that, are there other ways to create that protection?

I also wonder: are Jacobs’ ideas really opposed to those of mainstream economics–or are there economists in the mainstream who believe her? I have no technical background in the discipline, but these ideas seem too obviously correct for every respectable economists to dismiss.

Written: October 19th, 2009