The Economy of Cities, chapter 5: What’s so good about import replacement anyway? Also,  evidence from confusing patterns of national growth which become less confusing under this theory.

So immediately after talking about the ways in which export multipliers grow a city, Jacobs immediately launches into a chapter about why that multiplier isn’t actually important. Though she circles back to them toward the end. Fundamentally, the problem is that some of the export multiplier goes to local end products, but most just goes to steps in the exports’s supply chain. This increases economic activity and employs people, but does not usually generate opportunities for the city to branch out.

Some basic background that isn’t explained here, and ought to be common sense but often isn’t: Total Imports = Total Exports. In order to import goods, you must export an equal value of goods, but also the other way around. This can sometimes get lost in the abstraction of ‘money’, because it’s easy to not think of money as an import or an export. But at the end of the day, in goods or investment capital you’re importing a dollar of value for every dollar of value you export.

Alright, now that that’s explicit: elaboration on Import replacement. Writers before Jacobs, and most mainstream writers after, call it ‘import substitution’ instead; she changes her terms because ‘substitutes for imports’ is much more awkward than ‘replaces imports’, which is kind of a silly change but which I will stick with here.

Import replacement is the process by which a city starts creating from less-processed materials what it had previously imported as a finished product. Jacobs asserts that this will happen whenever the capacity to do so exists efficiently, every time. If local companies use thingamabobs, there is a set of skills that can make them locally from thingies and jobbies, and the city can import or otherwise supply thingies and jobbies, then it will happen unless the imports are cheaper than the local production.

This seems to me to bake in a few extra assumptions without acknowledging them, but as long as you include ‘ability to conceive of the potential process’ and ‘ability to find your market and sell to it’ in the set of necessary skills, it is reasonable. I’m sure that if this theory was developed more, we’d find systematic market failures in the same way as we currently find violations of the Efficient Markets Hypothesis, but like the EMH it ought to remain a good approximation.


So what are the effects of import replacement? Well, there is now more value that is being added in the city itself, without changing the exports being produced. But because imports=exports,  unless exports are dropping (and usually they aren’t) the total value of imports can’t drop. The new work requires new workers and new equipment (or, in older times, new livestock), so there is now higher demand for food, fuel, transit, and housing construction, but this is not going to match the total gap in value; some new imports will have to arrive to pick up the slack. 

(If the value gap isn’t greater than the cost of food, fuel, and other inputs needed for the replaced work, the importer’s price will remain better and the attempted import replacement will fail.)

So this shifts the import balance, adding more diversity of supplies coming in, without changing exports. And the city now has access to the old import, now being made locally, and the new imports, for an even bigger increase of diversity and a significant jump in economic activity; everything stays local. This might then lead to higher exports, if the new intraports also find external markets, but since it’s merely replacing existing supply chains, it can’t possibly reduce them.

Conscious of the big claim she’s making and the need to demonstrate that city growth really can happen without an increase in exports, Jacobs finally branches out her anecdotes and brings out a really solid example: Los Angeles in the late 1940s, from the waning war machine through the early postwar period.

Starting in 1945, the aircraft and ship-building industries, which had been the major employers in LA, shrank massively; by the end of the decade, ship-building had almost entirely ceased. Until 1946, LA had exported petroleum; afterwards it was net importing gasoline. It had previously gathered and shipped away nuts and fruit from Orange County; by the early 50s this had also dried up as suburbs replaced the farms. Even Hollywood was shrinking; the Golden Age of film was ending. It’s unclear what the total drop was, but something like 80% of export jobs vanished. Unsurprisingly, many people had predicted that LA might dry up and blow away when the war ended.

But instead, these years were when LA took firm possession of the title of “America’s Second City”. In 1949, LA exported less than ever before, but also employed more workers than ever before. 1/8th of all new businesses in the USA from 1945 to 1950 were started in Greater Los Angeles; there was a massive manufacturing boom, and LA was importing almost strictly raw materials, food, and fuel. This is important because, in her words:

From the point of view of the world outside, Los Angeles was buying as large a quantity of imports as it could have bought in any case. But without the replacement and shift of imports there would have been many idle people in the city, at a much lower standard of living. The replacement work had not only expanded the total of economic activity in Los Angeles, but in the United States and in the world as a whole.

She also provides the example of Shakespearean London. It was limited in its ability to export, for European political reasons, but was still growing at an impressive clip, and importing foreigners to make previously foreign goods locally. (Shakespeare lived over the shop of a French Huguenot, who made French-style headdresses for Londoners.)

As illustrated by Los Angeles (and possibly by London), import replacement creates new work, and grows the city’s ‘domestic’ GDP without any change in import/export volume, and so increases the ratio of local to import/export activity.

Jacobs goes even further here and claims that literally all new work created is generated in periods of import replacement in growing cities. Recognizing that this is a strong claim demanding strong evidence, she attempts to provide statistics to back it up, but as this had not previously been recognized as an important measure, she has to approximate.

The statistics that do exist classify work as ‘basic’ and ‘non-basic’. Basic work is exporters and work that feeds into exporters; in theory, the exporters and their supply chain, and only that, is the basic work. Non-basic is everything else. These measures are not exactly what we’re concerned with, and in practice they’re very lossy measures that miscategorize a lot of work, but they were the best available at the time. Judging on this, we find, as predicted, that the larger the city, the higher the non-basic/basic ratio; in descending order by population: NYC was 2.1, Detroit 1.2, Cincinnati 1.7, Albuquerque 1.0, Madison 0.8, and Oshkosh 0.6. I tried to find updated data but did not find it accessible.


Explaining Mysteries

Prior to Jacobs, there was a fairly long-standing puzzle about national economic growth. In a big success for her theory, it ties together several pieces of this puzzle with a neat city-level explanation.

It had previously been noticed that whenever a country grows, demand increases mainly for rural goods, but the many jobs created are mainly in cities. Explanations   were somewhat lacking, the prevailing one focusing on increases in rural efficiency freeing up people to move to the cities. It’s easy to see that this is insufficient, though: workers just as skilled exist in massive surpluses already in many parts of the developing world, and they have no massive growth spike nor increased demand for food and other rural goods.

Jacobs’s theory predicts (well, retrodicts) this better. If, as she claims, all country growth is city growth, mainly by import replacement, then all growth would be accompanied by a surge of jobs in cities, doing the import-replacing. (check!) Also, they would bring a shift in imports toward things that the city cannot make itself. Things previously imported from other cities would cancel out and not be seen, but also we should expect that goods mainly made in cities are easier to make in a different city. Goods that are predominantly rural in origin (food, coal, iron, etc.) are going to be, on average, much harder to replace in a growing city. This explains the import bias toward rural demand. (and again, check!)

This is fairly impressive; despite the repeated failures to predict correctly in prior chapters, this (and rumored good explanations of the mechanism of stagflation in her second book) give me more confidence that the theory has real validity.

Alright, Back to Exports

The tail end of the chapter talks about two things: the importance of exports in the growth of cities, and how new cities acquire exports and begin their growth.

To demonstrate export’s key role, Jacobs uses her native city of Scranton. While import replacement does a lot of work, it can’t bring in new imports. For that, you need your export industries to grow (probably not under your control), or your intraport industries to expand to export markets. When a city like Scranton replaces its imports and grows, but fails to diversify and create new export work, it will stagnate. Cities which successfully grow large, do so by repeating cycles of export creation and import replacement where the replaced industries create exports, the exports bring in more imports, and the imports get replaced in turn.

Which brings us to the start-up question. If cities exclusively grow by this two-part cycle, how does any city get on the bike? Your initial exports have to come from somewhere. The natural place is as suppliers for the growth of other cities; when London was replacing imports in the Elizabethan era, someone was supplying lumber and tobacco to them; the lumber came from Plymouth and Boston, the tobacco from depot cities in the southern American colonies. In these cases, they could not quickly begin import replacement because mercantilist restrictions prevented them from creating locally what England wanted to supply to them. But otherwise, they could use these initial exports to jumpstart growth.

She generalizes this and expands the claim to all cities. The first uses the justification of triangular trade to say that even cities like Detroit, which started out shipping flour to the undeveloped West Indies, grow from the expansion of other cities. She asserts that in this example, the demand for flour in was based on a demand for limes, rum, and turpentine, produced in the Caribbean and consumed in English cities; the flour would not be shipped if there was not a ‘spare’ leg to ship it on. I’m amenable to this conceptually, but I think a better argument is needed to really make the case.

The other extension is to early cities. There’s a neat aside ending the chapter, tracing the history of cities to the older cities whose growth created their first exports, and then tracing the chain back, through Rome and Alexandria to the very first cities. But in grounding it she claims again that the export/import-replacement cycle is the only way for cities to grow strongly, and that therefore there must have been a group of relatively strong protocities engaging in trade with each other and slowly generating exports before they started their first import-replacement spree and grew into cities proper.

Given the track record of extrapolating her other predictions backward and forward, I’m skeptical. It sounds plausible, but so did the first-city origin story and the speculation about recycling. So I’m inclined to want more evidence, even though this is a weaker claim and less contradictory of established consensus.

Extending The Logic

One interesting thought I had while reading this was ‘Why Cities?’ Most of this is conceptually general; it applies to the development of nations as well as to towns. Or to counties. Or in principle planets, not that we have others to trade with.

But most importantly, why not go smaller than cities? Why not the household? Sure, households have more lag-time increasing the labor supply to create new work, but there is a labor pool, frequently somewhat slack, and multiple sources of imports and exports. So why not?

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