nfhGCtuSd
Why are there 'spaces' scattered throughout this paper. Makes readi...
William Easterly is Professor of Economics at New York University a...
As this is such an unconventional paper in the field of development...
“Creative destruction, coined by Joseph Schumpeter (1942), who cons...
Comparative advantage describes how, under free trade, an agent wil...
Kenneth Arrow (23 August 1921 – 21 February 2017) was an American e...
Google street view of the block: https://www.google.com/maps/place/...
"In economics, total-factor productivity (TFP), also called multi-f...
Background on the long and complicated history of New Amsterdam: ht...
A Long History of a Short Block:
Four Centuries of Development Surprises on a Single Stretch of a New York
City Street
1
William Easterly (NYU)
Laura Freschi (NYU)
Steven Pennings (World Bank)
June 2016
Development economists usually (and understandably) evaluate effectiveness of intentional efforts to
achieve economic development. There are few opportunities empirically to appreciate the unintended and
surprising part of development outcomes portrayed by theories of creative destruction and other theories
of spontaneous general equilibrium outcomes not intended by anyone. This paper does a development
case study at an extreme micro level (one city block in New York City), but over a long period of time
(four centuries). We find that (i) development involves many changes in production as comparative
advantage evolves and (ii) most of these changes were unexpected (“surprises”). The block’s history
illustrates how difficult it is for overly prescriptive planners to anticipate changes in comparative
advantage and how such planning could instead stifle creative destruction.
2
I. Introduction
It is widely accepted that at least some important part of development outcomes are the spontaneous result
of a general equilibrium process, such as “creative destruction,” in which no single agent consciously
intended the final outcome. Kenneth Arrow suggested in a classic quote that "the notion that through the
workings of an entire system effects may be very different from, and even opposed to, intentions is surely
the most important intellectual contribution that economic thought has made to the general understanding
of social processes."
Yet there are few opportunities empirically to appreciate the unintended surprises that are part of
development histories. Research in economic development understandably focuses mostly on whether
intentional efforts to improve development outcomes are successful. Even historical case stud ie s of
economic development usually emphasize stories of nations in which most of the focus is on in tention al
policies by national leaders to achieve national development.
Seeking a way to appreciate spontaneous general equilibrium outcomes in development, we undertake a
drastic alternative: a case study of nearly 400 years of history of a single city block in New York City.
The block we study is 486 feet of a north-south street called Greene Street between Houston and Prince
Streets.
2
Today it is part of the luxury residential and retail neighborhood called SoHo in downtown
Manhattan (Figure 1). With a small unit like our block, we can see change initiated at the level of
individual households or firms that in turn make up sectors of economic activity. We see a pattern of
rapid change: new sectors replaced old ones while new households or businesses replaced their
predecessors. Most importantly, the changes were usually surprises (we list six surprises in total). For
example, from 1850 to 1890 the block suddenly went from a high-end residential neighborhood to New
York’s largest concentration of brothels, only to change just as suddenly to be part of the epicenter of
New York (and US) garment manufacturing. The surprises are not evenly spaced – there was about a
century and a half between the first and second surprise, after which they came much faster.
Figure 1: location of the block we study relative to Manhattan neighborhood s today
The small unit of analysis allows us to illustrate why surprises were prevalent. The shocks that affect the
block can vary from what is happening two blocks over to what is happening on the other side of the
world, interacting with trends that affect the world or the US or New York City, or other trends that are
specific to the neighborhood. Moreover, these shocks interact with initial conditions on the block.
Greene Street block for this study
3
a. Relationship to academic literature
A long development literature emphasizes Total Factor Productivity (TFP) growth driven by creative
destruction (e.g. Aghion and Howitt 1992). We can observe creative destruction most dramatically at the
level of small units that can show sudden ups and downs.
A more recent literature has also emphasized misallocation of inputs across heterogeneous units with
different TFPs, leading to lower overall TFP (Restuccia and Rogerson 2013). Examples of
heterogeneous units are farms (Adamopoulos and Restuccia 2014), manufacturing plants, Hsieh and
Klenow (2014), and cities (Hsieh and Moretti 2015). We suggest in this case study that the search for
losses from misallocation could include even misallocation across such small geographic units as city
blocks.
One response to micro-level inefficiencies is that there needs to be more development planning to move
scarce factors of production from “obsolete” inefficient units to more productive “modern” units. National
case studies such as those by Wade (1990) and Rodrik (1995, 2001) on the East Asian tigers and Rodrik
(2006) on China describe some success by national lead ers at “picking winners.”
A case study of a block forces us to consider the role of leaderless, spontaneous forces prone to surprises,
making it harder to pick winners. Previous literature (e.g. Benabou 1993) has also portrayed a city as a
complex general equilibrium in which policy and individual decisions interact to produce unanticipa ted
outcomes.
Our case study of one block corrects som e biases understating the chaos of creative destruction, but it
may create new biases. The difficulty of attribution of what was happening on the block to city-wide or
nation-wide policies may understate the public planning that boosted the block. This case study can best
be seen as a reminder that development does not have to be at one extreme or the other, all planned or all
spontaneous. Our block ’s chaotic development path occurred within a framework of some flexible public
planning: street layout, water supply, sewers, fighting crime and fires, publ ic schools, and other public
services.
A longstanding deba te in planning contrasts flexible planning of public servic es and institutions with
more prescriptive planning that aims at specific neighborhood or sectoral outcomes (we will cover an
example of this in the block’s history).
This study obviously overlaps with a rich urban economics literature, even though our original intention
was to do a different kind of case study of economic development. One very relevant literature on urban
policy to address poverty contrasts the efficiency losses associated with place-bas ed subsid ies to les s
distortionary person-based subsidies (Kline and Moretti 2014). Glaeser (2011, Kindle Location 4326-
4327) provides a strong statement of case against place-based policy: “The national government does no
good by favoring particular places, just as it does no good by propping up particular firms or industries.
It’s far better for companies to compete, and it’s also far better for cities to find their own competitive
advantages.”
b. Design of the case study
We selected the block out of convenience because it was close to NYU, and because it had abundant
historical documentation. A possible selection bias was that we knew that the block is a “success story”
today. Selecting on success is not so different from the prevalence in national case studies of analyzing
4
“success stories” like China or the East Asian tigers. Moreover, the larger aggregates to which the block
belongs – New York City and the United States – are also “success stories” and so the block helps
visualize some of the micro successes behind these much larger aggregate successes. Still, we
acknowledge that, like “success sto ries” of nations, a case study of only one block’s success is mostly of
use to illustrate how development success hap pen s; it do es not const itute rig oro us ev iden ce for detailed
policy prescriptions.
In the first two centuries after the Dutch founding of New Amsterdam in 1625, maps and histories allow
us to track the few individuals operating on our block. Beginning in 1834, maps, city directories,
censuses, tax records, and factory inspection reports allowed a recording about every 5 years of alm ost
everyone who was on the block, their econo m ic activ ity, and real estate values.
3
The data is subject to
some errors and omissions, but the num bers enabled description and analysis of what was happening on
the block.
We base our links from shocks to changes on the block on the many specialized histories available (for
example, Gilfoyle (1994) and Sanger (1859) on prostitution in New York) and some contemporary press
accounts (all sources ar e detailed in the endnotes and bibliography). It is the nature of a case study,
however, that we cannot rigorously prove causal links from shocks to changes. Some of the determinants
of change were them selv es endo g enous (transportation infrastructure, for exam ple) , and we are describing
outcomes that are part of a larger general equilibrium.
The rest of the paper proceeds organized into sections corresponding to major changes in comparative
advantage of the block, describing each of the shocks that contributed to chang es – w e call them
“surprises ” when the shocks and changes were generally unanticipated.
II. The agricultural period
Before the Dutch founded New Amsterdam in 1625, the block lay in a forest just north of some wetlands
on Manhattan.
4
There is little knowledge about the Lenape people (later known as Delawares) who
occupied the greater New York region before Europeans arrived.
The earliest records for the block date from the 1640s, when Manhattan was the Dutch colony New
Amsterdam. The Dutch had brought slaves from Africa to New Amsterdam as early as 1626.
5
The Dutch
governor Wi llem Kieft gave parcels on our block and surrounding area to four slaves, Marycke (widow of
Lawrence, December 2, 1643), Anthony Portuguese (before 1644), Gratia D’Angola (December 15,
1644), and Piet er Van Cam pen (April 6, 1647).
6
The borders of the four parcels straddled our block.
These slaves then bec ame “half-free” – meaning that they were free, but their children would remain
slaves.
The gift was not quite as magnanimous as it appears, as Kieft had provoked a war with the Indians that
lasted from February 1643 to August 1645. The slaves formed a buffer against Indian attacks.
7
They
produced food for the city by paying a tax of grain and livestock. Giving this land to slaves also reflected
the low value of the land at the time, which reflected the low population of the city (only 450 people in
1644).
The gift of land to slaves also reflected the low expectations the Dutch had for New Amsterdam. During
the treaty negotiations with the British after the war that resulted in permanent transfer of the colony, the
Dutch at one point addressed the question of whether to retain Suriname or New Amsterdam, and chose
the more promising sugar-producing slave plantations of Suriname.
8
Surprise 1: Dutch expect New York to be less valuable than Suriname.