Undercover Economist

What cities tell us about the economy

‘In 1667 the Dutch ceded Manhattan to the British, thinking sugar-rich Suriname was a better bet’

The economic indicators that surround us are familiar, as are the criticisms they attract. The consumer prices index doesn’t fully capture the boon of new products; unemployment figures do not count workers who have given up the job hunt in despair; gross domestic product (GDP) includes bad things if they have a market price, and excludes good things if they don’t.

But there is one fundamental flaw in all these statistics that is rarely discussed: they are almost always applied to countries. It is not impossible to find educated guesses about the GDP of Cambridge, or the inflation rate in Mumbai, and there is nothing conceptually troubling about trying to calculate either. Yet most economic statistics describe the nation state.

This is odd, because the nation state is a political unit, not an economic one. Policy does influence the economy, of course — national authorities can impose a common interest rate, tax rates and regulations. But, as the unorthodox thinker and writer Jane Jacobs used to argue, the natural unit of macroeconomic analysis is not a nation state at all. It is a city and its surrounding region.

Aberdeen, Cardiff, Glasgow and Manchester are subject to some similarities by virtue of their shared participation in something we call “the British economy” but economically they are quite different. Their relative fortunes fluctuate because they are pushed and pulled by different forces.

In her book Cities and the Wealth of Nations , Jacobs zooms in still further, looking at “Shinohata”, a pseudonymous Japanese hamlet a hundred miles north-west of Tokyo. (She relies on a rich description of Shinohata by sociologist Ronald Dore.) Shinohata was initially a subsistence economy, supplemented by woodland foraging and a little silk farming. In the 20th century, the villagers gained some time thanks to improved agricultural techniques, and they used it to produce more silk cocoons. After the war, Tokyo’s expansion pulled Shinohata into its economic orbit. The booming Japanese capital became a market for Shinohata’s fresh fruit and wild oak mushrooms; Tokyo’s government paid for bridges and roads; its capitalists built a factory; its labour market lured young men and women from their village existence. The tale is intricate and unpredictable; Japan’s economic miracle, as recorded in the national statistics, was actually the sum of countless unrecorded stories of local development.

Jacobs is not the only person to argue that economic development may be profitably studied through a magnifying glass. A new research paper from three development economists, William Easterly, Laura Freschi and Steven Pennings, offers “A Long History of a Short Block” — a Shinohata-style tale of the economic development of a single 486ft block of Greene Street, between Houston and Prince Street in downtown Manhattan.

Easterly, a former World Bank researcher, is well known in development circles for his scepticism about how much development can ever be planned, and how much credit political leaders and their expert advisers deserve when things go well.

“Here’s a block where there is no leader; there’s no president or prime minister of this block,” he explained to me. Greene Street, he suggests, offers us a perspective on the more spontaneous, decentralised features of economic development.

Greene Street’s history certainly offers plenty of rapid and surprising changes to observe. The Dutch, who had colonised Manhattan in 1624, decided in 1667 to cede what is now New York to the British, in exchange for guarantees over their possession of what is now Suriname in Latin America. The Dutch thought sugar-rich Suriname was a better bet but New York City’s economy is now more than a hundred times larger than Suriname’s.

In 1850, Greene Street was a prosperous residential district with several households who would be multimillionaires in today’s terms. Two large hotels and a theatre opened nearby, and prostitutes started to move in. By 1870, the middle classes had fled and the block was at the heart of one of New York City’s largest sex-work districts.

In the late 19th century, perhaps because property values in the red-light area were low, entrepreneurs swooped in to build large cast-iron stores and warehouses for the garment trade. Greene Street’s fortunes waned when the industry moved uptown after 1910, and property values collapsed. In the 1940s and 1950s, urban planners suggested bulldozing the lot and starting again but a community campaign — famously involving Jacobs herself — fought them off. Property values were revived as artists colonised Greene Street in the 1950s and 1960s, attracted by the large, airy and cheap spaces. None of these changes could easily have been predicted; some are rather mysterious even in retrospect.

The lessons of Greene Street? Getting the basic infrastructure right — streets, water, sanitation, policing — is a good idea. Aggressive planning, knocking down entire blocks in response to temporary weakness, is probably not. Predicting the process of economic development at a local level is a game for suckers. Most importantly, even a tremendous development success — the United States and, within it, New York City — is going to show some deep wrinkles to those who get in close.

Written for and first published at ft.com.