Book Review/Essay 3/97
The recent celebration of the fiftieth anniversary of the start of the Marshall Plan was more than just a bit of self adulatory puffery for this generation of politicians. Speeches flowed with congratulations all around for our forefathers’ cleverness and fullness of spirit. Surely the regeneration of the European continent, laid waste by its own scourges, was a marvelous accomplishment!
Predictably, even the casual observer of history could recall that the story was a bit more complex and had different, more challenging, lessons that it could tell.
The following data comes from the US government: www.usis.usemb.se/topical/pol/marshall/mp-toc.htm.
Between July of 1945 and December of 1947 the US provided Europe with $11 billion of aid, mostly food and other consumables. The Marshall Plan, beginning in 1948 running through 1952, added $13 billion more of direct aid, guarantees, and technical assistance. The key differences between the two injections of resources was that the Marshall Plan brought a “plan” to bear. Recipient countries carried out planning for the use of the resources and pledged matching funds to add local leverage. The use of the funds rapidly shifted from food stuffs to capital equipment (machinery). Agricultural production rebounded and industrial output came to exceed prewar levels.
The general image of the Marshall Plan is that it was a great deed of American generosity, foresight, enlightened self-interest in action, a bulwark against communism and so on. Above all the Marshall Plan worked. Europe got back on its feet and quickly became a powerhouse.
An interesting observation can be made about the actual of economic development: countries and regions within countries that were prosperous before the war returned to prosperity and countries and regions with countries that were not prosperous before the war languished. Southern Italy continued to be a land of poverty and underdevelopment. Northern Italy boomed. Greece did not suddenly become a southern European powerhouse. Other examples come to mind easily.
This brings us to the second half of the title of this essay. Jane Jacobs and her 1984 book Cities and the Wealth of Nations: Principles of Economic Life (New York: Random House). As with Jacobs’ earlier books, The Death and Life of Great American Cities and The Economy of Cities, the subject book is about large topics written from a breadth of reading and observations that is daunting. Most strikingly Jacobs has continued to defy the conventions of academic stove pipe conventions and methodology. You won’t find her limiting herself to some subset of a corner of the respectable academic taxonomy. Big barn brushes here.
The very title, Cities and the Wealth of Nations, announces that we are embarking on an adventure. Could she be so bold as to start off spoofing the title of the bible of Western economics, Adam Smith’s 1776 work, An Inquiry into the Nature and Causes of the Wealth of Nations? Jacobs does not disappoint.
Her book is about economic prosperity. How can we arrange our affairs so as to get and keep prosperity? Isn’t this what we should expect from economics and politics? Why are depressions and recessions necessary or allowable? Why do some regions and parts of the world languor in poverty while others flourish? These are big questions and the right questions to ask.
Chapter One, “Fool’s Paradise” is a 25 page tour through the wreckage of economic theory, with particular focus on Keynes and his successors (little need to be said about the failures of Soviet style “planned economies”).
Let me quote at some length to give some flavor for her comments.
“Macro-economics – large-scale economics – is the branch of learning entrusted with the theory and practice of understanding and fostering national and international economies. It is a shambles. Its undoing was the good fortune of having been believed in and acted upon in such a big way. We think of experiments of particle physicists and space explorers as being extraordinarily expensive, and so they are. But the costs are nothing compared with the incomprehensibly huge resources that banks, industries, governments and international institutions like the World Bank, the International Monetary Fund and the United Nations have poured into tests of macro-economic theory. Never has a science, or supposed science been so generously indulged. And never have experiments left in their wakes more wreckage, unpleasant surprises, blasted hopes and confusion, to the point that the question seriously arises whether the wreckage is reparable; if it is, certainly not with more of the same.”
Jacobs closes her introductory remarks on this note: “Several centuries of hard, ingenious thought about supply and demand chasing each other around, tails in their mouths, have told us almost nothing about the rise and decline of wealth. We must find more realistic and fruitful lines of observation and thought that we have tried to use so far. Choosing among the existing schools of thought is bootless. We are on our own.”
As an aside about the hubris of economists there was a fascinating exchange last fall (1996) in the cyber-pages of Slate Magazine between Paul Krugman and ??????. Krugman is a highly visible current enfant terrible of professional economics, recently snarffed up to join the pantheon at MIT. He charged our journalist/commentator with sloppy thinking and lacking acquaintance with the discipline and rigors of numbers and data as found in “real” science. Even from the perspective of the mechanical or electrical engineering world, not really science at all, but codifications of scientific process and findings, this claim is hysterically funny and intellectually dishonest. To put any of the social sciences on the same footing as even a modest field like structural engineering is frightening. Would you want to walk across an economic bridge designed by current economists using the present state of the art economic theories and design practices?. Have any constructs of economists stood even the practical test of years of use such as the Brooklyn Bridge or even your typical overpass? There is hardly the need for even a rhetorical answer to these questions.
But back to Jacobs quest for something more useful to say about economic development.
The ideas at the center of Jacobs’ argument are: (a) national economies are not a useful concept or entity for understanding how economic life works; and (b) cities (metropolitan areas) are a very interesting economic unit or aggregate for studying economies.
The nation state has been at the center of economic discussions for at least 400 years. Mercantilist theory began the connection between the political entity, the nation, and economies. Adam Smith declared it to be the fundamental unit of analysis in the very title of his well-known text. Though Marx centered his economics on class (thus the withering away of the state), his successors in practical life embraced the nation as the fundamental unit of economic activity.
The nation-state is at the center of politics locally and internationally. Almost every human being will declare themselves to be a proud member of some nation or another. The nation-state supports the notion of the national economy by collecting all sorts of data about the economic activity within its borders. Everyone recognises the acronym “GNP”, Gross NATIONAL Product.
Once the disentangling of political units (as we will see latter this applies beyond just the nation-state unit) from economic units begins very interesting observations emerge.
Get out your atlas and find Winnepeg, Canada and look south to ???. This is the vast grain producing region of the North American continent. When farmers in this region get their 5AM news of the Chicago Futures Market the prices (and their economic prosperity) are driven by relationships, customers, and competitors around the world.
At a recent meeting of the Boston Area Semiconductor Council member companies were most concerned about their competitive stance vis-a-vis Silicon Valley. And notice the name of this organization. Boston AREA…. The member companies come from southern Maine and New Hampshire and eastern Massachusetts with a smattering from Rhode Island.
