What’s an economy – According to Jane Jacobs

Lots has been said, and even more has been written about the economy and how it works. Most of that writing is phrased in the language of economics with its specific terminology of market, capital, investment, production, money, profit, and more. But little of that terminology is easily transferred to the natural sciences, which talk in quite different terms like eco-system, energy consumption, and so on. Bridging that divide needed somebody with a broad spectrum of interests, insights and ideas: somebody like the journalist, author, and activist Jane Jacobs [1].

In 2000, Jacobs published one of her lesser known books, The Nature of Economies. True to her conviction that economies are – just like any other human endeavour – subject to the exact same basic principles that govern chemistry, mechanics, and biology, she offers a conceptual description of economies entirely based on natural principles. This post is a tribute to her work.

A simple sketch of a complex system

Jacobs presents her concept of an economy and its inner workings along three main processes: development, expansion, and re-fueling (or self-sustainment). Taken together, these three interlocking processes describe how an economy adapts itself, growths, and keeps itself going. The processes are subject to several correction mechanisms as the economy strives to evade collapse (in the form of either stasis or disintegration). Finally, Jacobs argues that an economy’s fitness and success must be viewed more broadly than through mere growth rates.

The chart above is an attempt at sketching the essence of Jacobs’ concept before entering into a more detailed description.

Development

In the abstract, you could picture an economy as a large system composed of a huge number of building blocks (what Jacobs calls “generalities”). Such building blocks include organizational structures, technologies, tools, resources, and so forth. An economy is then defined by the combination of such generalities, their number, and their interactions. Development in an economy occurs along three strands:

• Differentiation from generality – The numbers, compositions, and interactions evolve in response to new demands or new opportunities: known generalities are put to novel uses (that’s “differentiation” in Jacobs’ terms).
• Generality from differentiation – A differentiation, if successful, is adopted for other use cases. Over time, such a differentiation spreads and becomes a new generality: it is then a new standard building block available to the entire economy.
• Co-development – However, no development occurs in isolation. Rather, the environment must be receptive and, ideally, supportive. Many strands of development must come together at the right time and place.

To look at a concrete examples, let’s take the steam engine as a case in point. Of course Newcomen and later Watt built their first contraptions with the tools and from the technologies they had already available. But they differentiated the interactions between those generalities, they combined them in novel ways. And especially Watt refined the design until his steam engine became a multi-purpose technology, a new generality. Still, that breakthrough would have been impossible without many co-developments: the steel to build the steam engines, the coal to power them, the pumps and trains to apply them to. And let’s not forget the role of Matthew Boulton, who added the business mind to Watt’s engineering skills, thus forging a highly successful entrepreneurial symbiosis.

Expansion

Probably the most prominent feature of an economy is its growth, its expansion over time. Jacobs describes expansion around the idea of what you might call “economic energy“, or the resource that drives an economy. [In later posts I’ll prefer the term “economic fuel” for its broader applicability; but for the purposes of this post, I’ll stick to Jacob’s original terminology.] This broadly defined resource includes not only physical energy, but raw materials and information as well as human capital, i.e., talent, skills, ideas, knowledge. Imports (or exports) describe the infusion (or discharge) of economic energy, i.e., an exchange across the boundaries of the economy. Against this backdrop, expansion consists of three essential elements:

• Capturing energy – Any economy runs on energy, and that energy is captured from the outside before is can be useful for and within the economy.
• Using / re-using energy – Within the economy, captured energy is used, transformed, and re-used in a multitude of ways. And the more re-uses the energy goes through, the more this economy can expand.
• In diverse ensembles – The re-use of energy works best through a diversity of users, and their multiple interactions. In order to expand, an economy seeks to maximize the utility drawn from captured energy.

Again, that’s fairly abstract, but take a chemical process plant as an example. It is set up to generate a specific product from required raw material input. The underlying chemical process defines the input / output relations; but there’s a catch: some byproduct from that process. Now, you could simply discharge that byproduct as waste. Or you could think about re-using it as input to another process to generate another product. If you go for re-use, you’ll have to add more components to the assembly of your infrastructure: you’ll expand your plant.

Re-fueling

But even without expansion or development, an economy must keep going: in order to maintain its baseline effectiveness, an economy must re-fuel. This need for self-maintenance has two facets:

• Energy needed to capture energy – Capturing energy consumes energy. Hence a portion of any amount of captured energy is not available for expansion or development; it must be set aside to capture more energy.
• Equipment appropriate for fuel – An economy needs to be geared to make use of the available sources of energy (the fuel within its reach). Without appropriate tools and equipment, even the richest energy source is useless.

By now it is clear that in Jacobs’ concept of economies nothing ever stays the same, that everything is always in flux: economies are highly dynamic systems. Therefore, the idea that an economy could achieve a static equilibrium is flawed.

Evading collapse

Economies strive for dynamic stability as they evolve through the three main processes outlined above. There is no defined end state, other than avoiding paralysis (development and expansion coming to a grinding halt) or disintegration, i.e., the reversion of development and contraction of the economy.  In order to evade such collapse, economies employ four different control mechanisms:

• Bifurcation – A bifurcation is literally a fork in the road, it means to leave the old path behind and get on a different trajectory. For this approach to work, it’s vital that a viable alternative crops up before crisis strikes. And that’s easily seen in hindsight, but difficult to predict or plan.
• Positive feedback – The simple case where “more” leads to “yet more”. That’s what we see in the hockey stick growth of successful start-ups. But such growth is unsustainable, it does not continue eternally.
• Negative feedback – The other simple case: “more” leads to “less”. This is the mechanism that keeps deviations in check, that limits growth. But just by itself, it would actually cause paralysis, as no change (be it development or expansion) would ever gain traction.
• Emergency adaptations – In times of crisis, an economy might resort to temporary adjustments (similar to hibernation). But these adaptations only work effectively for limited periods of time, and only under the specific crisis conditions. They cannot be extended forever, and they should not be mistaken as bifurcations either.

None of these controls is perfect, each has its own downsides. But they yield considerably better results than simply hoping that an economy could magically escape collapse.

Fitness

Finally, Jacobs addresses the fitness of an economy through two lenses:

• Feeding and breeding – Conceptual descriptions of economies are often cast as the competition between different actors for food (to maintain themselves) and for partners (to maintain their species). This simple biological analogy, while correct, is incomplete.
• Habitat maintenance – For the long-term success of economic actors, their interaction with their environment is equally vital. Those that manage to keep their habitat intact, to avoid depleting the resources they need to import, have a significant advantage over their competitors.

Short-term success is quite possible with a singular focus on the selfish need to feed and breed. However, long-term success is only possible through the combination of both facets of fitness: the selfish and altruistic.

Why it matters

Jane Jacobs portraits economies as complex adaptive systems. Even though she doesn’t use that technical term, the main characteristics of such systems are central to her concept:

• Such systems are often described as fractal or self-similar: they are made of building blocks that are themselves composed of yet other building blocks. That is exactly the idea Jacobs expresses through “differentiation from generality” and “generality from differentiation”.
• Such systems evolve over time, they strive for dynamic stability instead of static equilibrium. Positive feedback and negative feedback are vital mechanisms for such systems to thrive: adapting to change and growing, while avoiding stagnation and disintegration.

Once you start looking for them, complex adaptive systems are abundant, both human-made (such as societies, cultures, cities, or technologies) and natural (ranging from ant colonies to biotopes to the biosphere itself). By avoiding the use of conventional economic terminology, she moves economies from a “special corner” and into the mainstream. With that move, Jacobs does not only force us to take a fresh look at economies, how they work, and how we might influence their evolution. More importantly, she opens up a cornucopia of examples to compare with and to draw lessons from. I’ll scratch the surface of some such lessons in an upcoming post.

[1]  Jane Jacobs is probably best known for her influential book on “The Death and Life of Great American Cities” (1961). For a good first acquaintance with this ardent advocate of the human dimension in urban planning, take a look at The Prophecies of Jane Jacobs.