The Nature of Economies

August 6, 2012

Human economies are natural processes like any other, so we should look to nature for the principles that govern the economies that govern our lives.

At the nonprofit where I work, we have a job called “Director of Development”. I don’t really know what this person does, but her title has always struck me as comically ambitious. Development can mean so many things! I think of photographic development: is her job to manifest a strikingly crisp image out of the amorphous silver gelatin of the organization? Or “R&D”: is she charged with researching how the organization works and doing experiments to make it better? Or “child development”: is she to guide the maturation of all of the organization’s employees? In truth, I think she just asks people to give us money–a narrow but necessary definition of the term–and lets everyone else figure out how to develop on their own.

On the other hand, I often describe myself as a “developer” of websites, and can point to elements of the former paragraph’s three examples in the work I do each day. Like photographic development, developing a website is about crystallizing a swarm of nebulous ideas, requirements, and goals into an artifact: a thing that is one way and not other ways. Certainly research (like traffic analysis) and experimentation (usability and A/B testing) play a role in the development I do. And as with child development, I monitor and guide the websites I build as they mature with more data and features.

Development is, ultimately, the object of Jane Jacobs’ study in The Nature of Economies. She wants to know why some things–ecosystems, economies, species, products–develop while others stagnate. And she believes the answer lies in the realm of nature. In her words, human economic life, rather than something created and ruled by us, is instead “ruled by [natural] processes we didn’t invent and can’t transcend, whether we like that or not, and that the more we learn of these processes and the better we respect them, the better our economies will get along.” (11) By looking at things like cities and markets as if they were spores or rainforests, she seeks to learn from nature the universal laws of growth and development–the knowledge of which might save our species from poverty and extinction.

The Nature of Economies takes the form of several dialogues between five friends, though Murray and Hiram, a father and son team of ecologists, command the most attention. I had always assumed that ecologists were something like environmentalists–earth scientists with a preservationist bent–but that now seems a pretty narrow notion. According to Jacobs, ecologists are like economists of nature: they study the webs of interactions comprising complex natural systems. Their work touches on something called cybernetics, from the Greek word kybernetes for “steersman”, which refers to the way systems steer themselves or incorporate feedback to maintain a stable course. For an economic example, one way to think about money is as a feedback-carrying medium. When there isn’t enough of some good, its price goes up, inducing people to consume less and entrepreneurs to produce more of it, correcting the deficit. It isn’t hard to see a kind of rationality at work here (Adam Smith saw an “invisible hand”), but this kind of mechanism predates the appearance of humans and even things with brains on earth.

Such feedback loops are just one natural dynamic to which human economies are subject. Before I get into the rest, let me review why Jacobs is seeking them out in the first place: to understand how and why some things develop and others stagnate or die off.

What is development, and how do we do it?

Jacobs proposes a radically simple definition: all development–the big bang, the evolution of species, the gestation of babies, technology–is “differentiation emerging from generality.” Economic development is no different: when we think of “the developed world,” for instance, we have in mind places with a great diversity in the kinds of jobs and products available. The second principle of development is that once differentiation emerges, it becomes the new generality from which further differentiations emerge. Early humans differentiated rocks into diverse things like hammers and axes. Later humans differentiated the hammer into the mallet, the ball-peen, and the sledge. And we never go backwards.1 The third and final principle is that development depends on co-developments. We couldn’t turn trees into dwellings without axes. Lungs couldn’t develop without plants, since each’s input is the other’s output.

So what do these principles tell us?

It tells us that development isn’t 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.

…[but these] are merely the products of the process somewhere else. They don’t mysteriously carry the process along with them. (32)

So, if you want to kickstart an economy:

How Do Economies Expand?

So you’ve got an economy going, now how do you make it expand? That’s the easy part, since here on Earth, expansion is the norm. Three billion years ago, the earth was a barren rock. Now it’s full of 7 billion humans, all kinds of plants and animals, and even more bacteria (which make up 70-80% of all life on earth by volume). How did this happen? Earth was a barren rock, and for 6 billion years the sun bathed it in free energy. Eventually things emerged that could use that energy, and those things used that energy to become more complex things. Now we have iPhones and rayon and poetry, but it’s all ultimately just refined sunshine.

How’d it all happen? By creating ever-more-complex conduits for energy to pass through before giving it up. While we can temporarily store energy in bodies and batteries, we can’t keep it forever. Eventually we give it up as heat or light or episodes of Family Matters beamed out into the farthest reaches of space. This makes us ecosystems, or “conduits through which energy passes.” Some ecosystems do much with that energy. Some do little. In a desert, most energy is wasted, bounced right back up at the sun without doing anything. But in a forest or meadow, the energy goes through millions of conduits and organisms, doing work at every step along the way. The “energy leaves behind, in complex webs of life, ample evidence of its passage.”

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. (47, emphasis mine)

Hence, the richest countries in the world have the most diverse economies, and the poorest countries tend to be agricultural and monolithic economies. (There are temporary exceptions that get rich from a short-term store of some resource like oil or gems, but this never lasts.) Ultimately, the only way for places to develop economically is by fostering processes that create diversity, which allows you to do more with captured energy.2

Jacobs builds on her work in The Economy of Cities to identify two ways that cities develop through diversity. One is import shifting, or importing things to turn into new things for export. But Jacobs seems far more interested in its sister mechanism. Import replacement, or making things locally that you used to import from afar is a process that enables cities to capture new imports, creating diversity. For example, San Francisco in the 1850s began producing canned fruit instead of importing it from the East Coast. This provided several advantages–they could outcompete East Coast fruit sellers allowing the city to spend the saved money importing other things, powering a virtuous cycle of local economic diversity. This means that dependent (and often exploited) settlements have a path to economic independence. And it counters the long-standing economic wisdom of specialization: that settlements should do one thing extremely well (to take advantage of economies of scale) and import everything else. Look to any company town after the company leaves town to see how an over-specialized settlement comes to ruin.

Evading Collapse, or How to Keep it Going

Having covered how economies develop initially and how they expand, Jacobs turns at last to how they sink or swim. The key here is maintaining stability, and Jacobs identifies four ways systems do that:

The Double Nature of Fitness for Survival

Jacobs closes ends the book by turning to the future of the human species. She compares us to the vine kudzu, which is so successful that it destroys its own habitat, using the unearned, accumulated richness of its environment (soil for kudzu, oil for us) to fuel unsustainable growth. If this isn’t to be our future, we should learn that, like the bacteria in our guts, “the most successful predators, large or small, are the ones that graduate to become symbionts in their habitats.” (121)

She muses on the human qualities that may prevent us from destroying our habitats as utterly as we are capable. They are:

Regarding inventiveness, we might keep in mind that bones, shells, and teeth began as discarded cellular waste (excess calcium is toxic) until nature found a use for them. Now we can’t live without them. It’s obvious our species lacks the will to cut back on carbon emissions, pollution, and garbage, but perhaps we might take a page from nature and find some use for them in our environment before it catches up with us.

Echoes of The Omnivore’s Dilemma

Jacobs’s belief that self-organizing systems are the most responsive is supported by The Omnivore’s Dilemma, specifically in how nature’s way of growing things (circles where one organism’s outputs become another’s inputs) is smarter than industrial farming (which breaks and flattens these elegant circles into waste-producing straight lines).

But while The Omnivore’s Dilemma highlights the need for better regulation in agriculture, Jacobs makes an astute distinction between good and bad regulation. Regulation should set goals, she argues, but never the methods for achieving them. It can be productive, for example, not to allow more than a certain amount of arsenic in baby food, but to enforce a certain method of arsenic removal will negate the opportunity to develop better filtration methods.

  1. As Kevin Kelly discovered in What Technology Wants, every species of technology ever made is still, somewhere, made

  2. Note to societies that exclude women, serfs, or other vast swaths of the population from opportunities for development: you’re turning your backs on a free source of diversity and thus hindering your economy. 

  3. Subsidies are a way of modifying this feedback, essentially of providing incorrect information to the system. If that means people are fed that the system thinks should starve, then it’s a good thing, but introducing false feedback into an incredibly complex, self-regulating system should not be undertaken lightly. For a negative example, Jacobs mentions the Canadian codfishing collapse, in which overfishing pushed cod to depletion, endangering the jobs of fisherman; the Canadian government’s solution was to subsidize cod prices, saving fisherman’s livelihoods but pushing them to further deplete cod populations. Without the subsidies, “cod would have priced itself out of the market before the fish stock collapsed.”