Wednesday, June 20, 2012

The Nature of Economics

We've been discussing several aspects of evolution and economics in recent posts. Here is another and rather different take.

Jane Jacobs changed the world of urban planning and the way we think about cities with her classic The Death and Life of Great American Cities (50th Anniversary Edition) (Modern Library). She argued for less superhighways and grand universal plans, and more attention to the detail of life at street level and the variety and intertwining of city life.

I read it years ago and it is a vivid and magnificent book, full of wry wisdom and creative insight. Jacobs is like an original genius, with extraordinary perception and a graceful and beautiful style.

She was essentially an amateur. She wrote about the Greenwich Village life she saw around her, and drove the major authorities in urban planning crazy. But she saw things that the so-caled professionals did not, and became one of the main names in urban planning herself.

She also had practical impact. She more or less killed the Robert Moses ideal of city planning stone dead, and was an inveterate opponent of "urban renewal" and city center expressways.

And ironically super math genius Stuart Kauffman also refers to her and her thinking about evolution and economics in the book we were just discussing, rather than all the great names of economics. She might yet have an impact on economic thought.

In 2000 she wrote another book, The Nature of Economies, which developed some ideas about cities and evolution in previous books It is more about ecology than the mathematical computation that Kauffman is interested in. It is a short book written in the style of a Platonic dialogue.

Development and Expansion

She starts off by discussing the nature of development and expansion. Instead of GDP growth, her view is much more about the growth of diversity and intricacy in an ecosystem. Expansion is like the growth of biomass. There is much more weight of life in a tropical forest than a desert. And the whole thing is a process, not a collection of things. It evolves.  

This is a different and productive view from our emphasis on monetary transactions in the national accounts. We'll walk through her definitions here, and then look at how she says the system maintains dynamic stability in the next post.

The starting point is differentiation.

Development is differentiation emerging from generality. A given differentiation is a new generality, from which further differentiations can potentially emerge. Thus the process is open-ended and it produces increasing diversity and increasingly various, numerous and intricate co-development relationships. All this is the consequence of one simple sort of event repeated, repeated, repeated and repeated. p22

You can see this in economic life, she says. Take agriculture and developing new varieties and breeds of plants and animals.

They've done this by fostering desirable differentiations and selecting those worth further fostering. Have you ever tasted a wild orange? Awful, though beautiful. p23

And development is a process.

..development is not a collection of things but rather a process that yields things. Not knowing this, governments, their development and aid agencies, the World Bank and much of the public put faith in a fallacious "thing theory" of development. The Thing Theory supposes that development is the result of possessing things such as factories , dams, schools, tractors, whatever- often bunches of things subsumed under the category of infrastructure. p33

This is where so much of the development effort in the third world went wrong. You couldn't just import capital goods and factories and railways and have a modern economy. Those things were the outcomes of a process. Instead, we ought to think of how the process works and what it requires, she says. It requires economically creative people and initiative for one thing.

Development is qualitative change. Expansion is quantitative change. The two are closely linked, but they aren't the same thing. p37

Self-refuelling and cycles

The difference between a tropical rainforest and a desert is not the amount of energy from the sun that falls on it. It's the myriad of ingenious ways that energy is used before being passed on in countless recycling circuits.

Expansion depends on capturing and using transient energy. The more different means a system possesses for recapturing, using, and passing around energy before its discharge from the system, the larger are the cumulative consequences of the energy it receives. (p47)

Successful cities and economies find ways to stretch the "energy" they import. They are like a conduit.

In the conduit, human labor and human capital transform imports - take them apart, recombine them, pass them around, recycle them, and by all these means stretch imports received into the conduit (p56)

The value gets stretched by a teeming diversity of economic activities, just like the biomass of a forest stretches the energy received by the sun in digressive ways.

So she emphasizes cycles. "Recycle, reuse, recombine, employ symbiosis." The richest places also tend to have the most intricate and diverse economies. They self-refuel themselves.

The practical link between economic development and economic expansion is economic diversity. Here's the principle, which applies to both ecosystems and the economies of settlements: Diverse ensembles expand in a rich environment which is created by the diverse use and reuse of received energy. p63.

Interestingly, there are parallels here with this HBR book by Umar Haique we looked at a while back, which argued for replacing value chains with value cycles. The more you can reuse things, the more average costs fall.

Jacobs says growing cities tend to replace imports - but, crucially, this is not the dumb import substitution policy of the 1960s and 1970s. They grow more differentiated and complex and import different things as a result.

The next step is how you keep the system on track.


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