The Nature of Economies – What Jane Jacobs tells us about innovation

In the previous post, I introduced Jane Jacobs’ ‘The Nature of Economies’. Her perspectives on economies and how they work are remarkable in many ways. In her quest to describe economies entirely based on natural principles, she presents economies as a complex web of interactions and mutual dependencies between different subsystems. Leaning on the concept of complex adaptive systems, she pushes economies off the ‘exceptional’ pedestal and opens an important gateway to comparing economies with other human-made or natural complex adaptive systems. Emphasising the principle openness of economies while avoiding reference to profit or money, her concept elegantly avoids the myopic misperception of economics as a zero-sum game driven by cut-throat competition.

Most importantly, Jacobs provides a view on a number of important aspects that usually go unrecognised. Starting from her insights on an economy’s main processes, the control mechanisms at work, and the fitness of an economy, we can now take a comprehensive look at innovation targets, i.e., the types of problems our society needs to solve. For our economy to be successful in this endeavour, we must appreciate that we live in an open system and take care of our economic habitat. And we must acknowledge that growth always occurs in a larger context; it is not an end in itself.

Growth in context

If you ever observed teenagers’ eating behaviours, you might have seen a more or less cyclical pattern. After a phase of ‘normal’ eating, there’s a period of frantic food-intake, followed by a short burst of almost visible growth, before eating resumes its previous ‘normal’ level: the increased food supply almost directly generates growth. The same applies to economies: in order to grow, you must invest energy.

But growth is not the only energy-consuming process in an economy. In fact, all three main economic processes identified by Jane Jacobs consume energy: development (i.e., solving problems), expansion (growth), and re-fueling (self-sustainment). Under the usual constraint of a finite energy supply, these processes are in direct competition. Which begs the question of appropriately allocating the available energy: which process gets how much when? The principle hierarchy should be obvious: re-fueling comes first, development is second, and expansion would be last. That is to say: growth can only occur after self-sustainment is ensured, and after all problems are sufficiently solved.

Now, there might be reasons to deviate from this principle. For example, if you need to solve an immediate problem directly related to re-fueling, you might decide to divert some of the energy usually used for immediate re-fueling, and invest that in solving this important problem. Such a short period of fasting might be an acceptable risk and actually a sound choice to increase the chances of long-term success. However, such deviations should only be short-term, as they carry detrimental implications if expanded over longer periods of time. Just think about the effects of malnutrition: in the medium-term, it will cause irreparable health damage, and ultimately it will lead to starvation. The same principle applies to economies: if overwhelmed with critical problems that absorb more energy than available, an economy will ultimately collapse: either because the problems remain unsolved, or because their solution absorbs the energy needed for self-sustainment.

Seen through this lens, growth is not the primary purpose for an economy to exist. Rather, healthy growth can only occur after the energy needs of re-fueling and development are fulfilled. Therefore, focusing on short-term growth alone risks the long-term failure of an economy. However, and that’s a big but, successful growth has fundamentally positive repercussions on the energy requirement for re-fueling. For example, bigger cities consume relatively less energy per capita. This increased energy efficiency is a good reason to strive for growth, as long as that growth is sustainable.

In the end, this question about energy allocation is the ever-tricky quest for a sound balance: dealing with short-term challenges and opportunities, while ensuring the long-term success of the economy.

Economic habitat

Jacobs vigorously emphasizes the two facets of fitness that leads to such success. There is of course the ‘own’ fitness, the competitive success in feeding (maintaining yourself) and breeding (maintaining your species). But given that an economy is an open system, it critically depends on its environment; therefore its ability to maintain this habitat is the other important – and often overlooked – success criterion, especially for its sustainability in the long run.

Using Jacobs concept of an economy, it’s easy to see why the economics habitat is so essential. Think about the idea of co-development, an important piece of the problem-solving process. That is easier if you have interactions with the ‘outside’ and can tap into a broad range of ideas. Think about bifurcations, one of the control mechanisms. For this to work out, you need to have an alternative readily available just-in-time, somewhat miraculously. Once again, the broader the range of ideas and sources you can draw from, the better your likelihood to succeed. And let’s not forget your energy sources, which are often external to your economy. The less you deplete them, the longer they’ll be useful to you.

All of these different examples demonstrate how your environment, or economic habitat, underpins your long-term success. Hence it is ultimately in our very own self-interest to preserve our economic habitat. Of course such habitat maintenance includes the traditional ideas like protecting biodiversity, stopping land use, reducing pollution of all kinds, and minimizing use of fossil fuels. But in Jacobs’ economic sense it also includes enduring, good relations with your trade partners, your customers, your suppliers. Taken together, these ingredients provide the substrate for our economy to thrive on. They form the soil in which our economy is deeply rooted. They are the foundation for our long-term success; without them, we cannot sustain our existence.

Innovation targets

Against this broad-brush backdrop, we can take a fresh look at the types of problems that our society needs to solve. What are these targets for innovation? As you will recall, Jane Jacobs described an economy as working along three main processes (development, expansion, and re-fueling), subject to several control mechanisms (evading collapse). The success of such an economy will depend on its overall fitness (see chart below). In this grand scheme, the need for innovation (in Jacobs’ terms that is the need for development) arises in the expansion and re-fueling processes. Let’s walk through step by step.

Nature of Economy - v2

But before we start, remember that Jacobs’ idea of an economy is built around a concept of energy that is a lot broader than physical energy measured in kilowatt-hours. For Jacobs, this all-important resource includes not only electricity, coal, or steam power; for her, economic energy includes raw materials (the very building blocks for society), it comprises information (the recipes for making use of physical energy and raw materials), and it embraces human capital as well (think about talents, skills, ideas, knowledge). You could actually imagine economic energy as literally ‘anything that can drive 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.]

Let’s begin then with the expansion process, or what you might call economic growth. That starts with capturing energy, i.e., obtaining energy for use in your economy. In many cases, energy capture implies gaining access to a source outside your economy – energy capture forces you to reach out beyond the boundaries of your economy; after all, it’s still an open system. And your economy’s success critically depends upon its energy capture, or more precisely: that it captures enough energy to run its three main processes in parallel. Therefore, innovation target #1 is energy supply: finding novel sources that were previously untapped, or making additional sources accessible that your economy knew about but didn’t use so far.

Once your economy has ingested energy, your economic expansion depends on how energy is used and reused by as many different subprocesses and consumers as possible, in as diverse ensembles as possible. So innovation target #2 is energy use: where is the economic energy consumed, how much of it, in which form, for what purpose? And closely couple with #2 you’ll find that innovation target #3 is energy distribution: how is economic energy transformed from one form to another, how is it transported across distance, how is it stored over time, and who gets how much (particularly when the available supply doesn’t the collective user demand).

Deriving these innovation targets from Jacobs’ expansion process doesn’t constrain their relevance to just economic expansion; they are equally applicable to the self-refueling process. For energy supply (innovation target #1), that is quite evident: to capture more energy, you must consume a portion of the energy that you currently have. That is an investment of your resources, and you want that investment to yield as much return as possible: you want to maximise your energy return on energy investment. And that’s already a key aspect for energy use (innovation target #2): the less energy you need to capture energy, the more energy is directly available for development or expansion.

The impact of energy distribution (innovation target #3) on the self-maintenance process is far less visible, because changes are extremely rare. At the face of it, nothing ever seems to change: you work with the energy forms you know, and you have the necessary equipment to make use of that energy. But the changes that do occur can have deep and far-reaching consequences: if somebody finds a novel piece of equipment that opens a door to capturing economic energy from a previously unused source, the results will shake the foundations that the economy was built on so far.

Just think about the Grand Revolutions (the Agricultural, the Industrial, and the ongoing Digital Revolution): in each case, novel sources of economic energy fuelled the transformation of entire economies, value systems and social orders in the course of just a few generations. Granted, such massive changes occur literally less than once in a life-time. But we cannot discard them as irrelevant, because we are living through the beginning of the Digital Revolution, and it’s for us and the following roughly two generations to make sense of that.

The rather abstract concept of innovation targets cannot offer a ready-made recipe to focus your innovation efforts on ‘the next big thing’. But together with Jacobs’ ideas of economic energy, it allows you to systematically map your innovation efforts and (to the extent that they are predictable) your innovation needs: You are very focused on Information Technology, but thin on the necessary knowledge? You are investing in blockchain technology, but your electricity bill is spinning out of control? Knowing where your attention is focused and where your blind spots are, is an essential element of your innovation fitness.

I’ll return to this question in an upcoming post.


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