Jane Jacobs: Brilliant Pioneer on Economic Growth
Jane Jacobs, uncorrupted by dogma, made some stunningly astute observations on economics. If time affords, I'd like to read all she's written, because what little I have read confirms she was decades ahead of most academic economists.
Yet when I google for evidence that people are quoting her two most important insights -- or at least what I consider to be her two most important insights -- it's almost like she's an unknown writer.
"Innovating economies expand and develop." That's her most important insight, and googling for people who quote her turns up about 15 results (try it yourself!). I was able to cobble together most of the paragraph from a couple of different sources:
"Our remote ancestors did not expand their economics much by simply doing more of what they had already been doing … They expanded their economics by adding new kinds of work. So do we. Innovating economies expand and develop. Economies that do not add new kinds of goods and services, but continue only to repeat old work, do not much expand nor do they, by definition, develop.” - Jane Jacobs, The Economy of Cities, 1969, pg 49. (The chapter title, "How New Work Begins," generates one result.)
Her other stunning insight is on how Roman Law -- prohibiting what you don't permit -- affects the process of adding new work to old. Googling for this observation turned up one result, and only a partial one at that:
"...forced to stay within prearranged categories -- whether by zoning, by economic planning, or by guilds, associations or unions -- the process of adding new work to old can occur little if at all."
But then, the realization that prosperity really is that simple doesn't seem very widespread.
Still, in 1969, Jane told us almost all we really need to know about economics: innovation creates growth and wealth, and you have to permit what you don't prohibit (i.e. Common Law) if you want innovation -- that is, if you don't force work to stay in prearranged categories, you'll naturally get innovation with its attendant growth and wealth. If you then endow innovators with equity to properly motivate them to strive for new work, then you have a wealth machine. Jane doesn't discuss equity explicitly, which is a shame, but at least she assumes implicitly that people who start new businesses own them.
Jacobs made her two crucial observations, but she then let her analogy of corporations as living organisms confuse her analysis. She said large corporations with internal divisions of labor were sterile except for their reproductive organs -- research and development departments. She correctly noted that R&D frequently produced wonderful innovations that the corporation then failed to capitalize on.
In fact, in 1969, Charles Koch was just beginning to grow Koch Industries with Market-Based Management, which indeed permitted what it didn't prohibit. Koch Industries was and is wonderfully creative in creating new work on old, even while maintaining the internal coordination needed to keep up the old work that remains competitive. Rather then central planning -- forcing divisions to stay in prearranged categories -- Koch Industries creates internal markets, like a miniature version of a market economy (and while the Koch family retains sole ownership, they do give employees a form of virtual equity for motivation)*. It works, beautifully, but Jacobs didn't chance to observe it in time to amend and extend her observations on how new work begins (fortunately, Thomas Petzinger did).
Jane's analogy of the corporation as living organism wouldn't have led her so far astray if she'd been as clued in on Lynn Margulis's ideas of symbiosis driving the origin of species as she was on the idea of cities driving the origin of agriculture, but then, Margulis's ideas were yet in the future.
To get a detailed ideas of how new work begins, you need to look more closely at evolution, and in particular at the ideas of Stuart Kauffman and John Holland. Their two chapters in the Santa Fe Institute's The Economy as a Complex Evolving System brilliantly describe how new work evolves as new combinations of modular elements drawn from existing work. Kauffman's use of fitness landscapes illuminates the interactions between new work and old, and his discussion of the adjacent possible shows the vast potential the economy has for future development. Holland's genetic algorithms offer an abstract description of how different modules come together to create new combinations, and how evolution balances exploration for new work together with exploitation of old work. Together, they show us how humanity explores the economic fitness landscape, climbing learning curves and adaptation curves (jumps from one fitness peak to another) to find better ways of accomplishing things that people want done. (Clayton Christensen doesn't have a theory of adaptation curves, but his work aptly describes the process of climbing them.) (The Dallas Fed's Michael Cox and Richard Alm aptly describe how creative destruction keep the economy churning.) (My own work contrasts, inaptly, the economic effects of Roman Law and Common Law -- I should further clarify how Roman Law helps the rich and powerful stay rich and powerful, which makes it a constant temptation for a government and its bureaucracies.)
So, Jane had the basics, and influenced both Kauffman and Holland in their thinking on the process of beginning new work. If we taught undergraduate what the three of them taught us on how to grow firms and economies, we'd have a lot more growth than we do now.
Just as an aside, George Soros has a much better explanation of mergers and acquisitions that Jacobs -- they stem from corporations using high-priced shares to buy assets cheap** rather than from underlying economic motivations as Jacobs would have it. But then, she didn't pay much attention to equities and markets.
* A little fair-use of Petzinger's 4/18/97 WSJ/Dow Jones copyrighted column:
"Drawing on economics, psychology and the history of science, Mr. Koch runs his company on what he calls "market-based management," which he regularly teaches to employees. Though the execution is often complex, the main idea is simple: The free market is an information system whose power in society can be drawn inside a company.'
"The concept is rooted in the right. Mr. Koch's father, Fred, was an ardent anti-Communist with a library full of free-market literature. One day in 1962, Charles, a newly minted M.I.T. engineer, pulled down a book on the Austrian school of economics, which describes free economies as systems of spontaneous, unplanned order. "I spent the next two years almost like a hermit, surrounded by books," he says. And it dawned on him that if central control was a "fatal conceit" in an economy, to quote the economist F.A. Hayek, why should it be any different in a firm?'
"SO SINCE ASSUMING his father's post in 1967, Mr. Koch has hacked away at command-and-control structures, transforming the $177 million-a-year oil company into the second-largest private company in America. Yet outside his endowment of libertarian causes and a long-running financial imbroglio with an estranged brother, his moves have drawn scant public notice."
** The relevant discussion should turn up in a Google search of -- "george soros" reflexivity "earnings per share" acquisitions -- but if it's in those 68 results (many of them repeats), it's not obvious at first glance.
Yet when I google for evidence that people are quoting her two most important insights -- or at least what I consider to be her two most important insights -- it's almost like she's an unknown writer.
"Innovating economies expand and develop." That's her most important insight, and googling for people who quote her turns up about 15 results (try it yourself!). I was able to cobble together most of the paragraph from a couple of different sources:
"Our remote ancestors did not expand their economics much by simply doing more of what they had already been doing … They expanded their economics by adding new kinds of work. So do we. Innovating economies expand and develop. Economies that do not add new kinds of goods and services, but continue only to repeat old work, do not much expand nor do they, by definition, develop.” - Jane Jacobs, The Economy of Cities, 1969, pg 49. (The chapter title, "How New Work Begins," generates one result.)
Her other stunning insight is on how Roman Law -- prohibiting what you don't permit -- affects the process of adding new work to old. Googling for this observation turned up one result, and only a partial one at that:
"...forced to stay within prearranged categories -- whether by zoning, by economic planning, or by guilds, associations or unions -- the process of adding new work to old can occur little if at all."
But then, the realization that prosperity really is that simple doesn't seem very widespread.
Still, in 1969, Jane told us almost all we really need to know about economics: innovation creates growth and wealth, and you have to permit what you don't prohibit (i.e. Common Law) if you want innovation -- that is, if you don't force work to stay in prearranged categories, you'll naturally get innovation with its attendant growth and wealth. If you then endow innovators with equity to properly motivate them to strive for new work, then you have a wealth machine. Jane doesn't discuss equity explicitly, which is a shame, but at least she assumes implicitly that people who start new businesses own them.
Jacobs made her two crucial observations, but she then let her analogy of corporations as living organisms confuse her analysis. She said large corporations with internal divisions of labor were sterile except for their reproductive organs -- research and development departments. She correctly noted that R&D frequently produced wonderful innovations that the corporation then failed to capitalize on.
In fact, in 1969, Charles Koch was just beginning to grow Koch Industries with Market-Based Management, which indeed permitted what it didn't prohibit. Koch Industries was and is wonderfully creative in creating new work on old, even while maintaining the internal coordination needed to keep up the old work that remains competitive. Rather then central planning -- forcing divisions to stay in prearranged categories -- Koch Industries creates internal markets, like a miniature version of a market economy (and while the Koch family retains sole ownership, they do give employees a form of virtual equity for motivation)*. It works, beautifully, but Jacobs didn't chance to observe it in time to amend and extend her observations on how new work begins (fortunately, Thomas Petzinger did).
Jane's analogy of the corporation as living organism wouldn't have led her so far astray if she'd been as clued in on Lynn Margulis's ideas of symbiosis driving the origin of species as she was on the idea of cities driving the origin of agriculture, but then, Margulis's ideas were yet in the future.
To get a detailed ideas of how new work begins, you need to look more closely at evolution, and in particular at the ideas of Stuart Kauffman and John Holland. Their two chapters in the Santa Fe Institute's The Economy as a Complex Evolving System brilliantly describe how new work evolves as new combinations of modular elements drawn from existing work. Kauffman's use of fitness landscapes illuminates the interactions between new work and old, and his discussion of the adjacent possible shows the vast potential the economy has for future development. Holland's genetic algorithms offer an abstract description of how different modules come together to create new combinations, and how evolution balances exploration for new work together with exploitation of old work. Together, they show us how humanity explores the economic fitness landscape, climbing learning curves and adaptation curves (jumps from one fitness peak to another) to find better ways of accomplishing things that people want done. (Clayton Christensen doesn't have a theory of adaptation curves, but his work aptly describes the process of climbing them.) (The Dallas Fed's Michael Cox and Richard Alm aptly describe how creative destruction keep the economy churning.) (My own work contrasts, inaptly, the economic effects of Roman Law and Common Law -- I should further clarify how Roman Law helps the rich and powerful stay rich and powerful, which makes it a constant temptation for a government and its bureaucracies.)
So, Jane had the basics, and influenced both Kauffman and Holland in their thinking on the process of beginning new work. If we taught undergraduate what the three of them taught us on how to grow firms and economies, we'd have a lot more growth than we do now.
Just as an aside, George Soros has a much better explanation of mergers and acquisitions that Jacobs -- they stem from corporations using high-priced shares to buy assets cheap** rather than from underlying economic motivations as Jacobs would have it. But then, she didn't pay much attention to equities and markets.
* A little fair-use of Petzinger's 4/18/97 WSJ/Dow Jones copyrighted column:
"Drawing on economics, psychology and the history of science, Mr. Koch runs his company on what he calls "market-based management," which he regularly teaches to employees. Though the execution is often complex, the main idea is simple: The free market is an information system whose power in society can be drawn inside a company.'
"The concept is rooted in the right. Mr. Koch's father, Fred, was an ardent anti-Communist with a library full of free-market literature. One day in 1962, Charles, a newly minted M.I.T. engineer, pulled down a book on the Austrian school of economics, which describes free economies as systems of spontaneous, unplanned order. "I spent the next two years almost like a hermit, surrounded by books," he says. And it dawned on him that if central control was a "fatal conceit" in an economy, to quote the economist F.A. Hayek, why should it be any different in a firm?'
"SO SINCE ASSUMING his father's post in 1967, Mr. Koch has hacked away at command-and-control structures, transforming the $177 million-a-year oil company into the second-largest private company in America. Yet outside his endowment of libertarian causes and a long-running financial imbroglio with an estranged brother, his moves have drawn scant public notice."
** The relevant discussion should turn up in a Google search of -- "george soros" reflexivity "earnings per share" acquisitions -- but if it's in those 68 results (many of them repeats), it's not obvious at first glance.
posted by Mark White at 6:02 PM
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