UNIVERSITY

OF FLORIDA

LIBRARIES

--^w(eT.f8S/Ullli

THE ECONOMICS OF LOCATION

AUGUST LOSCH

The Economics of Location

TRANSLATED FROM THE SECOND REVISED EDITION
BY WILLIAM H.

WOGLOM WITH THE

WOLFGANG

F.

ASSISTANCE OF

STOLPER

NEW HAVEN AND LONDON:

YALE UNIVERSITY PRESS

^
C."^
Copyright, 1954, by Yale University Press.

Seventh printing, 1978.

Printed in the United States of America by

The Murray Printing Company,

IVestford, Massachusetts.

All rights reserved. This book

reproduced,

in

whole or

may

in part, in

not be

any form

(beyond that copying permitted by Sections loy

and 108

of the U.S.

Copyright

Law and except

by

reviewers for the public press), without written

permission from the publishers.

Library of Congress catalog card number: 529268

ISBN: 0-300-00727-2
Published in Great Britain, Europe, Africa, and
Asia (except Japan) by Yale University Press,
Ltd.,

London. Distributed

in Australia

and

New

& Film Services, Artarmon, N.S.W.,

Australia; and in Japan by Harper & Row, Publishers,

Zealand by Book

Tokyo

Office.

^
^

Translator's

The translator

Note

gratefully acknowledges the indispensable help ot

two

distinguished economists.

of

Dr. Edgar M. Hoover, while on the staff of the

Economic Advisers, read the entire translation

furnished a great

Wolfgang

F.

many

President's Council
in manuscript

and

valuable suggestions.

Stolper, professor of economics at the

Michigan, also read the manuscript through.

University of

fellow student of Losch

under Schumpeter, in Bonn, Germany, and a close lifelong friend therehe was able to interpret some expressions peculiar to the author
that otherwise might have remained obscure.
after,

The

translator has profited throughout, too, by the advice

and

assis-

tance of the staff of the Yale University Press.

W. H. W.
Teaneck,

New

Jersey,

May, 1952

Grateful acknowledgment

is

made

to

the Social Science Research

Council for a grant which facilitated the translation.

Digitized by the Internet Archive

in

2010 with funding from

Lyrasis IVIembers

and Sloan Foundation

http://www.archive.org/details/economicsoflocatOOIs

August Losch

in

Memoriam

Written amid privations and war, The Economics of Location bears

witness to a combination of rare strength of character, intellect, and
warmth of personality in its author which is not frequently found
in scientific works in any language.

August Losch was born in 1906. He died shortly after the end
on May 30, 1945, at least partially as the result of that
very strength of character which forbade him to make any compromises with the National Socialist regime. He never even considered taking a government or academic position in which he
would have had to swear a personal oath of allegiance to Hitler.
The willingness to accept a professorship after the war, which he
of hostilities

expressed in the foreword to the second edition of his book, speaks

for his courage as well as for his solitude. It is for this reason that
though we have omitted this note from the American edition we

change any of the many passages in which his

of Swabia is fervently expressed. For what
has been hypocrisy in many others who turn their love of country
to account, in Losch is a reminder that there are men who can combine passion with intellect, love of home with a cosmopolitan view.
Even a glance at The Economics of Location is enough to convince the reader that its author was an extraordinary personality.
All of Losch's work is original in a double sense of the term. He
asked significant new questions and he added significantly to the
answers given by others to older questions. Like most truly original
persons, Losch appreciated the contributions of others. The Economics of Location contains an immense number of references to
other works. But two things stand out: Losch never hesitated to
quote anyone whether or not he belonged to the " wrong " nation
or " race "which was by no means easy at the time he was writing
this book. And he never quoted merely to criticize. This book, a
substantial piece of work, not only gives credit where credit is
due; it shows an appreciation of the achievement of others without

have not

felt free to

love for his

homeland

accepting anything, including the author's own contribution, as

final truth. Yet no man had more passion for truth, more feeling
for the fact that truth must come before originality.
Losch's first publication concerned the transfer problem and

The Economics

yjii

of Location

grew out of a seminar paper. His first major piece of work was a
booklet about the economic consequences of a declining population,
perhaps the best discussion of the problem in terms of classical (in
the sense of pre-Keynesian) theory that exists. The subject was set
as a prize question and Losch won the contest. Because he believed
in personal freedom, including the taking of risks, he chose to pubbooklet himself, using the prize money for the purpose.
his next major work, on Population Cycles and
Business Cycles, dealt with the economics of population. Both show
all the characteristics of a modern economist who attempts to fuse
theory and facts in one indissoluble whole. The books are concisely
written; no superfluous introductions ease the reader into the subject
matter. Nor does Losch spare the reader concise reasoning or a

lish the

That book and

multitude of facts.
It may not be without interest to give the main results of Losch's
population study in some detail, since the relation of population
growth and business cycles has aroused new interest through the
Keynes-Hansen-Terborgh discussion, through the stagnation thesis
and criticisms of it, and again through the fact that the forties and
early fifties have been a period of prosperity which has also witnessed
the largest absolute increase of population in the history of the
United States.
The question whether population cycles cause business cycles
requires different answers, according to Losch, in the precapitalist
and the capitalist eras. During the capitalist era population movements are neither necessary nor sufficient to explain the fluctuations
of the economy. Nevertheless Losch establishes the fact that in
Germany industrial production as a rule increased quickly following
a population increase. Indeed, during the periods 1861-1913 and
1923-33 he finds only two exceptions to this relationship. Since the
economic development of growing nations takes to a large extent
the form of increased housing and capital equipment for the
increased

numbers

consumers' goods,

movements and

amounts of
population
rhythm
of
the

of people, as well as of increased

it is

not unexpected that

of business cycles should largely coincide.

Further-

more, the growth of the economy to accommodate a growing population entails smaller risks than the adaptation to changes brought
about by technological progress and the creation of new markets.
Thus, in Losch's own words, although " population growth does not
create business cycles,

it

shapes their course."

This kind of discussion is quite familiar today. But Losch antedates the Keynesian discussion. If his contribution is formulated in

August

"^

Memoriam

LdscJi in

terms of any one particular frame of reference, it is in terms of

Spiethoff's or perhaps Schumpeter's rather than Keynes' theoretical
language. His contribution is distinguished by solid statistical
verification and arguments largely missing in the Anglo-American
discussion.

of Location, like his book on population cycles,

exhibits the characteristics of a man blessed at the same time with
originality and a sense of tradition and history. Losch knew and

The Economics

used the traditional theories of location from von Thiinen on. Yet
he succeeded in bringing new insights even to so well-developed a
theory as that of the famous Thunen rings. His criticism of Alfred
Weber's location theory is essentially that voiced by Schumpeter.^
Weber's solution is in terms of partial equilibrium theory and as
such is a brilliant piece of work. But the partial equilibrium
approach means that among the other things which have to be

assumed

demand, the location

as given are

of

raw materials, and

the location of markets. What remains to be accomplished, therefore, once a satisfactory solution of the partial equilibrium problem

has been

found,

is

the

development of a general equilibrium

approach.

one of Losch's major contributions. He had

Ohlin's and Palander's work to build on, and gratefully acknowledged both in spite of the fact that he was already working out
This

own

is

precisely

when

they published their contributions. It is neverLosch was the first to present a full general
equilibrium system describing in abstract the interrelationship of
all locations. To be sure, he did not go beyond counting equations
and unknowns. But this in itself is a major achievement which,

his

ideas

theless fair to say that

in

its

had eluded

precision,

achievement

sets

his intellectual forebears.

Again

his

the stage for the next step in the development of

the general theory of location: the development of the dynamics of

locations.

Lest

remember

that

we
it

lose patience

was over

and courage

sixty years before

it may be well to
dynamics was added

Walrasian system.
Losch himself has pointed out that his system of equations shares
the weakness of any general theory which is too all-inclusive to be
applicable. This was one of the reasons why he developed his theory
of economic regions. However, the theoretical framework itself is
useful for a number of problems for which it must, of course, be
narrowed down and made specific. It is surely no accident that
one of the most useful pieces of theoretical and empirical research,
to the

1,

In Schmollers Jahrbuch,

XXXIV

(1910), 1356

ff.

The Economics

of Location

Leontief s input-output analysis, which has opened up entirely new

And the
vistas, is based on the most general Walrasian system.
attempted
by
regional
data,
analysis
to
application of input-output
general
with
the
come
terms
will
have
to
to
Isard, for the same reason
theory of location which, in a sense, is simply the application of the
Walrasian system to an economy in which distance is also a variable.
Finally, anyone who works with regional economies of the real world
knows that interregional relationships assume greater importance
the smaller the region considered. Any theory which enables the
mutual relationships in mind therefore fulfills

scholar to keep these

an important function in empirical research,

Losch's discussion of the nature of economic regions is probably
his most original contribution. To be sure, here too he has in
Ohlin a magnificent predecessor. Yet there are enough differences
to mark Losch's work as something entirely new. The novelty could
be characterized in different ways. Losch does not assume his region
or define it, for example, by means of factor mobility; nor does he
assume the existence of markets, sources of raw materials, or even
transport lines. Instead he develops the structure of a region, that
is,

the interrelationship of

all

relevant variables, with a

minimum

of assumptions which, with true genius, are deliberately chosen to

be

as generalized as possible.

The

very lack of realism reminds one

of the theory of comparative cost which also substituted for the

trivial

realism that grapes could not be

brilliant proof that

an

inefficient

grown in Scotland the

producer could not be undersold

in all goods.

To

Losch does not ask for the definition of

which to analyze it, nor does he search
for particular characteristics. His region is not defined by factor
mobility for factor mobility is also permissible between regions
nor by " homogeneity " nor by " self-sufficiency," though the last
and possibly also the first of these characteristics can, after his disput

it

a region by

differently,

means

of

cussion of the nature of a region, be read into it. Instead his

question concerns the interrelationship of individual production
and consumption units, the eventual location of markets and producing centers, of transport lines, of distribution of population and
cities, all to be simultaneously and mutually determined.
What
matters is the complicated structure, the Gestalt, not the average
characteristics of an area. The relevance of these ideas to the problems of underdeveloped countries is obvious, and their application
in specific cases may turn out to be extremely useful.
The statistician and empirical scholar may well point out that

AuguiC Losch

in

Meinoiiain

xi

cannot possibly be assembled for all points of the United

States but must of necessity be combined for smaller or larger areas.
This is true enough, though perhaps less true than it seems at first,
since the aggregations themselves are based on the detailed individual data originally collected. And even to the extent to which
The bulk of
it is true, it is less damaging than at first appears.
Statistics

Losch's book consists of applications of his ideas to data, chiefly to

American data. This alone indicates their fruitfulness for empirical
research. But again, anyone working with regional data knows that
little can be done with the data of a single region in isolation without considering interrelationships with other areas. The income of
a region depends, of course, on its productivity, but just as clearly
on the prices of its exports and imports. As soon as this is pointed
out, the structure industrial, agricultural, population, capital, etc.

again becomes of paramount importance. In a similar manner interregional wage differentials cannot be understood without an awareness of the structure both of a region and its relationships with the
outside world.
The Economics of Location is not easy reading. This is partly
due to the evident pressure under which it was written. In a few
places it may be because important passages from the first edition
which were omitted from the second German edition to save space
have been reinserted in the American edition in the appropriate
places. But basically it is due to the very newness of the ideas: not
enough time has as yet elapsed or professional discussion taken place
since the publication of the book to lead to simplification, a streamlining as it were, of the formulations. Losch's work opens up new
vistas and new avenues of research. No greater compliment could
be paid to it than its being taken up where Losch left off and carried
on to new formulations and achievements. The highest praise of
this book will be if in the future it can be said that the work it
has stimulated has made it obsolete.

"Wolfgang

Ann
1953

Arbor, Michigan

F.

Stolper

Preface to First Edition

Just as the theory of economic development considers time, so

this book will include space in its approach to economics, not only
in the case of individual problems, as has been done before, but
throughout the entire field. It proposes to view all economic
activities geographically. In principle all economic theory can be
reformulated thus from a spatial aspect. But every exploration of

new

territory will concentrate

first

on the investigation of what

is

most interesting. I have been less interested in outlining a theory

that is complete than one that is capable of further development;
and I believe, for example, that, on the basis of the theoretical
foundation given, dynamics could easily be introduced into the
spatial picture. If the fundamental idea of the work is sound,
omissions and errors in details should not weigh too heavily. It is
of little importance, too, that some of my partial results have already
become known in the meantime, since I have written this book not
for its details but because of its broad view.
Obviously it was necessary first to integrate the scattered results of
previous research and what is particularly important in this special
field bring them into harmony with general economic theory. But
over and above that, this investigation develops a systematic location
theory, a new theory of foreign trade, and perhaps the first general
analysis of the nature of economic regions. These, Parts II and III,
are the kernel of the whole book.

The

relation of the present investigations to

my

previous ones

Those dealt with the relations between peoples and the

economy whereas this treats of the relations between space and the
economy. Or, seen from the standpoint of population, the subject
there was its development in time and here, on the contrary, its
is

this:

distribution in space.

conceived the plan of the present work ten years ago, as a

that time I could not foresee the practical interest
that these questions would arouse today, or that the underlying principle of the book, its recognition of local stability in the widest
sense, for which I then thought I had to do battle, would have
prevailed so completely in the meantime. Throughout this whole
period I have never discussed the basic features of my idea. But
just because I was so sure of my course, at first instinctively and
I

young student. At

The Economics

xiv

of Location

then more and more consciously, I could absorb in detail so much

of the information and suggestions that streamed in upon me without losing myself in a welter of theories or facts. It is therefore
impossible to give a complete

list

of all those

who

assisted in

my

with advice, criticism, or information, or by cooperating in so many ways. For their constant readiness to help
I thank first of all my teachers, Arthur Spiethoff, in Bonn; Walter
Eucken, in Freiburg; and Joseph Schumpeter, at Harvard University.
My obligation is especially great to the Rockefeller Foundation,
which generously made possible my two trips of investigation
through all North America, and the publication of their results.
I sincerely thank, also, the Paul Stelzmann Fund, in Freiburg, for
helping me through a critical situation. To Professor Wassily
Leontief I am indebted for valuable suggestions, and mention in
gratitude at least the following others: Professors Taussig, Chamberlin, and v. Haberler of Harvard, headquarters for my American
investigation

investigations; the
sors

members

of the

Roos and Hotelling, with

summer

Cowles Commission and Profes-

whom

spent a never-to-be-forgotten
Evans in Berkeley; Carver

in Colorado Springs; Professors

in Minneapolis; Hoover in Ann Arbor; Riefler, then in Princeton,

and Whittlesey; Spengler in Durham; Dr. Christaller in Freiburg;
and numerous other economists and geographers at the universities
already mentioned as well as at those in Chicago, Baton Rouge, Iowa
City, and Chapel Hill. I received the warmest cooperation from the
Internal Trade Branch of the Dominion Bureau of Statistics, in
Ottawa, and the Retail Price Division of the Bureau of Labor
Statistics, in Washington, whose director, Mrs. S. Stewart, took special
interest in the question of regional price differences. Dr. Constantine

E.

McGuire, of Washington, opened up many

possibilities to

the friendliest manner. Minister Barton, in Ottawa,

and

me

in

Vice-Presi-

dent Powell, treasurer Stewart, and other officers of the Federal

Reserve Banks in Minneapolis and St. Louis; Messrs. McGregor, of
the Dominion Tariff Board (Ottawa)
Young, of the Bureau of
Mines (Washington) Charles L. Horn and J. Bell of Minneapolis,
A. Edwards, F. W. Olin, and Col. Jackson of St. Louis, not to mention many other officials, librarians, and economists, freely gave me
information. In Germany I availed myself of the excellent opportunities for work at the Institut fiir Weltwirtschaft in Kiel. I shall
still have an opportunity to thank a few persons in the text, but
there remain many more whose help I value even though I cannot
call them by name here. Last but not least I thank my mother and
my fiancee, who facilitated the accomplishment of this wearisome
,

task at great personal sacrifice.

xv

Preface to First Edition

There are mathematical calculations in this book, because it is

reprehensible not to trust reason and rest content with vague words
and hazy sentiments. But there are also speculation and philosophizing where the frontiers of the calculable are crossed, and
where the meaning of the whole is to be interpreted.
As for mathematics, I have neither sought nor shunned it, but have
simply employed it where it was superior to other methods. He who
has a better command of it may be willing to forgive me for the
ponderous presentation; he who is less well schooled in mathematics
especially

only he accepts the results. On the other

hand, nothing was further from my mind than to be satisfied with a
cold mathematical consideration. This would resemble a mere brick
shell that is not yet ready for occupation; a skeleton without flesh

may

skip the dry proof

or blood. But

it

if

meant giving up a number of

original intentions,

most cherished. Here, indeed, I believe it is

impossible to do without a solid foundation. One can erect a large
or a small house on a foundation, adding more or taking away to
create comfort; but building materials without a foundation remain
a formless mass. This is sufficiently proved by the many well-meant
endeavors to achieve a living science immediately, and without rigid
even those that

In such a neglected field as location theory it required

work before even a tenable intellectual structure
could be erected. Yet I hope that even in its objective restraint it
thinking.

many

years of hard

testifies to
I

a sense of reality

and

to a belief.

was fortunate in being able to develop

and

test

my

views

through the more readily understandable conditions in America.

Though a foreigner slips more easily into error, my presentation

on the whole may show even the American reader the economy of
his country from a new viewpoint, and thus serve in some small
degree to express my thanks for the help and hospitality experienced
there in a hundred different ways.
It was not easy for me largely to forego the attractive task of
applying what had thus been tested to our more complicated German
conditions and analyzing the pertinent facts. But apart from all
foreign studies and the wide applicability of the resulting ideas, my
youthful experiences in a little Swabian town constitute the real
background of this book. I am convinced that we rarely learn to
know any conditions as intimately as those among which we grew up.
We can judge with certainty only a small understandable and
familiar world like this, and we transfer the findings to large
problems afterward. My Swabian homeland constitutes such a
world in miniature, if any economic landscape at all can be said

The Economics

xvi

to

do

so.

To

theories gives

book

my

have

me

original experiences there confirm

and

a real sense of security,

to the land of

my

of Location

my

final

so I dedicate this

birth, the land that I love.

August Losch
Heidenheim (Wilrttemberg)
Autumn, 1939

Preface to the Second Edition

The favorable

reception accorded this book, long since out of

beyond the circle of German economists and even abroad,^
in other sciences, and especially among practical economists, encourprint,

my

aged

resolve to publish a

conditions prevented

new

edition, although for a long time

me from making many

should have liked to make. Nevertheless

more

clearly

my

location theory,

of the changes that

have at

which in the

first

least

worked out

edition was merely

a preliminary study; added some new material on geographic price

differences; supplied what was most necessary to the regional planning made timely by the war; and presented the transfer problem
in better form, so far as monetary problems relate to it.^ In addition,
those who are familiar with the first edition will discover new
observations, statistics, and illustrations here and there. Occasionally
the presentation could be simplified, but nothing decisive would be
achieved: the indescribable difficulties under which the book was
first written so compressed and reduced what is valid, beyond mere
impressions, that only he who studies it thoroughly will be able
fully to exhaust its contents.
However, a few hints may be of service to those who hurry
through it. Entrepreneurs may be especially interested in pages
396-420; bankers in 461-476 and 505 ff., monetary experts in 2761.

book

The
is

World War. In America the

on microfilm, being unobtainable in any other form.
review reached the United States before the war shut off

plans for translation were upset by the Second

evidently being circulated

(Only a handful of copies for

the supply. Translator.)

My

book on money will contain more on this subject. (Because of the premature
this book has never appeared However, a lengthy article, " Theorie
der Wahrung," appeared posthumously in the Weltwirtschaftliches Archiv, Vol. LXII
(1949) 35-88.-W. F. S.)
2.

death of the author

F re face

Lo

''^"

Second Edition

304 and 317-324; price control officials 263, 333, and 452-507; geographers and statisticians in 365-507; sociologists in 66-91 and
223-262; and transportation specialists in pages 127, 170-191 and
440-444. Students may skip Part I, and at first the mathematics as
well. Those interested in town and regional planning will consider

329-357 and 440-444, Part IV in general and, finally,

Here
I and II, which is not alway easy.
they will find what economics has to offer today about the spatial
aspects of the economy.

especially pages

the basic material in Parts

many ideas for practical

The commission to prepare

In addition, of course, the utilization of

planning needs to be further developed.

this work I owe to the friendly interest of the Secretary of State

Dr. Muhs, Director of the Reichsstelle fiir Raumordnung. In this
connection I recall with pleasure my conversations with his collaborators, Ministerialdirigent Dr. Teubert, First Baurat Koster, Dr.
Puttkammer, and Diplomvolkswirt Wiesener. But above all I am
indebted for much to my compatriot, Oberregierungsrat Dr. Isen-

berg, a pioneer in regional research.

of those

who helped

to

make

the

first

edition as well as

When
I

the

first

its

my

rest,

dedication

edition was written

lack the time, to carry

too, the contribution

book technically

be underestimated today. As for the

the

Then,

possible

is

not to

the thanks expressed in

still

apply.

lacked the money, and

plans to completion. Most of

my

now

powers

were then consumed, instead of in actual work, in merely making

this possible. For generous though the help intended for science
may often be, little of it reaches the garret rooms where truth is
sought. But in the meantime I was able to test the new views on

many theoretical or pressing practical problems. Whether these

concerned wide areas (Grossraum) and the drawing of boundaries,
the establishment of towns and new settlements, or such apparently
remote subjects as currency, foreign trade, the formation of prices,
and market forms, they have proved fruitful throughout. A new
economics is coming into existence. But not enough time remains
to make it secure in peace on all sides, and since I do not wish to
offer what may be attractive at the moment but would not stand a
rigid test I have given up the publication of most of my results,
even though I could use some of them in my memoranda. It is not
easy to stand before this rich harvest with hands tied if one has within his grasp a

new method

for practicing

and analyzing economics.

August I.osch
Kiel

Autumn, 1943

Contents

Translator's

Note

August Losch

in

Memoriam, by Wolfgang

Stolper

Preface to the First Edition

vii

xiii

xvi

Preface to the Second Edition

List of Figures

xxiii

List of Tables

xxvii

I.

Location
A.

Systematic Presentation of the Location

Problem
1.

2.

3.

B.

The Meaning

of the Location

Problem

Specific Locations

a.

Effects of Locations

b.

The

upon One Another

Relative Position of Locations

Areal Boundaries

5.

a.

Boundaries between Simple Areas

13

b.

Boundaries between Areal Systems

13

Industrial Location

7.

Theory

a.

The General

b.

Practical Execution

The Theory

Principle

Orientation

Partial

b.

Comprehensive Solution

c.

Agricultural and Industrial Location

Site

(One-sided)

Comparison

a.

Reasons for

b.

The

Site
a.

Town Settlement
Town Settlement
Town Formation

and Reasons
Site of

and Cause

for

of Belt

Belts of Locations

Formation

b.

16
16

36
36

60

63
68
68

80
85

Producing Identical

Goods
8.

15

17

of Agricultural Location

a.

Theory:
6.

9
13

Selected Problems of Location

4.

85

Belts of Different Locations

The Problem of General

Location Patterns

90
92

The Economics

94

b.

The Equilibrium of Locations

The Separation of Locations

c.

Conclusion

99

a.

II.

of Location

98

Economic Regions
A. Economic Regions under Simple Conditions
The Market Area
9.
10.

The Network

of Markets

Continuous

b.

Discontinuous Distribution of Popula-

109

114

tion

12.

Regional Networks

122

The System of Networks

The General Pattern
a.
b.

124

124
130

Special Cases

The Network of Systems

a. The Relation of Landscapes

135
to

One

Another

B.

The Boundary Region

c.

Results

136
137

Difficult

Conditions

Some New Factors

Economic Differences
a.

139
139

Natural Differences

178

c.

Human

191

d.

Political Differences

Differences

196

14.

Further Restriction of Market Areas

211

15.

Economic Regions in Reality

a.
Spatial Arrangement

215

On

215

219

a Chaotic Interpretation

Trade

138

b.

b.

III.

135

b.

Economic Regions under

13.

105
109

tion

11.

105

Distribution of Popula-

a.

c.

101

223
223

Description of Equilibrium
16.

Six Cardinal Problems of the Division of

17.

The

Labor and Their Interrelations

Six Cardinal Problems of the

223
Divi-

sion of

226

a.

Labor Discussed Individually

The Occupation of a Person

b.

The

236

Personnel of an Industry

226

Contents
c.

d.
e.
f.

g.

18.

B.

The Locality of a Person

The Occupants of a Locality
The Industry in a Locality
The Locality of an Industry

240

Conclusion

262

245
248
255

Price Gradients

263

Disturbance of the Equilibrium

19.

264

Self-Regulation
a.

265

Transfer of Products During Short-

run

(The Transfer

Disturbances

Problem)
b.

265

Redistribution of the Factors of Pro-

duction with Long-run Disturbances

(The Combination Problem)

c.

20.

305

What Remains of the Classical Theory?

Regulation from Without

a.

Regulation of the Transfer of Prod-

b.

Regulation

(The Transfer Problem)

ucts

of

the

Distribution

Factors of Production

316
of

(The Com-

bination Problem)
c.

The

Practical

324

Value

of

Economic

Theory
IV.

357

Examples
A.

361

Location
21.

365

Locations of Production

b.

Uniform Distribution
Uneven Distribution

c.

National

a.

Boundaries

365

365
376
as

Factors

in

Location
22.

B.

The

Location of

382

Towns

389

Economic Areas
23.

395

Simple Market Areas

395

a.

The

b.

Description of Market Areas

402

c.

The Economic Importance

427

Significance of Distance for the

Individual Enterprise

24.

312

315

396

of Distance

Regional Systems
a.

Number, Spacing, and

431
Size of

Towns

431

The Economics

xxii

25.

Arrangement of Towns

b.

Spatial

c.

The Function

d.

Town

Towns

of

26.

27.

440
445

Frontier Regions

452

Price Levels in Space

452

a.

Prices of Factors of Production

452

b.

Product Prices

476

c.

Cost of Living

490
496

Price Changes in Space

a.

Spatial Differences in the

of
b.

Commodity

Space

Movement"
496

Prices

Spatial Differences in the

of Interest

On

438

439

Plans

Trade

C.

Epilogue.

of Location

Movement
505
508

Subject Index

509

Name

517

Index

List of Figures

1.

2.

The
The

concentration of locations

11

construction of isodapanes

19

4.

Consumption and production as functions of distance

Effect of increased freight on the demand for a cheap

5.

and for an expensive product

Rent per acre as a function of distance

49

6.

Intersection of two profitability planes

50

7.

Thiinen case

53

8.

Inversion of the Thiinen rings

53

9.

Contradiction between figures 8a and 8e

3.

10.

Comparison of rent per hectare

of

37

45

55

Thiinen case and

in

inversion

55

11.

Potato market

56

12.
13.

Corn market
Rent per hectare during

14.

Illustration of case 18 of the complete system

58

15.

Mixed cropping and

58

16.

Size of the

its

56
56

transition

rings

producing unit in

a)

industry and b) agri-

64

culture
17.

Supply of the same market by several entrepreneurs

18. Suitability of different soils for different

19.

Location of crops

as a

function of

soil

products
quality

70

86

and

distance

88

demand cone and the market

demand curve for the product as func-

20-22. Derivation of the

area from the

tion of distance
23.

Development

of

and the

cost curves

market areas from the large

106
circle to

the final small hexagon

110

24-26.

U7

27.

The three smallest market areas

The ten smallest economic areas

118

28.

Theoretical pattern of an economic landscape

125

29. Theoretical

pattern of an economic landscape, but

without nets
30.

Indianapolis and environs

125

125

The Economics

i[xiv

of Location

31.

Toledo and environs

32.

The

33.

Location of regional centers in the complete system

34.

Regions with equal structure, k

128

35.

Regions with equal structure,

132

36.

Regions with equal structure,

37.

Part of a square economic landscape

125

transport lines in the ideal

economic landscape

=3
k=4
k= 7

Comparison of individual

41.

Various types of total

c. i. f.

and

f.

o. b.

demand with

135

respect to the

140

price

demand

145

curves

149

Three individual demand curves with respect

price as function of distance,

to

f . o.

b.

corresponding total

revenue curves, and corresponding transport cones

44.

Geometric

45.

Comparison of price discrimination, uniform f. o.b.

price, and uniform c. i. f. price
Price cones of agricultural products around towns

46.

solution of limits of price differentiation

47. Similarity of price differentiation for

new

large-scale

economies on

size of

172

thickly

settled

and

thinly settled regions, with equal cost curves

50.

The law

50.

Schematic representation of efficient route from Hawaii

New

Orleans via

Panama Canal and

possible

186

52. Effect of gate cities

on market and supply

areas

53.

Economic and

54.

Schematic representation of the six basic questions of

55.

Population density of northeastern Europe, 1930

224

the division of labor

a price inflation on market

57.

The

58.

World-wide price waves

60.

areas

spread of price changes

258

268
271

304

customs union on demand and price

Reduction of market areas by a

190

204

political borders

59. Possible effect of

181

184

of refraction

Nicaragua cut

56. Effects of

167

176

Comparison of market area in

to

161

market

area
49.

151

154

goods and spatial

freight differentiation through zonal tariffs

48. Effect of

32

134

42. Factory price and distance

43.

128

38-39. Location of landscapes in respect to one another

40.

127

tariff

341
341

xxv

List of Figures

61.

Member banks

62.

Bank

the

Reserve

Federal

Chicago in Iowa, January

1,

Bank

of

366

1926

locations in the nine northwest counties of Iowa,

366

1926
63. Principal

European

367

1921

fairs^

population per square mile in North

64. Agricultural

America (United

States, 1930;

Canada, 1931)

65.

Rotation of crops

66.

Distribution of towns in Iowa, 1930

as a function of distance

382

village

68. Increase in distance

Parceling of
District of

389

towns in England, 1910

67. Distribution of

69.

fields

389

between towns west of Chicago

on

Herrenberg

400
404

71.

Encirclement of a small town by a large town

72.

Market area of

a house in Kansas City for fine

clothing and overalls and

73.

Market areas of

74.

Method

five

390

farm in the Administrative

70. Size of wholesale market areas by goods, 1929

75. Sales

375

from a

work

clothes

hardware trade centers

of determining retail

market areas

area for building lumber

411

woolen
413

415
418

and cement, Cedar

County, Iowa

418

76.

Supply and market areas for Muscatine, Iowa

419

77.

Hierarchy of supply areas for tung

420

78-79.

The

oil

great world wheat markets, 1928-29

421

80.

England

81.

Distance and foreign trade

429

82.

Shape and

442

83.

The French

as a

corner market at the center of world

trade routes, 1936

street

425

network of a small town

hinterland of Geneva

84. Influence of the

drawing of the boundary upon the

market area of Bischofswerder, East Prussia

85.

The network

86.

The

of railways

88.

447

financial sphere of influence of El Paso, 1914

land in Nordhorn, 1926-29

448
453

Value of agricultural units around Stuttgart and Heilbronn, 1935

89.

446

on the American-Canadian

border

87. Price of

445

Gradation of wages in the German Empire, 1941

454
457

The Economics

jcxvi

90.
91.

of Location

The

Stuttgart commuting area

Monthly wage, without board, of

United

458

States, 1933

92. Price in dollars for resoling

United

States,

and heeling a pair

of shoes,

459

1936

93. Price in cents for

States,

457
agricultural workers,

laundering a man's

shirt.

United
459

1936

94. Increase in the rate of interest

with distance from

New
462

York, 1919-25
95. Increase

in

the rate of interest with distance from

Houston, Texas, 1936

96. Spatial pattern of

465

wheat prices in the United

States,

478

1910-14
97.

Producer prices for potatoes. United

98. Retail prices of potatoes,

99. Isotimes for soap.

United

100.

Westward movement

101.

Comparison

102.

The

United
States

States,

States,

1906-15

480
480

1936

and Canada, 1936

488

of the depression in Iowa, 1929-

497

31
of house rents in the

United

States

and

Canada, 1929-37

500

North and South in

dependence upon tariff

ratio of price levels in the

the United States

policy, 1820-1935

and

its

502

List of Tables

1.

2.

34

Classification of locations

Complete system

of spatial order in agriculture for

two

crops

39

3.

Symbols of spatial arrangement

4.

System of equations

95
97

6.

Demand
The ten

7.

Calculation of n

8.

Regions with homogeneous structure

131

9.

International trade

227

5.

as a

function of regional shape

1 1

smallest possible market areas

119

119

10.

Interpersonal trade

11.

Comparative

12.

Order of comparative advantages

228

efficiencies

(comparative advantages)

of

the countries

229
231

15.

Example of determination of the price

Transfer and construction of currency

16.

Transfer with different reserve ratios

17.

System of methods for regional planning

18.

Significance of regional production in the

19.

Surplus, self-sufficient

20.

Employment per

21.

Frequency distribution of towns in Iowa, 1930, by

and distance

13-14.

of land

255
282
283
347

United States,

1929

368

and

deficit regions

1,000 inhabitants. East Prussia,

369

Wurt-

temberg, Ruhr, Reich

22. Distances

United

separating

373
size

States

392

23. Distances separating

24. Selling cost

391

towns in various parts of the

English towns, 1910

and distance

394
398

25. Relation of sales radius to cost in certain wholesale

trades
26. Size of

399

market areas for wholesale trade in the United

States according to goods, 1929

27. Size of
28.

wholesale market areas by

Distance and
counties

size

of

demand

in

405
cities,

1929

407

wholesale trade, by

409

^^^ Economics

xxviii

29.

Distance and

size of

demand

of Location

in retail trade for similar

places in three counties in

410

Iowa

demand

412

30.

Distance and

31.

Source of wheat imports, by importing country and

size of

423

exporting country, 1928-29

32.

Germany's share in the foreign trade of European countries,

430

1928

33. Structure of region, with k == 3

34.
35.

431

Regional systems in Iowa, theory and reality

Increase in interest rate on bank loans with distance

435
in

465

Texas, 1936
36. Increase in interest rate

on bank deposits with

distance,

466

Texas, 1936

481

and distance

37.

Orange

38.

Local differences in nonagricultural retail prices in the

prices

United
39.

States

Comparison

of

and Canada, 1936

price movements on the American-

499

Canadian border, 1915-37

40. National price increase after devaluation in

and the United

487

Canada
500

States

UNNUMBERED TABLES
One-to-one correspondence between international and
235

interpersonal trade

Relation of physical yield of various crops to the

proportion of total production of the United States

by

New

England, Middle Atlantic, and East North

376n.

Central States
Selling cost
total cost.

dependent on distance

United

as

percentage of

397

States

Freight per ton-mile relative to factory price,

Theoretical and actual

number

Germany

of places in Christaller

432

system

Expenses of national banks

397n.

as

percentage of deposits,

1935

470

Spread of interest rates between New York and twentyseven financial centers in the South and West, 1923-35

505

PART ONE. LOCATION

OUR EXISTENCE

is determined for us, but we are

our location. This is influenced, though
not dictated, by our place of origin. Finding the right location
is essential to successful life, but it is essential also to a successful
enterprise, to the establishment of a lasting settlement in short, to
group survival. In addition, a suitable location must be a location
for the right events. On closer examination, these originally simple
problems constantly divide and subdivide anew. Thus presentation,
unlike investigation, must begin by introducing some order into

in time

largely free to select

this rapidly

confusing abundance of problems.

A. Systematic Presentation of
the Location

No MAN-MADE
for

Problem

SYSTEM can avoid the arbitrary. None

we do not know

the final cause of things.

We

is

conclusive

know only

mutual relationship, not a simple series of causes from beginning

to end, from above to below. It is basically immaterial where our
presentation begins, since we cannot linger over the parts without
considering the whole. If a system is regarded as an order of
preference, the emphasis lies heavily on the word order.
order
our facts according to viewpoints that are important to us. Hence
the same thing appears again and again but is seen differently,

We

whereas in a proper sequence, in an ideal system,

it would have a
Just as the first three parts of this book imply no
clear-cut separation, so classification within this as within all other

unique

place.

is only a matter of convenience.

This is already shown by
the fact that not until the third part does the argument expand into
a comprehensive view of economics in space and the division of
labor in general. Here we limit ourselves to the narrower problem
that forms the subject of traditional location theory, namely, where

sections

a particular economic activity is to be found. In judging the manifold contributions to this theme it is helpful to fix their place in
the theory. Moreover, only thus can we recognize the basic problems.
1.

This concise review presupposes in

Hence the beginner should merely glance

its

details

some

familiarity with the subject.

at first over pp. 5-14.

Chapter

1.

The Meaning

of the Location

Problem

The

question of actual location must be distinguished from that

The two need not coincide. Interest in
the first is divided between identifying and explaining a site, and
may concern itself either with an individual case and thus be essentially historical in character, or with a behavior that is typical at
of the rational location.

least for an epoch. From this follow rules for the considerations
by which entrepreneurs let themselves be guided in choosing an
actual location. It is often important to know this. But it would
be dangerous to conclude that what is must also be rational since
otherwise it could not exist, and that any theoretical determination
of the correct location would therefore be superfluous. Such a
capitulation to reality is as useful as the advice of those who on
principle contradict no one: a contemptible attitude that is satisfied
to accept one's era instead of serving it. Of what value is a science
that does not observe Schiller's valiant watchword: " Live with thy
century, but be not its creature; give to thy contemporaries, but
give what they need, not what they laud "? ^ No! The real duty of
the economist is not to explain our sorry reality, but to improve it.

The

question of the best location

is

far

more

dignified than deter-

mination of the actual one.

1.

Ueber die asthetische Erziehung des Menschen,

9.

Brief.

Chapter

2.

Specific Locations

EFFECT OF LOCATIONS UPON ONE ANOTHER

a.

The

PRINCIPLES for a rational choice of location vary according to

(as entrepreneurs) from the standpoint of
the individual, or (as regional planners) from the standpoint of
the whole. According to the point of view we perceive only one
factor determining location, or two.

whether we view them

1.

Theory of Location for an Individual Firm

a.

Choice of Location for the Economic Unit

The problem is: Given all locations but one,

The individual solves this problem according to

to determine this.^
his best advantage.

(This is the first general tendency.) As a rule, he must find the

most favorable center of a production, sales, or supply area. The
first two cases concern the location of a producer, the third that
of a consumer.
1.

The situation of available means

and of consumption must be known

Location for a Producer.

of production, of competition,

but the significance of these factors is variable

For the location of a farm it is highly important
that its production be areal, whereas its market may be thought of
as punctiform. For a typical nonfarm enterprise the situation is
reversed, and the theory of agricultural location differs therefore
from that of industrial location. The latter has been discussed
especially by Weber though in very simple terms, to be sure; the
former, by J. H. von Thiinen.^
as geographical data,

in the extreme.

2. Location of a Consumer.
His location depends
location of the producers and of neighboring centers of

1.

The

pricing problem of an individual enterprise

is

no

different.

upon

the

consump-

As in any one

individual case price can be explained by costs, so any one location can be explained
by others. The general theory of pricing must not, of course, follow this circular
reasoning, and neither must the general theory of location. In either case only a
system of simultaneous equations can properly demonstrate the interdependence.
2. J. H. von Thiinen, Der Isolierte Staat in Beziehung auf Landwirtschaft und

Nationalokonomie (Hamburg, 1826), 11 and elsewhere.

Part One.

Location

This case was especially important in the Middle Ages: An

inland town would develop only where the neighboring towns
left it an adequate source of agricultural supplies. The situation
is fundamentally similar today for cotton mills, flour mills, slaughter
houses, and so on. Some discussion of this subject is to be found in

tion.

on economic history (Sombart) though as far as I am

theory has not been so thoroughly worked out as that of

the literature

aware
the

its

first case.

fi.

Repercussions of Individual Choices of Location

In adopting the viewpoint of the individual economic unit we

appear to have freed ourselves from the general interdependence of
locations, and thus to be able to give a more exact solution than
that contained in the general equations of location to be discussed
below. But certain repercussions immediately appear, which radiate
from the desired location back to those that determine it. As long
as we consider only the first and nearest of the determining locations
(as in what follows) we still deal with a problem of partial equilibrium. But as soon as we endeavor to take account of all interactions we are faced with general interdependence (as in 2)
1.

chosen

Influence on Competitors. When the new enterprise has

its location competitors may re-examine theirs. This difficult

problem was

first

suggested by H. Hotelling,^ but treated

on such

simplified assumptions that his conclusion (a tendency to agglomeration) cannot be generalized. Under uniform conditions in a free
market the individual has no latitude in the choice of his location.
The problem can thus have practical importance only either during

the transition to equilibrium or, in equilibirium

those industries where

human

itself,

only in

or natural differences play a role or

where a single enterprise produces a large part of total output.

After production has been divided among individual firms, a residue
may remain in this case that is too small to permit the existence of
an additional

firm, yet large

enough

to allow those already estab-

lished to operate well to the right of Chamberlin's point.*

enterprises then have

some

latitude of choice,

and may

fight

These

among

themselves for the most advantageous location.

Influence on Customers and Suppliers. We can distinguish
effects on the form and the substance of their activities.
2.

(aa)

Effects

on Form.

3.

Harold Hotelling, "

4.

See below, p. 109, note

First,

the form of consumption as a

Stability in Competition,"
1.

Economic Journal,

1929, pp. 41-57.

specific Locations

Given the location of its production, the

consumption of a particular product may assume different forms,
depending on the distance from the site of its manufacture. For
example, it might prove advantageous to ship a large machine
function of distance.

already assembled to a near-by purchaser. The additional cost of

shipping a bulky machine rather than its parts will be more than
offset, up to a certain distance from the factory, by savings in the
cost of mounting. Beyond this critical distance, on the other hand,
the machine will be shipped knocked down.^
Second, the form of production as a function of distance. Given
the place of consumption of a product, the particular form in which

produced may vary with the distance from that place. By form
may be meant intensiveness, that is, the method of
production
of
(Thiinen)
or the stage to which factory production
cultivation
local finishing is more expensive than
locally.
If
is carried out
centralized finishing, perhaps because the advantages of large-scale
production cannot be utilized so fully, but freight per unit of
consumption is less when a product is shipped in finished rather
than crude condition, then it may pay at a certain distance from
the consumer to ship frozen meat, say, instead of livestock for
slaughter. In these cases the final product always remains the same.
it is

From

this

we must

distinguish the cases in which different

end

products such as fresh milk, cream, or butter are prepared from the
same original products, depending on the distance from the consumer. We then deal no longer with different competing forms,
but with different products the subject of the next section.
(bb) Influences on the Substance of Economic Activity. First,
the object of consumption as a function of distance. Suppose com-

peting goods are produced in the same place. Where each will be
consumed may depend on the distance from their origin.^ Consider,

and poor ores, both mined at the same spot, the

former below, the later at the surface. Since the cheap ore is therefore cheaper per consumption unit, though more expensive to ship,
it has an advantage in the neighborhod of the mine, while the rich
ore is purchased only by more distant iron works.
Second, the object of production as a function of distance. We
come to the other half of Thiinen's famous statement of the problem, the first half of which concerned the form of production as a
function of distance from the market. Suppose the locations for the
for example, rich

zig,

5.

See below, p. 37.

6.

See

1885)

W. Launhardt, Mathemaiische Begriindung

,

p. 164.

der Volkswirtschaftslehre (Leip-

Part One.

Location

consumption of various products to coincide in a town. These products compete for land for their cultivation. Thiinen has shown
that under certain conditions their cultivation is arranged in rings
around the market. We shall return to this problem laterJ

The General Theory

2.

a.

If

we wish

to

of Location

General Equations of Location

be precise and to consider the influence of the

on all other locations in the

example of Thiinen just mentioned, for instance, the repercussions
of the location of our town not only on the particular farms that
supply it, but on all agriculture and on all other towns then we

selection of a

enter

upon

particular location

the general theory of location.

The repercussions,

strictly

and it ceases
pick out one location and examine its relation

speaking, are transformed into mutual relations,

to

be

meaningful to

to

its

neighbors in isolation.
all locations.

We

are faced with the interdependence of

Equilibrium of the location system can therefore no

longer be charted, but can be represented only by a system of equations that are insoluble in practice. The conditions that they express,
rather than the equations themselves, are of great interest indeed.

For they contain the conditions for the functioning of the whole
system and are therefore more important than all that the special
location theory has to offer in the way of realistic details. With the
general equations we encounter the other basic force that determined location: the tendency to equalization of the advantages of
the individual economic units and (in a market into which entry
is possible)
the maximization of the number of competitors.^
j8.

The Simplifying Theory

of

Economic Regions

Between the theory of individual locations and that of location

patterns stands the theory of economic regions.

It shares with the

former the advantage of geometric representation, with the latter
a breadth of subject. It shows the universal interdependence of
7. An industrial parallel appears when different goods are made from the same
raw material with different weight losses. See O. Englander, Theorie des Giiterverkehrs und der Frachtsdtze (Jena, 1924), pp. 129 f.
8. As the latter eliminates profits (though absence of profits, on the other hand,

does not assure maximization of the number of independent economic existences)

one may speak roughly of a tendency toward equalization and elimination of profits;
of an equalization of incomes among independents and between them and
i. e.,
dependents. Later we shall assume free entry to markets as a more desirable situation,
and thus treat both tendencies together.

specific Locations

locations with such simplifications that

it

can be charted.

It neglects

and in some though not all respects

urban demand. It considers the relations between all producers and
consumers of the same goods, and between the producers of different
in particular natural inequalities

goods at

major

least in so far as they are significant for the

cities

and main transport

arteries.

If

establishment of

the suppressed factors

quite probable that the picture would be someunlikely that it will be wholly invalidated.
Because of their importance, a separate part of this book will be
are introduced

it is

what changed, but

it is

devoted to economic regions.

b.

We

THE RELATIVE POSITION OF LOCATIONS

The Basic Types
1.

shall

now

discuss the results of a rational choice of location.

and characteristic combinations emerge between the places

where a commodity is produced and those where it is consumed,
depending on their numbers and locations. In the market as a
whole there may well be a hundred such, which usually will split
up into smaller groups of which the majority find it advantageous
to deal principally with one another, or exclusively so if the products
of the individual manufacturers are homogeneous. Every group is a
submarket. Those submarkets that have immediate contact with
Definite

each other, as well as those markets that are not split

may be reduced

up

into

few basic types: It occurs

only rarely that a single producing center deals with a single consuming center. Yet nonagricultural location theory has preferred
to base itself on this limiting case. As a rule, several producers are
grouped about one consumer, or several consumers about one
producer. We speak accordingly of regions of supply or of demand,
and include both under the term market areas.
These two basic types of positional relations are the core of
every determination of a location, areas of demand playing a larger
role in the nonagricultural theory and areas of supply in the agricultural. The latter has been discussed principally by Thiinen, the
former by Launhardt, and the borderline cases by Weber. It
makes little difference whether the number of locations distributed
throughout the market area is large, as in agriculture, or small, as
it often is with nonagricultural enterprises.
According to circumstances we deal with complete or with incomplete market areas,
but fundamentally the situation is the same. Nor is it altered if a
center of production included many independent enterprises in the
further subdivisions,

to a

Part One.

iQ

Location

which supplies the entire area. In

respect to their common area of demand they may be treated as
one firm, and their supply curves may correspondingly be added.^
From this it follows that the nature of the area is determined not by
the number of buyers or sellers, but by the number and position of
their locations. ^'" The locations of the producers and consumers
of the same product, as well as of different products, may be situated
anywhere or may be agglomerated. These agglomerations are important enough to be treated as a special problem.

same

line of business, each of

2,

Agglomeration of Locations
a.

The

Punctiform Agglomeration

why

questions

many producers (or

why production in some places is

the best locations for

sometimes coincide,

consumers)
so unusually great, and why and where
the same. The answer must distinguish
locations for the production of similar
the production of different commodities.

towns grow, are one and

between agglomeration of
commodities and that for
As to the former category,
we set aside the case where a particular place has only a single large
firm that has merely attracted a few local enterprises to the spot.
At present we shall discuss how several similar and independent
enterprises can exist in the same place as the result of purely
rational considerations; that is, if either mergers or migration of
some firms could occur without friction. In large cities, finally, the

concentration of similar and different enterprises may occur together.

The relation of all these agglomerations to one another is subject
to special laws, which will be discussed in Part II.
p.

Areal Agglomerations

With punctiform agglomerations

least their centers, coincide.

by the

fact that

the individual locations, or at

Areal agglomerations are distinguished

the locations of their centers

lie

close together

Otherwise some product differentiation would have to exist.

numbers alone were relevant i. e., if locations were evenly distributed areas
of supply would result if in the economy as a whole the number of production centers
exceeded that of consumption centers, and vice versa for areas of demand.
9.

10. If

11.

The

nature of the area

form, together with the

is

in turn an essential factor determining the

number and importance

of buyers

and

sellers,

their

behavior, and their complementarity. It was a mistake to think that the market

method and
number of buyers and
i.

e.,

the

results of price

market
market

form

formation could be known merely from the

sellers without their locational pattern. In general, the tradimarket forms acquire an essentially different content as soon as they are seen
geographically. But there is neither time nor space to develop this here.

tional

'^

specific Locations

without, however, coinciding. This has the important consequence

that in the latter case the market areas of the various locations
remain separate though close together, whereas in the former they
coincide precisely near the concentration of locations but in turn

wide extent. An example of an areal agglomeration of

locations is the network of the supply areas of cotton gins in the
United States, which are distributed with fair regularity throughout
the cotton belt and are also restricted to it. An example of punctiform agglomeration of locations is the factories producing men's
collars, practically all of which are situated in Troy, New York, but

may be

of

Areal

none
Restricted

Cluster

market network

^ ^ ^

True network
Belt (cotton gins)

District (coal

mines)

Place (collars)

(bakeries)

Fig.

The

I.

Concentration of Locations

whose market includes the whole of the United States. There is,
however, a third, intermediate, form. Most of the American coal
mines are not concentrated at one site, though they are restricted
to a relatively small territory. Nevertheless they do not supply
arbitrarily those areas that lack coal.

The importance

of overlapping

somewhat overestimated. They depend

quality differences.^^ In the main they are the result of
freight rates. On the whole it may be said, therefore,

coal shipments

is

section of the coal-producing area has

12.

Thus

its

own

special

partly

on

irrational

that each
outlets."

the steel works in the Chicago area get their coal from the Pittsburgh

region because the coal from the

Even with small

much

nearer Illinois

fields is

not suitable for coking.

makes good sense: it prevents crosshauls within

a district that is already overburdened with traffic. When this district is of even relatively small extent a sensible organization of the markets becomes difficult. Imagine
a circular coal deposit, and assume the demand to be so small that only the mines at
the periphery are kept busy. Then each mine will supply a sharply defined sector of
the surrounding tenitory. With increasing demand it will pay to work the mines in
13.

districts this

the next inner ring. Strictly speaking, therefore, rather than the entire coal field only

an outer ring

is

worked, whose width varies with demand.

to the periphery the larger

if

coal, like cotton, say,

is

the rent they yield.

were collected

at a

The

The

nearer the mines are

situation

would be simplest

few cents at the edge of the circle and then

Part One.

12

Location

Hence in areal agglomeration of locations for the same industry we

must distinguish the belt, where the market networks are compressed
close together; and the district, where the markets are separated,
while only their centers are compressed. Figure 1 pictures the differences of the last two agglomerations from complete dispersal on
the one hand to punctiform concentration on the other.
Hitherto we have been discussing only the case of a single
industry. But there is an areal as well as a punctiform agglomeration
of locations for different activities:

the so-called industrial areas.

In their structure they resemble partly belts and partly

redistributed from
their distances

Producers' and consumers' rents would vary then only with

from these collecting

easily determined.

worth while

tliese.

districts.

centers.

In reality the situation

to go into the details here.

is

Their supply and sales areas would be

somewhat more complex, but it is not

Chapter

3.

Areal Boundaries

BOUNDARIES BETWEEN SIMPLE AREAS

a.

Besides the locations themselves, the lines that separate them in

areal distribution are of interest, and, in punctiform distribution,

We must therefore distinguish between

between
different kinds of goods (i. e., areas that
(1) boundaries
produce or consume different kinds of goods) and (2) boundaries
between different kinds of markets (i. e., areas that sell the same
Thiinen's rings
product in different markets, or buy from them)
are an example of the first; separation of the sales areas for two
competing enterprises in different locations is an example of the
second. We may also call the latter the boundaries of competing
locations, the former the boundaries of competing goods.
The boundaries separating areas of competing locations delimit
the supply and demand areas of identical goods. The boundaries
separating areas of competing goods delimit the areas of production
or consumption of different goods, or at least of different forms of
the areas of influence.

goods.

The latter are already given with the position of all locations,
but the former must be calculated from the locations. With homogeneous goods the boundaries are sharp if buyers and sellers are
scattered and numerous, and if the center of each area is treated
as though the other centers did not exist. Otherwise the markets
overlap and the boundaries become indistinct.

BOUNDARIES BETWEEN AREAL SYSTEMS

b.

There are systems in which the areas for different goods are
(as in the Thiinen case)
or overlap (as in economic
provinces)
Depending on the system, we get only boundary lines
Boundary lines between both kinds of
(1) or boundary zones (2)
areal system have two things in common: Both include boundaries

separate

between simple areas, and, with intrinsic similarity of both towns

and provinces, both separate market areas for the same marginal
good. The same Thunen ring lies on either side of the border,
referring, however, to different towns; and with economic provinces
we find on either side of the boundary market areas of the same
13

Part One.

14

Location

correspond to each other and have the largest necessary

But if the towns or provinces are of different size, the
goods on the two sides of the boundary are also different. Any kind
of Thiinen rings meet, and may change as one walks along the
boundary. Similarly, when the economic provinces are unequal,

good

that;

extension.

the marginal goods are different.

The distinction between boundary lines and boundary zones is

The former constitute a sharp boundary between two towns or
major cities in so far as these rival each other. The latter exist
this:

only between major cities, and indicate the boundary area in which
" loophole " markets are found, that is, markets belonging wholly
to neither of the two districts even though both are by nature wholly
similar. They arise from the fact that where markets meet district
boundaries empty corners appear that in themselves are too small

room

for another independent enterprise, and that can be

enough only by combination with similar corners in
the adjoining province. We shall see later that these boundary
zones extend from the edge of the district about two thirds of the
way toward its principal city, but that they become less important
Boundary zones are not distinguished by any
as they approach it.
particular price situation. Boundary lines and simple boundaries
introduced under (a) on the contrary, are lines of equal profit to
to afford

made

large

the producer or of equal prices to the consumer.

B. Selected Problems of Location

neither possible nor really necessary to answer here every

problem on location that has systematically been raised in the preceding section. They are not all of equal importance, and the
It

is

nature of the solution of the individual cases would not differ

greatly.
It will suffice, therefore, to demonstrate a few typical
methods of treating the problem. Once the procedure is thoroughly

grasped there will be no difficulty in applying

complex

it

to other

and more

situations.

The

following pages will discuss two groups of questions concerning the choice of location seen from the standpoint of the
individual economic unit (industrial and agricultural location
theory) two problems on the agglomerations of locations (formation of towns and belts) and two divisions of the general theory of
location (of which only the locational equations will be introduced
,

in this part; the fundamental discussion

on economic regions

will

be presented separately)

1.

In a few places throughout the following discussion certain findings on economic

regions have been anticipated, whose proof cannot be given until Part

II.

Chapter

a.

The

Industrial Location Theory

4.

THE GENERAL PRINCIPLE

is selected by the entreHis choice rests upon subjective considerations. He will,

of course, bear objective facts in mind, but these alone cannot
dictate location. Thus it is conceivable that under exactly the same
external conditions two entrepreneurs may choose entirely different
locations. The available range ^ for their decision depends upon

location of an industrial enterprise

preneur.

They

the size of their possible entrepreneurial profits.-

will share

only the formal aim, which is to choose their location so that the
utility shall be as great as possible. Whether they have hit upon
the right one can be determined only later, of course, for even after
mature consideration they will chose " with their fingers crossed." ^
L

Imitating enterpreneurs easily forget that this range

may

is

more

restricted for

some

them

though
not the greatest possible, may result in losses to the former. Therefore they should not
simply take the locations of leading enterprises as a guide, or without further thought
attach themselves to an already existent agglomeration of their industry.
2. Here enter all those eccentricities that skeptics like to advance as examples of
the irrationality and antitheoretical nature of actual events. For instance, a producer
may frequently locate his plant so that he can pursue his favorite hobby on the side.
The preference of English businessmen and their wives for life in the south of England
than for the abler pioneers.

location that

has been said to play an important role in

yield the latter

profit,

the southward migration of

British

(PEP, Political and Economic Planning: Report on the Location of Industry

[London, 1939], p. 46.) But as long as such a capricious choice costs no more than the

industry.

entrepreneurial profit,

it is still

consistent with theory.

There are two reasons for this: the practical difficulty of determining exactly
under given conditions how good a site really is, and the fundamental impossibility of
foreseeing how these conditions will change. Dynamically there is no best location,
because we cannot know the future. What follows is therefore meant to apply to static
conditions. That the measurement of utility itself is dubious will be discussed later.
3.

The

degree of uncertainty connected with a location varies, of course.

The

scale

runs from the security of old farms, manorial estates, or mercantile establishments
inherited for generations that have seen their owners through all vicissitudes; through
virtually

permanent positions that their occupants hold

for life

(rural pastorates)

through the multitude of industrial enterprises that under prudent management may
last for a few generations, or may move away or collapse at any moment; down to
itinerant folk of all sorts musicians

and

poets, scientists

mercenaries, reformers and seekers after the Holy Grail, for

order holds no place,

who

and preachers,
all

of

whom

inventors,

the existing

can only choose between being ascetics or prostitutes and

i6

Industrial Location Theory

17

The chosen location may turn out to be only subjectively a failure,

or even objectively so. An entrepreneur fails subjectively when the
personal success expected from the chosen location is not realized,
objectively, when he goes into bankruptcy because his choice, seen
also from the standpoint of the economy as a whole, proved to be
wrong.*

PRACTICAL EXECUTION

b.

In order to fix exactly the point of greatest utility we should

have to bear in mind more considerations than would be scientifically possible, let alone practically convenient. An approximate
formula for the choice of a location, however, depends on how

many

of the factors that influence a careful decision are eliminated.

Obviously

all

irregular influences

must be removed, since compre-

hensible rules can be established only for the effects of the regular.
If we disregard all locally conditioned priceless utilities, the entre-

preneur will choose the location of greatest real

profit.

If

we

discover

no spatial regularity in the price level of the things he consumes,

which will certainly be true for corporations, it will be best to
eliminate such a cost-of-living pattern also.

a.

Nominal
As

profit

goal will then

One-Sided Orientation

1.

receipts.

The

of the greatest nominal profit.

become the location

Cost Orientation

the difference between

is

money

depend on many irregular

receipts

location theory has generally disregarded them.

cost

and money

factors, industrial

Thus Weber

con-

This assumes among other

things that an areal boundary that separates neighboring competitors
is fixed once and for all. The factory would then be situated at the

demand

sidered

point of lowest

c. i. f.

whose proper location

world.

The

be wholly

to

fate of List

is
is

costs

inelastic.

(cost,

insurance, freight)

the highway, where they are torn between

home and the

a German

repeated every day. [Friedrich List (1789-1846)

championed protective tariffs for infant industries, customs

unions, and government development of railroads and merchant marine. Because of
his views he was forced into exile for several years and upon returning to Germany
was sentenced to imprisonment, but pardoned when he promised to emigrate. In 1825
he entered the United States and later became a citizen. Because of illness and financial
difiBculties he finally took his own life. W. H. W.]

economist,

vigorously

Bankruptcy does not necessarily mean the elimination of the unfit, but mainly
its dignity through its distinction from chaos
and not really through having accomplished something just or meaningful (except
perhaps the maximum of free will, though not, as was formerly believed, the maximum
4.

the preservation of an order that derives

utility)

See below, p. 92, note

2.

Part One.

i8

Location

TRANSPORT ORIENTATION

1.

production depends upon local price differences and

the amounts of factors of production and other things required. If
these inequalities are finally abolished by the ceteris paribus assumption, only transport costs remain to be minimized. These alone
almost always show spatial regularity, and their contribution toward
determining location has therefore become the principal item in

The

cost of

the ruling theory.

The Point of Minimum Transport Cost. Location theory

now recognizes three methods for determining the point of
minimum transport cost, that is, the place where total freight costs
(aa)

up

to

per unit are lowest.

Construction of the Point of Minimum Transport Cost in
1.
the Locational Triangle by the Proposition of Exterior Angles. This
discovered by W. Launhardt,^ and rediscovered a
generation later by Alfred Weber. In recent years T. Palander ^ has
contributed an extensive discussion of this solution. The method
solution was

first

is only touched upon here, because it is of neither great theoretical

nor great practical importance. It applies only when the number
of necessary sources of materials and places of consumption together
amount to 3, and freight costs are proportional to weight and

distance.

The Mechanical Model.

2.

Perforations are

made

in a

stiff

map

and markets. Threads bearing determinate weights are passed through these holes and tied together in

at the sites of material sources

one knot.

The

of production.
costs

is

position of rest for the knot

The problem

is

the desired location

of finding the point of lowest freight

identical with that of finding the position of equilibrium

The mathematical proof is given by Palander.

weights on the threads are proportional to the quantities to be
moved. Let A, B, and C be raw material sites, of which 3, 2, and

in a system of forces.

The

needed to produce I ton of finished product;

be markets consuming 80, 15, and 5 per cent of

0.5 tons respectively are

and
5.

let

His

D, E, and
first

easily accessible

orts einer gewerblichen

paper

is

"

Die Bestimmung des zweckmassigsten Stand-

Anlage," Zeitschrift des Vereins Deutscher Ingenieure, 1882,

pp. 106-115.
6.

Alfred Weber,

Ueber den Standort der Industrien,

Translated and edited by C.

of Industries

(Chicago, 1928)

J.

Pt.

Tord Palander, Beitrdge zur Standortstheorie (Uppsala,

8.

Op.

p. 141.

(Tubingen,

1909)

7.

cit.,

Friedrich as Alfred Weber's Theory of the Location

1935)

pp. 139-145.

Industrial Location Theory

19

the total output respectively.

Then

the weights for the points

to

must be related as 3 2 0.5 0.8 0.15 0.05. (For the history

and bibliography of this method see footnotes 5-7.) The field of
applicability of this method is wider, hov*^ever; it can be used for
any desired number of production and market sites, though again

when

only

freight rates are proportional to distance.

Alfred Weber's isodapanes are lines of equal

is, lines connecting points for
which a definite combination of hauls is equally expensive. The
3.

Isodapanes.^

total freight per unit of product; that

combination consists of the shipment of raw materials and intermediate products to, and shipments of the finished product from.

Fig. 2.

The

Construction of Isodapanes

the factory. Isodapanes must be distinguished from isovectures: lines

representing equal unit freight rates for simple transport to and

from a certain

place.

For a homogeneous transport surface, isovecone another at equal intervals

tures are concentric circles that follow

for similar freight differences.

They

are proportional to distance as

one proceeds outward from the center, and follow one another
generally at increasing intervals for a graduated

port area

is

tariff.

If the trans-

traversed by especially cheap lines of transportation

combined transports result (e. g., by rail and

and the isovectures are distorted, Isovectures serve for the
construction of isodapanes. They are drawn for the transport of that
(railroads, canals)

truck)

9.

Palander {op.

10. Brilliantly

cit.,

p. 305)

has reviewed the various " iso "

discussed by Palander, op.

cit.,

pp. 337-360.

lines.

Part One.

20

Location

quantity of goods which is required for the production and sale of

a unit of finished product. Thus, in the foregoing example, the
isovecture for 3 tons is drawn around A, that for 2 tons around B,

A is the line up to which

raw material can be shipped for the total
expenditure of 1 monetary unit (isovecture 1) the next line connects the places to which the shipment of 3 tons from A will cost 2
monetary units (isovecture 2) and so on. It is simplest always to
derive one family of isodapanes from two families of isovectures, as
shown in Figure 2. On the assumption of a freight rate proportional
to distance, the isovectures 1-12 are drawn around A, and 1-8
around B; the isodapanes constructed from the two sets of isovectures are drawn in as the broken lines 9 and 10. Isodapane 10, for
example, connects all points to which the freight of 3 tons of raw
materials from A and of 2 tons from B will cost together 10 mone-

and

so on.

The

nearest isovecture around

3 tons of the particular

tary units.

On

it

there

for instance, the points of intersection

lie,

A and

around B, and also

Next a group of
higher order isodapanes is constructed in exactly the same way until
finally, in the highest group, all movements of goods between the
production site looked for and the six points A to F are included.

of isovecture 4

around

of isovecture 6

the points of intersection of both isovectures

Of

5.

these highest order isodapanes only the innermost bearing the

number

lowest cardinal

is

of real interest in the present context,

surrounds the minimum total cost of transportation; i. e.,

the most advantageous location for production. Isodapanes have the
advantage over the mechanical model that, like it, they can be used
for any desired number of locations, but, in addition, they can be
used for any number of transportation lines and transport tariffs.
because

it

The
sum of

4.

the

Principle of Substitution.

According to

freight increases equals the

sum

infinitesimal deviations

characterizes the

from the desired

minimum

possibility of calculating

it

point,

it

this principle

of freight decreases for

While it merely
the same time the

location.^^

indicates at

from the equations

for the surface repre-

senting total freight.

Limiting Position of the Point of Minimum Transport

Ever since the time of Weber, special interest has been devoted
to those special situations where production has been drawn to a
favored point. In addition to transshipment points and nodal points,
we also designate as favored points the sites where the factors of
(bb)

Cost.

11.

A. Predohl,

liches Archiv,

XXI

"Das Standortproblem
(1925)

294-321.

The

in der Wirtschaftstheorie," Weltwirtschaft-

principle

is

stated

on

p. 306.

21

Industrial Location Theory

production/- consumers, or competitors are to be found. ^' Under

what conditions does the point of lowest total freight costs coincide
with one of these favored sites?
Four cases may be imagined with a tariff proportional to distance.
The first is weight ratios. If the weight on one of the threads in the
mechanical model (p. 18) is greater than the sum of the remaining
weights, the position of rest for the system of forces will coincide
with the point of insertion for the large weight. In the Lorraine
iron industry, for example, the weight ratios before World War I
Thus the
1 ton of pig iron.
1 ton of coke
were: 3 tons of ore
weights.
other
two
sum
of
the
than
the
greater
weight of the ore was
even
been
would
have
basin
minette
Lorraine
The attraction of the

greater had not the freight rate for coke from the Ruhr to Lorraine
exceeded that for the shipment of ore from Lorraine to the Ruhr."

The

poorer the ores that have to be smelted, the greater the attracHence the iron industry moves today more
and more toward the ore. A typical example of weight-conditioned
attraction toward the consumer is offered by the brewing industry.
The weight of the water added is greater than the weight lost by
tion of their deposits.

hops, malt,

The

and

fuel.

relative positions of the various locations are the second

reason for the coincidence of the point of minimum transport cost

with one of the favored points. What has just been described occurs
12. If

point or

these are present but only in insufficient

site

number one can speak

of a favored

only with reservations.

There may be some doubt whether a

central location between neighboring

Such a location may be highly important as a guess in
respect to a possible general neighborhood but it is difficult to define in theory, since
it is not a stable point; indeed, under realistic assumptions such a point can be defined
only through maximization of profits. Such an intermediate location is probable if,
first, in transport orientation the freight rate on raw material is low compared with
that on the finished product (in the German railway tariff the highest rate for manufactured goods by the carload is almost five times, the less-than-carload rate almost
thirty times, as high as for coal!)
so that production would be carried out exactly
at the center of consumption; if, second, in orientation by total costs instead or besides,
location of raw material and labor are about evenly distributed; if, third, in orientation by return the buyers are scattered (at the desired point the sales cone would
have to be intersected least by the neighboring ones) or if, fourth, in orientation by
profits everything coincides: high freight on manufactured goods, and wide dispersion
of raw material sites, labor, and the markets. This case leads to production for a wellrounded exclusive territory. Eggers and Umlauf have called this " area-bound " production. Part II will be devoted to this topic.
14. H. Schumacher, " Die Wanderung der Grossindustrie in Deutschland und in
den Vereinigten Staaten," Schmollers Jahrbuch, 1910, pp. 451-482. Buchman et al..
Die Standorte der Eisen- und Stahlindustrien der Welt (Berlin, 1927)
13.

competitors belongs here.

Part One.

22

Location

not only when one of the weights exceeds the sum of the others,
but also when it exceeds their resultants. The resultant for any
given weight depends on the relative positions of the points of
insertion of the weights."
Third, established lines of communication have the result that
the costs of transportation are always smallest at one of the perforations (location of raw material or of consumption) or nodes, as can
be readily seen on the mechanical model. Only at such favored
places can the opposing forces affect each other by altering the angle

between these points they remain constant. Hence

advantage that from them a larger number of
the
have
nodes
the
reached than from other points, which might
directly
can
be
places
if
a transport area existed.
perhaps be preferred

of attack, whereas

The

three causes for the limiting special locations consisted

in a reduction of transport cost. The fourth cause lies in a saving
of transshipment cost. This factor, among others, accounts for the
location of industries at transport junctions, including seaports.
first

transports do not pass a transshipment point, the cost

would nevertheless be saved if the production site were

Even where
of reloading

moved

directly to the source of a factor of production instead of

simply near it. This shift will occur as long as the increase in linehaul costs is less than the saving in terminal costs.
We now replace the simple tariff proportional to distance by
differential tariffs. First, according to the type of goods: The freight
rate for the finished good is often higher. This works out exactly as
though the ordinary rate prevailed but the finished product were
It alters
heavier than it actually is (Weber's " ideal " weight)
nothing in our analysis except that location at the site of consump.

tion becomes

more probable.

Not

secondly,

so,

when

rates are

graduated according to length of haul. Graduated tariffs favor shipment over long distances and hence favor as locations the starting
points and terminals of transportation systems

(location of

raw

materials or of consumption) rather than intermediate or transship-

ment
15.

points.^"

For the simple case of the location triangle

figure 8

lies

cit.,

we have

areas,
If

(op.

lies

p. 144)

If

a consumption

a normal case: the

site of

refer as

site

lies

production

lies

in

an example to Palander's
one of the cross-hatched

within the location figure.

in the dotted area, goods are produced at the point of consumption.

in the area of broken lines, goods are produced at the source of

Many

scattered areas of consumption easily give the

raw material

site

raw

If it

material.

the prepon-

derance of influence in the location of production.

16.

figures

The
{op.

contrast with a straight mileage tariff

cit.,

p. 318)

The

is

well brought out by Palander's

legends must, however, be transposed.

23

Industrial Location Theory

recent development of automobile transportation counteracts some of the factors discussed that influence the limiting special
location. It undermines the preferred position of railway stations
in general and that of favored special points in particular. The

The

advantages of transshipment points are less frequently felt because

transshipment is less frequent when motor trucks are employed.
Location near consumption whether it is concentrated in large cities
or distributed over open country becomes less advantageous because
with competition truck rates are regulated more by immediate cost
than by " what the traffic will bear." Thus it is hardly possible to

burden finished goods with higher rates. Markets and locations of

raw materials, finally lose their power to attract when, as in the case
^'
of the motor truck, mileage tariffs supplant graduated freight rates.
To this extent the truck has a decentralizing effect on the location
of industry. It breaks up agglomerations that depend only on differentiated freight tariffs but, under conditions still to be discussed,
it encourages agglomerations that depend upon lower production
costs

by eliminating scattered rural

locations.

ORIENTATION ACCORDING TO PRODUCTION COSTS

2.

by themselves may sometimes determine locaThe

if so, always in marginal situations.
generally indefinite technical orientation by production must be
separated from this case. Only where one or a combination of
several factors of production are exhaustible, immobile, and unique,
does production necessarily occur at this location if at all. In the
main, these will be instances of resources whose occurrence in the
Production

costs

tion exclusively, but

minimum

quantities

climate, or of gifted

men who

necessary

3.

is

especially rare, of

some

special

refuse to migrate.

ORIENTATION ACCORDING TO TOTAL COSTS

(aa)
Location of Lowest C.LF. Costs. As a rule the costs of
production cannot be separated from the freight cost on raw material,
and often it is not desired to separate them from the freight cost on
the finished product. In such cases they affect location only in combination with the latter, e. g., when several scattered raw materials
have to be combined, or when several sources of supply are available.
In our examples on page 18 let there be two sources for the first,
mobile raw material, for which the cost at /ij is 10 marks per ton

17.

Thus

freights,

and

the automobile
for goods

is

superior to the railroad for short hauls, for express

on which freight

rates are high.

Part One.

OA

whereas in remote
15 marks

A2

Location

By ordering from A 2,
is only 5 marks.
of finished product can be saved. But let

it

on every ton

the total freight per ton of finished product for the combination
F at the point of minimum transport cost be 20 marks
Ai,BF.
less than at the minimum point for the combination A2,B
pretherefore
be
A^,
would
source,
nearer
expensive
but
The more

Hence

ferred.

freight costs decide the choice

among

^^

among

and

sources,

points of lowest freight rates.

the choice
production costs
In short, the most favorable location depends upon both, and
therefore

upon

total costs.^^

Special Location of the Point of Lowest Total Cost. Here

things must be distinguished. First, total costs may attract an

(bb)

many

enterprise to a favored point even though neither production costs

nor cost of distance is a minimum there, provided that the sum of
upon the

differences in production costs rest

18. Spatial

fact,

as

Ohlin has

fre-

quently emphasized, that the factor endowment of different regions varies, and that
these factors are combined in varying proportions and thus affect production in

However, spatial price differences are not simply the

different degrees.

result of local

Because of the mobility of the factors of production and of

differences in scarcity.

their products, the relative scarcities themselves are a result of the particular spatial

price system.

It

is

necessary to emphasize interdependence at this point, instead of

merely citing physical factors (climate, natural resources,

of local differences in production costs.

But

it

differences entirely to variations in freight cost,

costs

The

freight costs.

transportation.

difficulty

do

characteristics) as causes
to

reduce spatial price

and thus orientation according

the price differences

to transport orientation, since

cance of space too

human

will not

may be

could be surmounted, to be sure, by pushing the

and developing the whole theory of production

far,

to total

smaller than the

signifi-

as a theory of

Obviously every step in production could always be reduced in the

movement.
Again the substitution principle characterizes the minimum point: For small
changes in location, the sum of cost increases must equal the sum of cost decreases. If
costs were known as a function of latitude and longitude, their minimum point could
be determined on principle algebraically instead of by Weber's geometrical solution.
Predohl (loc. cit.) introduced the marginal principle into the theory of industrial

last analysis to spatial

19.

location.

The

substitution equilibrium

theory. Predohl to the contrary (op.

it

is

cit.,

harder to define here, however, than in price

but in agreement with other passages),

p. 314,

does not matter that equally priced amounts of means of production, whose price

may be

varies locally,

substituted for one another without change in physical return

(which here includes transportation to the buyer)

It is not the change in physical
cost (which may be restricted to transportation or be wholly absent) that is relevant,
but in money cost; and not in two factors, but in two combinations of all factors
.

(which

may

differ in

amount and/or

value)

The

entire combination varies even with

small changes in location (in contradistinction to substitution at the same place)

its

total costs

cheap labor,
of

minimum

substitution)

must remain constant.

total costs

cost

may

With

nevertheless decrease.

the marginal principle

and

larger displacements, say to a place of

fails

to

As soon

as there are several points

indicate

the best

(discontinuous

^5

Industrial Location Theory

the two costs is a minimum. Second, in cases that remain indeterminate in respect to production orientation, total costs permit a decision as to where, if anywhere, the special location is reached. It may,
that a factor of production is immobile but
that
it is found in several places. The condior
not irreplaceable,
only that in the case of replaceable factors
decide
tions of production
some special location may be, and in the case of more frequently
found factors certainly will be, chosen. Only total cost can decide
for example,

happen

the various possibilities. Again Weber's isodapanes are

employed.^" But instead of giving each of the highest isodapanes
the cardinal number that corresponds to the total freight for each

among

produced on a particular isodapane, we

may set down the difference between this figure and the freight
costs at the minimum point. This new number indicates by how
many monetary units the total freight costs per unit of product
increase, when production is moved away from the optimum transport point onto the corresponding isodapane.
If, for example, local wage differences are to be considered, we
can indicate in the same way by how much the labor cost per unit
is greater or less than at the point of lowest freight costs.-^ Instead
of at the place of lowest freight cost, the plant will then be set up
where the saving in wages less the additional freight costs is greatest.
Third, where production is technically restricted to a unique
unit of product

location,

when

it is

and where location by

partial cost leads to a special location,

this special location will be necessarily confirmed

total cost.

The

special location

may

by the

effect of

perhaps be confirmed by the

when

the plant has been transport oriented.

Fourth, if costs of transport alone lead to an unequivocal ^^ special
location, this location can be shifted to another favored point as

effect of total cost

20. A.

cit., pp. 100-103; English ed., pp. 102-104.

the spatial picture of wages will be so regular that isotims of

Weber, op.

21. Occasionally

connecting points of equal wages. Moreover,

can be interpolated within certain limits, L. von
Bortkiewicz was probably not correct on this point in his otherwise wholly pertinent
criticism of Weber. Bortkiewicz prefers empirical calculation even when nothing but

labor can also be drawn; that

as " iso-lines " or "

freight

and labor

made up

lines

is,

contour lines

"

costs are taken into account,

individual labor markets, which

is

more complex procedure than the finding

freight cost in general for these sites alone.

vom

Standort der Industrien," Archiv

criticism
22.

vocal.

because isodapanes themselves are simply

and only afterwards compared with

of similar individual empirical calculation

is

found on page

filr

770.)

special location according to transport orientation

Even with

several

of

Eine geometrische Fundierung der Lehre

Soziahvisseuschaft, XXX [1910], 759 ff. The
("

minimum

points,

is

almost always unequi-

one will generally be the cheapest because

there are several sources of supply to choose from.

Part One.

26

Location

taken into consideration that either

though mobile, do not give rise to
are found
costs by themselves lead to an
production
freight cost.^^ Whenever
determined
not exclusively on
is
that
unequivocal special location
the simultaneous
grounds,^*
technical but perhaps only on economic
lead to removal
likewise
consideration of transportation costs may
as the prices of factors are

soon

in different places or,

to another favored point.

Finally, orientation

by

total costs

may even

eliminate the special

location in such cases instead of merely changing

j3.

it.

Orientation by Gross Receipts

LOCATION OF THE MOST FAVORABLE MARKET

1.

plant can be established at a place where revenue is greatest

rather than where outgo is smallest.^^ Still more one-sided than the
choice of the place of largest sales would be establishment according

one of their components, quantity and price. Orientation by

quantity would look more toward the number of buyers, orientation
by price toward their purchasing power. The former, therefore,
would favor populous districts; the latter, prosperous ones; both
prefer a location away from competition.
to

SPECIAL LOCATION OF THE POINT OF GREATEST

GROSS RECEIPTS

2.

for gross receipts alone forces production to the location

Regard

of the consumer, if the market is technically tied to the buyer (the

corresponding phenomenon on the expenditure side is production
tied to an immobile factor of production) and if purchasers cannot
or will not change their location (the corresponding phenomenon is
If such areas of consumption
irreplaceable production factors.^'')
,

23.

Local taxes, capital, and labor, for example. Capital

and labor

at

most

in respect to definite kinds

and

definite

is almost never immobile,

amounts. But the cost of

changing their locations cannot, except for commuters, be treated as are other transportation costs. It is incurred only once and connected with the locality in question.
24.

When

all

transportation

is

production elements are present in one or several places and thus no

technically necessary for purposes of production, the only or cheapest

source will be chosen in orientation by production, whereas in orientation by total costs

the combination of factors from different places, or a location nearer the market,

be

still

may

more advantageous.

25. ".
in the absence of decisive natural factors
industries tend to be located
within easy reach of the market." Royal Commission on the Distribution of the Industrial Population (Barlow Commission) Report (London, 1940)
(Cmd. 6153) p. 48.
.

26.

As a rule the location of consumers depends in turn,

the local prices of the production technically tied to them.

at least in principle,

on

Industrial Location Tlit^ory

everywhere (the corresponding phenomenon with natural facubiquitous occurrence) the fact of a special location means

exist
tors

27

is

nothing;

if

several possible locations exist, the special location

technically indeterminate; that

is, it is

is

a necessary but not sufficient

condition for the choice of a location. Then receipts are the governing factor. The special location is technically unequivocal only
when all buyers, or at least a sufficient number, live in one place.

2.

The Correct Procedure

a.

Orientation by Profit

In so far as they dominate in practice, all the points of view so

may perhaps explain an actual location, but except in
special cases no single one shows the right location. This depends
neither upon expenses nor upon gross receipts alone, to say nothing
far discussed

of any individual cost or receipt component.

Their significance

may well be considered singly at the beginning of the analysis, but

the final and sole determining factor is their balance: the net profit.
In a free economy, the correct location of the individual enterprise
lies

where the net

Of

profit

is

greatest.^^

even the procedures discussed above represented

attempts to find this optimum point. For when receipts, say, are
given, the location of the greatest profit coincides with that for the
lowest

course,

c.

i. f.

costs.

But a consideration

of the variability of gross

revenue should make use beyond a one-sided orientation by costs; we

should not, with Weber, regard gross revenue as constant by assuming
a given demand and price. Actually, demand varies with price ^^ in
part directly, in part via the size of the market area; and it varies
also with the site of production chosen. The connection between
price, demand, and location is such that for each possible factory
price, for example, the greatest total demand will be realized with
a different location of the plant, because with every change in price
the market area assumes another form (even if, as will usually
happen, neighboring competitors do not change their locations too)
and because the demand of individual markets changes in different
proportions. Even in the simple case of a linear demand curve, an
increase in price would restrict the demand from distant points by a
27.

This does not exclude deviations for extra-economic reasons, in so far

as profits

permit.
28.
(2)

In other words, sales

right,

rise as prices fall:

(1)

at the

expense of competitors and

Not only does the demand curve

but actual demand moves downward on the new curve as well.

at the

expense of other products.

shift to the

Part One.

28

larger percentage than that

would

that

Location

from nearer ones. The factory location

demand would thus be more

result in the greatest total

strongly affected by
prices are high than

the location of neighboring markets when

when they are low. That is, the optimum

with each change in price. As soon as this

is taken into account ^^ all of Weber's constructions on the supply side collapse again.^" For it becomes
meaningless to wish to find the point of lowest cost. The minimum
transport point and isodapanes cease to exist. The minimum point
vanishes because, as soon as the boundaries of the market area are
changeable, the average freight costs would be smallest if nothing
were sold beyond the location of the factory indeed, if the factory
itself were finally to disappear! Isodapanes, on the other hand, can
be constructed only when a shift in location does not itself bring
location

would

variability in

about a

shift

demand

demand.

shift in

hardly necessary to go further into this

solution for the problem of location proves to be
as not only cost but also sales possibilities are
fundamental error consists in seeking the place
It is

Weber's
incorrect as soon
considered. His
matter.

of lowest cost.^^

Review of S. R.
29. A. Robinson has recently criticized this omission by Weber.
Dennison, The Location of Industry and the Depressed Areas (Oxford, 1939) in
,

Economic Journal, L

(1940)

267.

30. This does not exclude the possibility that isodapanes may aid in the determination of locations not only of production, but also of consumption, and of raw
(See Palander,
materials, whenever two of the three categories of location are given.
op. cit., pp. 159 ff.) In the first case, local wage differences may be taken into account,
as described above; in the other two cases, differences in f o. b. cost of materials.
.

pp. 162-165.)
In the intermediate case, the problem

(Ibid.,

may be

to include simultaneously

of local differences in manufacturing costs in the calculations.

All isodapanes

in principle.

(i. e.,

lines of

equal freight

cost)

both kinds

This, too, can be done

merely become isotims

With their help

equal price, or, in this case, of equal total unit cost)
we can determine the area for which any particular combination of production sites
and raw material sources (at least with constant cost) will be superior to every other
(i. e.,

lines of

combination.
i.

e.,

lines of

The lines separating such areas are indifference lines, or "isostants,"

minimum cost points. However, one must not overlook the fact that such

a construction presupposes a knowledge of production locations, and

is

therefore not

Nor does it permit consideration of the influence of changing

any more than does the construction of isodapanes.
also to all modern location theories (those of Predohl, Palander,

suited to their discovery.

demand upon
31.

costs

This applies

and Ritschl among

others)

in so far as they are based

on Weber. See my review of

and my reply to

Palander's Beitrdge zur Standorttheorie in Schmollers Jahrbuch, 1938,

Ritschl, "

Um

eine neue Standorttheorie: Eine Auseinandersetzung mit Ritschl," Welt-

wirtschaftliches Archiv,

LIV

(1941), I-ll*.

This by no means excludes the incorporation into a new location theory o*f parts
of his theory which, though destroyed as a whole, nevertheless is a great achievement.

29

Industrial Location Theory

This is as absurd as to consider the point of largest sales as the

proper location. Every such one-sided orientation is wrong. Only
search for the place of greatest profit

is

right,

geometrical solution becomes

impossible as soon as price and quantity are added to the two
spatial variables, for it can be applied to three variables at most.
Yet algebraic treatment leads to equations of an insoluble degree.
This complexity stems from the facts that, as already explained,

But where

there
of a

is

this to

be found?

more than one geographical point where the total demand

surrounding district is at a maximum, and that from these
is

demand does not

decrease according to a
simple function.32 \Ye are thus reduced to determine separately
for every one of a number of virtual factory locations the total
attainable demand, and for similar reasons the best volume of propoints outward total

duction as a function of factory price (market and cost analysis)

The greatest profit attainable at each of these points can be deter-

mined from the

cost

money

and demand

curves,

optimum

and from

this the place

can be found.
Now the procedure is no longer theoretical, however, but simply
empirical testing, since the result holds only for the locations actually
examined and cannot be interpolated. As all points in an area can
never be analyzed in this manner, we cannot exclude the possibility
that among the locations not examined there may be one that would
yield a higher return than the most advantageous of those investigated. There is no scientific and unequivocal solution for the
location of the individual firm, but only a practical one: the test
of trial and error. Hence Weber's and all the other attempts at a
systematic and valid location theory for the individual firm were
of greatest

doomed

profit,

the

location,

to failure.

For example, Weber's method could be employed in deciding between dispersed settlement of farmers and village settlement. For in this case demand is actually given as a
first approximation as far as the location, amount, and market price and the number
of products are concerned

(but see p. 60, note 41)

to locate the farms in such a

as producer, vendor,

Advocates of the

way

Thus economically

it

remains only

that the total costs of transportation to the farmer

and consumer are minimized.

classical

theory of international trade which regards countries as

points and the market area as given can explain the international division of labor

by means of the minimum transport point (see W. H. Dean, The Theory of the
Geographic Location of Economic Activities [Ann Arbor, 1938], pp. 24 ff., from the

also

dissertation)

comparative
32.

or at least introduce the conditions of transportation into the theory of

cost.

Nor does a

substitution equilibrium prevail here any longer.

departures from the best location the cost

that of the proceeds.

may

change,

if

their

Even with small

change

is

as great as

Part One.

^o

Location

Yet science does offer something to the practical investigator of

First, it teaches him to avoid the errors of one-sided
orientation, wherein generally an investigator may arrive at wrong
conclusions more often than right ones. Second and this is really
the most important the theory and statistics of areas with or without
insufficient locations (that is, our theory seen from the practical
side of the individual firm) indicates not at what spot, but in what
neighborhood, a new location must be sought. For the actual choice
we can at least provide a list of favored points that should by all
means be appraised in addition to the approximate center of gravity
of the market area, even though it might be advisable to avoid them
since their market areas are often more than saturated. But there
might be so many of these points that it would be worth while to
know which ones deserved further examination. Here, too, theoretical considerations help, together with the findings of statistics
and the results of practical experienced^
locations.

33.

To

that

end

it is

on the

necessary to determine

cost side

cost items

industry)

we must know:
(b)

their shares in the total costs

(a)

the extent of their geographical differences

which point of supply

Thus

of production factors offers the greatest saving as a location.

for each individual

(chief cost factors of

an

(cheapest sources for the

compared with the most expensive)

The former can be only
itself varies from place to place.
In the
latter, geographical price differences include the costs of transportation. For most cost
factors the price will be lowest at one of their points of supply. Local taxes, of course,
have no point of supply; workers may be willing to accept lower wages in an attractive
place to which they must first migrate. Goods may be cheaper away from the place
where they are produced because of dumping or of smaller trade margins. The saving
in costs is presumably greatest where those factors are cheapest (a) whose share in
total costs and (b) whose geographical price differences are especially large; with
factors where only (a) or (b) or neither, has a high value considerable savings are
less probable. Whether this first presumption was justified can be determined for any

main

cost factors as

approximately calculated since the share

given place only after the cost of factors that are not particularly cheap

is

taken into

account. However, to calculate total production costs one must include demand, whose

extent often determines the height of the costs and always decides whether they can be

borne.

Thus one ends up with an unavoidable

calculation of the chances of profit in a

As a location where the most important cost factor was especially

cheap may nevertheless prove a failure in the end the suggestion of such a location
can be only a hint, worth following up, but nothing more. Similarly, and with results
of equal value, places may be selected from the standpoint of demand and appraised
where the product presumably might bring a particularly high price or command a
particular locality.

particularly large market.

But, above

all,

points

more or

less in

the center of their

expected sales areas should be considered, and even before that the favored points in
their vicinity.

These

reflections are applicable to entire industries.

If

systematic

lists

are prepared

of the characteristics of various industries (technical restrictions, cost structure, market

conditions)

of various sites

(supplies,

prices,

location)

and of

locations

already

appraised, the locations and possibilities of dislocation that are especially probable or

Industrial Location Theory

3*

and the co-operation

shown
in a series of
of at least the most important ones, can be
typical though greatly simplified cases. This would aid directly in
Finally, the effect of single location factors,

the discussion of practical location questions, or at least provide a

The irregularity of even such standardized situations makes

model.^*

a systematic presentation of their solution impossible, just as the

irregularity of conditions in any actual case usually prevents a

Even Lehmann-Lenoir, who applied Weber's

by trial and error.^^
The situation is somewhat simpler when a factory is to be moved
rather than newly established. At any rate cost analysis offers the
lesser difficulty. But how is one to discover in advance what demand
may be expected at the various eligible locations?' Here the muchcriticized " basing-point system " may be an important help. It
consists in charging the customer freight from a point different from
the point of production. By considering one eligible location after
another as a basing point, the effect on demand will be almost ^^ as
though the industry had been experimentally established at these
scientific

solution.

theory, proceeded only

various places, while the risk of actual investment

j8.

is

not incurred.^''

Special Location of the Point of Greatest Profit

In comparison with one-sided orientation, an orientation by

could produce new special locations at favored points where
neither outlay is lowest nor proceeds are highest, but where their
difference is greatest. There is, however, no industry in which this
profits

would

necessarily be the case.

With complete

orientation, production necessarily takes place at

a favored point only

when

it

requires an irreplaceable or immobile

improbable can be determined for different industries. Conversely, it can be stated

for individual locations whether they are likely to attract industries, and which ones.
Thus far, however, we lack systematic cost analyses for the different industries, and
especially geographic price analyses of the individual cost factors.
34.

Our

conclusions on the economic importance of distance for the individual firm,

for example,

on the geographic gradation of

prices,

and many others are of

direct

practical interest.
35. F. Lehmann-Lenoir, Les verreries suisses. Etude comparative de leur repartition
territorial efjective et de celle resultant de la " Reine Theorie des Standorts " d'Alfred

Weber

(Soleur, 1940) pp. 217 ff.

In some respects, for example where the advantages of actual contact are concerned, it makes a difference whether the industry is actually moved or not.
37. Producers with branches can establish new enterprises more easily than those
,

36.

with but one plant, since the former can draw more reliable geographic comparisons
from actual experience than if they had to rely on estimates alone.

Part One.

32

Location

production factor or consumer, or a still rarer combination of

such factors or consumers (technically conditioned special location)
whether at one place (definite special location) or several (indefinite
In the latter instance the location will be deterspecial location)
mined by the simultaneous consideration of all the other location
.

including proceeds, in contradistinction to one-sided orientation by total costs. Definite technically conditioned special locations will necessarily be confirmed by profit calculations; others,
which depended on one-sided orientation, may be so confirmed.
Should production be carried on at a special location when only
factors,

proceeds (a purely economic restriction) or transportation costs are

considered, it can always be shifted or eliminated by inequality in
production costs, and usually ^^ by the changeability of demand (as
son as the market area is no longer sharply defined.)

In retrospect, it is clear that special locations are probably more

numerous with one-sided than with complete orientation. In reality,
they are therefore more significant than they would be in a rational
world. Only a few obvious and easily surveyed factors are generally
taken into account in choosing a location, and often enough all but
a single one are eliminated as trifling because a real comparison
would be far too difficult. Thus it happens that special locations
are

more common
3,

Up

to

in reality than they should rationally be.

Orientation and Especially Favorable

Locations
now

orientation has

may mean

had

several

meanings in the

literature

the motives for or the outcome of a choice

of location.

It

of location.

In the former case

it

denotes the factors that are taken

into account either (1) exclusively or (2) as especially important.

have employed the term only in the sense of (1) transport

We

orientation, orientation by production costs, total costs, proceeds,

and possibly by

profits.^^

In the second case one

38. If

(3)

describes or at the

same time

(4) gives

a special location depends on established lines of communication,

demand

depends on weight ratios, demand

conditions can ^eliminate it only if the finished product predominates (provided that
the tariff is not graduated and that all costs imposed by distance except freight are
This predominance may be lost when the finished product is shipped
insignificant)
to several places, so that only the resultant of these divided forces is operative. If, on
the other hand, a raw material predominates, nothing can alter this, no matter how
conditions alone cannot as a rule eliminate

it;

if it

the consumers are distributed.

39.

As well

as

(extra-economically)

by the technical conditions of production.

Industrial Location Theory

33

reasons for the result of the choice. The first of these simply names
an actual situation at the source of a location factor after that factor,
but it remains an open question whether this factor is also responsible for the choice

(we shall

call this " situation " at

the source

raw material, etc.) The second implies that the factor

whose location production is situated has obviously caused the
choice. This explanation is meaningful only in the case of technical
restriction. It is sufficient for one," and a necessary (though only
partial explanation) for several sources of the same kind (it is better
of supply for

at

to speak of definite or indefinite " technical restriction " to sources

for

raw material, etc. dj in Table

1) .^^

But

it

may mean only

that

the actual site is rational though not technically due to the factor
(We call this either " economic " or
located in the same place.
" extra-economic " restriction to a point of consumption, etc. dz

and

ds in

Table

l.)*^

40. Apart from the fact that whether or not production will pay at all depends also
on every other factor influencing profit. (See Predohl, op. cit., p. 294.)
41. As such technical restrictions are imposed mainly though not entirely by
nature, the influence of nature on the choice of a location may be briefly sketched.
The natural causes for local differences in the economic scarcity of means of production
may be divided into (1) their natural abundance, first as to the number and second
as to the extent of their sources; and (2) their technical suitability for shipment

(mobile or immobile)

According to the number of the sources of supply, production is: (1) With immobile
of production unconditionally dependent on source technically and economically

means

(one source)

conditionally dependent

(ubiquity through occurrence)

(2)

(several sources)

All mobile

means

or free to choose a source

of production allow technical

independence of their source, no matter what the number of their sources (ubiquity
through transportation)
Thus a location's technical independence of its sources predominates except where
immobile factors of production are found at only one or a few sites. Technical ubiquity
need not be economic, however, and vice versa. A locally varying economic scarcity of
factors of production can only limit still further the possibilities of a production
location that are already narrowed by technical scarcity. It cannot extend them.
In addition to influencing the choice of a location through sources and the technique of transportation, nature influences it through the technique of production,
which, however, depends not solely upon nature but also upon price relationships.
Nevertheless, nature does affect in this way the kind and relative amounts to be
shipped. (The extent of the weight loss is only one factor among others.)
42. It is clear how protean the all-too-popular concept of orientation is. When it is
said, for example, that an industry is " oriented to raw material," does the phrase

mean: (a) That in choosing a location attention need be paid to raw materials alone?
But to which of several? To the cost of its production or of its transportation? To its
quality or its quantity? Or (b) that the raw material merely plays the most important
role

among

several location factors?

Or

(c)

simply that the production in question

usually occurs at a source of raw material, whatever the reason?

an industry that

for technical reasons can be carried

on only

Or

(d)

do we

at this source?

refer to
If

there

Part One.

34

Location

" Especially favorable location," the situation of production at

a favored site, is for any particular type of orientation: (aa) definite,
when only one, or (bb) indefinite, when a whole group of favored
sites could provide the desired location. In (bb) it is certain only

Table

Motives for Choice of

Location
(b)

(a)

All
Partial

factors

(one-

con-

Extraeco-

sidered

nomic

sided)

Orientation

Ordinary location
(bb)
Indefi-

Technically con-

nite

sary

Techni-

(cc)

Result
2

of
choice

cally

(d,)

economi-

Explanation

cally

(c)

Special

of
location

and

of

Techni-

location

(aa)

Defi-

cally

special

and

loca-

extra-eco-

10

tion

nomically

nite

Fortui-

Economi-

cally (d2)

11

economi-

tous

(dd)

Extracally (d3)

The

letters refer to the categories set

up

in the text.

a special location; in (aa) the situation of this special

determined. This is (cc) necessary when based upon a
technical restriction; (dd) fortuitous when the restriction is only
economic or even extra-economic. A fortuitous special location is
that there

location

is

is

raw materials, is " orientation to raw material " an adequate explanation

any actual location? Or, finally, should a raw material source happen to prove the
most suitable location when several or all factors are considered, is " orientation to
raw material " only subsidiary to transport orientation, orientation by production, or
complete orientation? It would obviously be better to describe the situation in plain
are several
for

words.

Industrial Location TIteory

always definite

(e. g.,

35

transport orientation)

a necessary

one may

with orientation by technical restrictions on production) .^3 A rational special location is always definite, but a
definite one is not always rational.
Table 1 shows the relation between orientation and special location in their various meanings. One-sided orientation need not lead
to a special location (Space 1) and special location does not neces" Techsarily presuppose one-sided orientation (Spaces 5, 6, 8-11).**

be indefinite

(as

nical restriction "

means

in the nature of things a special location,

profits
this remains uncertain (Space 8) unless costs (Space 2)
(Space 5) or extra-economic considerations (Space 10) are also taken
into acount with the exception of an unavoidable technical restricIn this case only will
tion at one single source of supply (Space 9)

but

even one-sided orientation necessarily provide a rational special

location, because by way of exception it is synonymous with orientation by profits. As a rule, however, no single factor can indicate
a location. All influence it, many favor it, but none determines it.
Many reasons lie behind its choice.*^*

43.

Transport orientation

duction

may be

is

merely an economic restriction; orientation by pro-

also a technical restriction.

44. For example, it does not follow from location in a market area that easy sales
determined the choice of this location in whole or even in part. In many other cases,
on the contrary, the location of consumers has a great influence on the choice of

location,

though

concealed because the resultant of the various forces favors

is

it

another location, which appears to be independent of consumption.

45.

The

location of any particular coal mine, for instance, cannot be fully explained

Only the whole relationship between production and demand

make clear why coal is mined at just this spot and at no
others. Which of the possible mines will actually be worked depends among other
things on its technical productivity and the local prices of the factors of production
on the one hand (cost curve) and transport relations to the market (demand curve)
on the other. Thus, whereas over half of the American coal deposits are said to lie
in the Rocky Mountains (Sten de Geer, " The American Manufacturing Belt," Geoby the presence of

coal.

that results in profits will

grafiska Annaler, 1927, pp. 233-359)

unlike the coal

fields in

the Appalachians, they

have not attracted many industries nor are they worked to any great extent because of
of their unfavorable location. Although coal is widely distributed, coal mining is
rather concentrated.
tion

Hence

by raw material,"

is

" orientation by

raw material," or more exactly

" restric-

not an adequate explanation here, where this factor

one of those taken into account. By

itself,

therefore,

it is

is

only

a false explanation for the

special location.
46.

The

relation of special location to orientation, even in the

do not employ,

is

this:

Special location

orientation in the sense of

(a)

for orientation in the sense of

or (&)
or (d)
;

(c)

meanings that we

the possible but not inevitable result of

on the contrary, it is the necessary condition
is

Chapter

As

The Theory

5.

far as industry

of Agricultural Location

concerned,

is

we have discussed thus far only

That is, we have considered

the location of an additional enterprise.

the location problem from the standpoint of the individual firm.

Later we shall describe in detail how industry as a whole is located.
agriculture, this more general statement of the problem
namely, where a particular product is grown is of greater interest
from the very first. At the same time a second important problem
is solved: what is to be produced in a particular place or by what

With

particular enterprise.

PARTIAL (ONE-SIDED) ORIENTATION

a.

can be simplified by ignoring some of the

be considered. Of the various problems,
the importance of location has been most thoroughly examined (by
Thiinen) Later we shall discuss changes in the quality of the soil,
and in demand. When we finally consider the remaining factors,

These problems,

too,

factors that should properly

especially joint

demand and

wage

supply, local

local variations in prices to the enterprise,

we

differences,^
shall

move

to

and
an

orientation that takes all factors into account. But here, too, as with
industrial location,

1.

we

shall

have to forego a geometrical solution.

System Based on Thunen's Theory

a.

Preliminary Remarks

Thiinen regarded industrial locations as given, and deduced

from them. Basically he discussed a special
case of reactions to the choice of the location of an individual

agricultural locations

enterprise

(Fig. 3)

an enterprise that sells its product in two

forms, one of which is cheaper to produce per unit of consumption
while the other is cheaper to ship. Let OA be the factory price
for a machine and AB the cost of knocking it down for shipment
Let

1.

be the

site of

G. Pavlovsky, Zur Frage der raumlichen

nationale Landwirtscliaftliche Rundschau,

I,

36

33

Ordnung der
(1942)

337-373.

Landwirtschaft, Inter-

Agricultural Location

37

and reassembling it at the purchaser's. Transport cones are drawn

from A and B that give the c. i. f. prices for various distances. The
cone above A is more acute because it costs more to ship a bulky
or delicate machine in assembled form. Nevertheless, up to the

OD

lower for the assembled machine,

and only beyond D will it be shipped knocked down."
Still another situation is elucidated by Figure 3. Suppose that
different competing products rather than different forms of the
same product are produced at O. Let the first of these two products
be cheaper to produce per unit of consumption but more expensive
distance

the delivered price

is

Fig. 3.

let the other be more expenproduce but in return cheaper to ship (rich ore mined
The market area for the poor ore will therefore
underground)
extend from the mine to the distance OD, and only then will the
ring be reached within which it is cheaper to smelt the rich ore.^

to ship (low-grade surface-mined ore)

sive to

Figure 3& illustrates similar cases, except that O is now no longer

the center of production, but of consumption, and the rings around

are

now

conversely rings of different productions. Suppose that a

certain product raised in the neighborhood of

is

purchased there

Assume that processing on the spot

must be carried out on a small scale,

in crude or finished condition.

more expensive because it

but that it will save freight charges because it decreases weight.
For example, let OA be the price paid for potatoes by starch factories
is

2.

Another example

is

which

shipment over long distances requires the

Similarly, with lignite the calorific
are greater per unit of weight for briquettes, so that

cotton,

for

additional process of compression in large presses.

value and manufacturing costs

these are sold in a distant market.

3.

If

OA

is

a coal district,

the low price of electric current from a large power station erected in
and AB the loading costs of coal (i. e., costs independent of distance)

plus the additional cost of small power stations,

and

if

the costs that

depend on

distance are lower for coal than for electricity, current will be transmitted in
vicinity

and coal shipped

kelusu'lrtscliaft

to distant points.

(Berlin, 1934)

pp. 201

ff.

the

See C. Pirath. Die Grundlagen der Ver-

Part One.

38

at

O, and

AB

the

amount by which

Location

the cost of local reduction to

The

vertices of the cones drawn

then represent the grower's price for potatoes as a
function of distance. For all farmers in the region OD it will clearly
be more advantageous to ship potatoes to the town to be worked up
at a center, whereas those at a greater distance will do better to

starch exceeds that at a center.

from

or

ship starch.

The same

figure,

Sb, throws light

on

still

another situation,

which is of special interest in the present connection. Let O be the

market for different products rather than for different forms of the

same product. One,

when

raised in the

potatoes, yields economic rent OA per hectare

immediate vicinity of O, whereas corn yields

only rent OB there. The picture changes with increasing distance

from O, because a greater weight of potatoes than of corn can be
harvested from a hectare. The freight charges for sending these
yields to O will therefore be higher for potatoes. With increasing
distance the freight absorbs the rent from potatoes more quickly
than that from corn, and from the distance
outward only corn
rather than potatoes will be raised. Thus cultivation of the various
crops is spread out in rings around the market.

OD

^.

The famous Thiinen

for

Possible Cases

rings represent special cases.

and the limitations of

place in a complete system

The

reasons

be clearer when its

purpose the following

this solution will

is

seen.

For

this

symbols have been chosen:

Independent Variables

A: Outlay per hectare, in marks

E: Yield per hectare, in centners
p:

Market price per centner

k:

Distance from market, in kilometers

Freight per centner per kilometer

/:

Derived Variables
a

=A

TT

= p kf:

^ir a:

-^

Outlay per centner, in marks

Local price per centner
Local profit per centner

R = rE = E {p kf) A:
m ^ p a: Highest profit

Rent per hectare

per centner
without

(== highest freight possible

loss to

producer)

Agricultural Location

Table

39

COMPLETE SYSTEM OF SPATIAL ORDER

AGRICULTURE FOR TWO CROPS

2.

IN

Variables

Fulfill Condition
No. (m)

Crop Produced
Monoculture

Relative

Polyculture

i"^
o c
^2

Size
of

a
o

Variables

Uncon-

SomeAlways

times

Conditional

^v

Never

ditioned

Culti-

vated

Rings

together

6
E,

Ai

Pi

to

to

to

Eo

A^

P2

I
I

>

>

>

=
<

>

<

8
9

=
<

>

11

12

=
<

>

16
17
18

<

X
X

22
23
24

<

(m)

X
X

X
X
X
X

>
=
<

X
X

<

X
X

X
X

<

=
<

>

25
26
27

X
X

X
X

>

21

X
X

>

19

side

II

in-

in-

side

<

20

and II
by

side

side
1

X
X

=
<

>

13
14
15

X
X
X

X
X

>

10

<

or
II

X
X
X

>

II

X
X
X

X
X
X

X
X
X

X
X
X

See text for definition of conditions, p. 40.

Part One.

40

Table

2 contains all possible variations of the relative

tudes of the

three independent variables for two crops,

first

Location

magni-

and

II.

Spatial Order

y.

We seek those cases where both crops are raised. Only then
does the problem of their spatial order arise. Both crops will be
grown when one yields a gieater rent per hectare at the center
of the area and the other at its periphery. The condition under
which I will yield a greater rent at the center than II is Ri > R..
This

yields:

First Condition:

< ^^'^^~^^

(I)

The condition under which II will yield a greater rent at the

periphery is: Ri < R2. This gives
Second Condition: ^''t'~'l'
E2-p2A2
4.

This

< |^
2

derived as follows:

is

R^ >R,.
substituting

E^-{p,-kf) -A,>E,-(p,-kf) -A^.

Since at the center of production k

0, this

becomes

Ei-pi-A:,>E2-p2- A^.
By dividing

this

becomes
Ez'

5.

This

is

p2 A2

derived as follows:

Ri

< R2.

By substitution we get

-A^<E^-{p^-kf) -A-

E^- (p.-kf)

But

at the periphery

Therefore
^1

ipi

p2 +
1^2 +

(Pi

Simplifying and substituting

E,pr

- E,p, +

E^p^-E,p,+
7-2

E^pr

a^ ^=

-Ai<E2 {p2 -p2 + a^) - ^2

^1 < 2^2 ^2^2 + Em A^.

ao)
fiifla

?,

we

get:

E2

- ^, < E,p, - E,p, + -J^ - A,

-^-A^<0

E^Az
A
^ E^p. -
iEiAz
= EJEspz
-A^<
T?

I,

,2

,2

Dividing by

{E.p.

A.) we

==

El

{E2P2

.2

get

E.p,-A,

^Ei

Aj

E2P2

j3

- A2)

(2)

Agricultural Locution

<jl

Both conditions combined:

^^^

'^E,p,-A,^E,
First
(1)

we

and

establish for

what variations oi A, E, and p conditions

are fulfilled. Table 2 shows that of 27 cases condition

(2)

(1) alone is always fulfilled in 7, and that condition (2) alone is

always fulfilled in 7 further cases. In the first 7 the cultivation of
crop II will nowhere be advantageous; in the other 7 only crop II

be grown.
In 12 additional cases our assumption on the relative magnitudes
oi A, E, and p is not sufficient to decide between the different crops.
They leave it open whether only one or both together will be
planted. The latter will occur either when both conditions are
fulfilled or when neither is. This depends on the exact numerical
value of ^, , and p. If both conditions are fulfilled or if neither
one is, cases 10 and 18 differ from the remaining 10. Since in both
cases Ex/E^= 1, both conditions can never be met. On the other
hand, it has the same effect that for (pi p^
(a^ do)
both
conditions are unfulfilled at the same time.^ The cultivation of
both crops simultaneously is then possible as in the other 10 cases.
They can even be grown side by side in adjoining sectors within
the same ring instead of in successive rings only, as in the other
will

10 cases.

For the remaining 10 cases certain relative values for A, E, and

which both conditions are fulfilled. The choice of a
crop is then a function of distance. In all cases where Ex > Ez
crop I will necessarily be grown in the inner ring. In all cases
where Ex < 2 it will just as necessarily be grown in the outer ring.
If 1
Eo, only one of the crops in question can be grown ecoexist for

6.

(2)

To

prove that when

can be

(pi

pz)

(a^-a^)

neither condition

,1

If

Ei{pi

= 2.

(1)

nor condition

fulfilled:

as

assumed

p2) =A^ A^;

in cases 10 to 18,

therefore E^p^

it

,2

follows that

Ai = E^p^ A^.

Dividing by the right side:

Eipi

But condition
requires that

it

^2

requires that this expression be greater than unity; condition

be smaller than unity. \V. F. S.

(1)

^2)

Part One.

42

Location

nomically as a rule, with the following three exceptions: in cases

10 and 18, already mentioned, it is possible under certain conditions,
and in case 14, the median case of the whole system, it is always
possible, to plant

more

both crops side by

We shall now examine

which rings may be formed.

side.

closely those 10 of the 27 cases in

Reason for the Formation of Rings

8.

For the choice of a crop to depend

and (2) must be simultaneously
fulfilled. When crop I should be grown in the inner ring, equation
^
(3) shows that the following must be true:
1.

upon

More Exact

Reasons.

distance, conditions

{p2

(1)

a^) <

{pi

a,) <

{p2

fla)

or

<

2^22

Since

m^

<

mg,

Thus crop

^iW^i

<

or

-1^12

jEimi

>

>

follows that Ei
2brings in the greater total profit

it
I

2^2

{Ej_mi)

but the

From this it
smaller profit per unit (mi)
yield 1 per unit of area is greater. The first inequality makes
certain that crop I is superior at the market; the second, that it

follows that the physical

it
is

superior only there. If both inequalities are fulfilled that is, if

rings are established at all the product with the greater return by
weight will be cultivated in the inner ring. The exact reason why
the superiority of crop I is lost with distance from the market is
that freight charges absorb its unit profit more quickly,^" until a
7.

Derived as follows:

E2P2
since a

= A/E,

= aE;

A2

substituting in

ipi

(3)

E2

- aiEi

(3)

E^

^ E^(pi-aj)
2 (p2

E^^
*

- 2)

Multiplying through and simplifying:

2(^2-0.) <i(pi-ai)

< 1(^2-^2)

same order)

Q.E.D.

8. Geometrically this means

M-axis farther from, the distance axis nearer to, the origin, and hence is steeper than
The point of intersection with the /cm-axis marks the greatest possible distance
II.

(in

the

that in Figure 7a / cuts the

shipment (m/f) which for crop I is smaller.

This is neither an additional nor a sufficient condition for ring formation, but
It cannot, therea necessary one (though it is already contained in the two others)
for

9.

fore, replace either of these.

10.

A more

detailed analysis

would have

to take into

account that the price of the

43

Asricultiiral Location

arrived at where this is no longer outweighed by the gi eater

yield per hectare: the boundary line between the two crops has
been reached.^^

point

is

also varies with distance and with the possible freight. Near a
town, labor especially becomes more expensive and agricultural machines cheaper.
Let us sketch at least briefly the manner in which nominal agricultural wages
depend on distance from the market. Suppose that the amounts in the laborer's

same physical input

budget are independent of price; that agricultural and industrial commodities can be
combined into a general commodity of which the amounts / and i are supposed to be

consumed per year. Let / be the freight per unit of quantity and distance, and pi
or pi the unit price in the town; suppose finally that the real wage is the same
/

a constant)
everywhere (/J

= + =

How

does the nominal wage (Na) vary with the distance

(a) ?

The nominal wage

equals quantity times the price of agricultural and industrial goods:

Na

= l(p,-af) + i{pi

-\-

af)

= Ip, + ipi + af{i~l)

Whether
these, Ipi and ipi are constants, whereas af{il) depends on
the nominal wage will decrease or increase with distance from the town will therefore
depend upon whether a greater weight of agricultural or of industrial goods is

Of

distance.

consumed.

Even today agricultural goods are likely to preponderate. The urban annual consumption per capita is roughly 500 kg. of food and 400 kg. of coal. The rural laborer
receives by way of the town perhaps 60 kg. of industrial goods and 80 kg. of food (in
the country potatoes, milk, flour, and meat make up three fourths of all foodstuffs)
He uses less coal than the town dweller because he burns wood, and besides coal does
not always reach the country from a town. Thus one can count on only about 140 kg.
of urban products as against 420 kg. of rural products. Much depends upon fuel.
A second reason why agricultural wages decrease with distance from a town is that
house rents are lower because the ground
agricultural rent

itself is

cheaper

and lower density of population)

materials, being nearer, are less expensive.

(as

a result of the small

and because natural building

third reason

is

the greater surplus

population, which often increases with distance from the town, together with the
incomplete mobility of this surplus. Fourth, the agricultural laborer saves transport
cost and local taxes, since local services can safely be lower. In the fifth place, he has
more incidental and intangible income (land for gardening, the possibility of breeding
small animals, and a more natural way of life)
Sixth, he buys some things from
.

farmers at lower

cost.

Finally, agricultural wages, lowered for the reasons just cited,

are reciprocally depressed

still

further to a certain degree

(by lower trade margins,

example)
On the other hand, the migration of the abler inhabitants to towns,
where they can specialize according to their particular gifts, does not explain a real
difference in eSiciency wages as between town and country, though it does explain such
a differential among country dwellers in favor of the skilled trades.
for

11.

The

matter can be expressed this way

also:

The

total freight

is

proportional

but total gross profit (money receipts less cost of production)

rrig.
In other
than proportional to the physical yield, since nii

to the physical yield,

for crop I

words:

The

is

less

gross profit

<

on crop

is

greater than that on crop II by a smaller per-

Hence
its physical yield, which influences the cost of transportation.
same distance the latter makes up a greater percentage of the gross profit for
crop I, and this difference in percentages increases with distance. The originality
greater net profit for I, therefore, shrinks more quickly with increasing freight costs
and finally drops below that for crop II.

centage than
for the

Part One.

44
2.

Determination of the Transition. At the limit

i?i ==

Location

R2, or

Hence

E^{py-kf) -A^^E^ip^-kf) -A2.

^- E,p,-E,p^-\-A,-A,
f(E,-E,)

or

/ E^mx

Eomz Y

The

distance k of the transition from the center is directly proportional to the difference in gross profits before deduction of freight

charges,

and inversely proportional

difference in physical yield.

kf

If

{E^m^

to

the freight rate and the

the equation

is

written as

2^2) / (1 E2)
and the
and above production costs)

the left side corresponds to the marginal cost (in freight)

right to the marginal receipts

(over

per centner Thus every production spreads out until at the edge
of its ring the rising marginal cost curve intersects the marginal

revenue curve.
This differs from the usual discussion of marginal adjustments
individual firm only in that in the latter case marginal cost
an
of
refers to production, whereas here it refers to transport cost. The
two problems of the amount and the location of production are
thereby solved simultaneously. If rings I and II represent areas of
intensive and extensive cultivation of the same commodity, between

which no transition

is

possible, the difference

from the usual

dis-

cussion of marginal adjustments consists only in the fact that here,

with increasing distance, the marginal cost for a great part of the

product (namely, that by which I is more intensive than II)

suddenly rises above marginal revenue. This leads to an abrupt
transition to extensive cultivation.
12.

This

is

reached as follows:
2^2

as a -

A/E, A

= aE;

- ipi + A^-A^

therefore

ft

_ :^2p2 ~ -^iPi +

'^i^i

~ '^^^

f{E,-E,)

E^ip.

substitiiting

we

m=

(p

~ a)

a^)

-E^{pi-a^)

E,-E,

and multiplying numerator and denominator by

1)

get

ft

(E.m,-E.mA

1
.

\Ei Et

^ p

_^

S.

Agricultural Location

45

The sequence of spatial order is often

3. Popular Reasons.
explained plausibly and on a common-sense basis, even by Thiinen,"
by saying that the " lighter " or the " dearer " good is produced
farther out, because with it freight is less important." If this vague
formulation means the commodity that costs more per pound, that
which fewer pounds can be bought for one mark, the stateIn case 1 of Table 2, for example, the cheaper
is false.

of

is,

ment

I.

Cheap Product

II.

Dear Product

Effect of increased freight

Fig. 4.

demand

and

for a cheap

for

on the
an

expensive product

commodity is cultivated on the outside.^^ It is sometimes said, also,

that the more extensively grown crop comes from outside. This is
only the smaller physical yield per hectare ^^ is meant, independent of outlay. This condition is in fact necessary but not
true

if

13. H. V. Thiinen, Der Isolirte Staat in Beziehung auf Landwirtschajt

Nationalokonomie (Wantig edition, Jena, 1921) p. 12.

und

14.

The

assertion that the

more expensive commodity can

manifestly incorrect in this general form.

the cost of production, the same freight,

commodity
(I)

(II)

to almost nothing,

If

kf,

in Figure 4

reduces the

whereas

hardly

it

is

" bear

the

demand

more freight "

demand curve and

for the

is

more expensive

affects that for the

cheaper one

demand curve the situation may be reversed.

Verkehrsmittel und die Lehre vom Verkehr," Schmollers
" The transportability of goods does not depend on

Naturally, with a differently shaped

See O. Englander, " Emil Sax'

Jahrbuch, 1924, pp. 265-305.

their value " {ibid., p. 276)
15.

Example: Corn

because the latter

is

intensive cultivation
Riihl,

grown near the River Plate and wheat farther away, not
its yield per hectare with an appropriately
smaller (contrary to the otherwise excellent discussion by A.

is

dearer but because

is

Das Standortproblem

The

specific gravity of

in der Landwirtschaftsgeographie [Berlin, 1929], p. 120).

goods

by weight of each unit of area

is

is

of as little import as their value; only the yield

decisive.

On

easy spoilage, or transportation of food or

a par with

it

are higher freight rates,

manure through and beyond

the town

(transportation in an opposite direction)

16.

and

Or, which amounts to the same thing, reduction by drying, cleaning, butchering,

so on.

In wartime,

when

transportation

is

difficult,

this concentration

is

carried

Location

Part One.

^6

that the extensive or intensive

sufficient, since it is still possible

crop will be cultivated everywhere. But if " extensive " means

" smaller outlay per unit of area or of weight," this statement, too,
is false.
For example, in case 9 both are greater for the product
cultivated in the outer ring.
c

An Example

of

ThiXnen Rings

The popular example of ring formation in the sale of milk

may serve as an illustration of the subject now under discussion.^^
When we arrange the possible products in the order milk (I) cream
(II)
and butter (III) it is immediately known that the yield per
,

acre, E, falls in that order,

market

price, p, rise.

This

whereas the outlay per

is

case 9 in

Table

very far in areas that are distant from their markets, so

2,

acre,

and

that

it

A, and
will be

a relatively small

shipping space can transport the same useful load.

Weight

is decreased by:
(1) Eliminating everything superfluous or less important;
shipping powdered instead of fluid milk; fruit juices instead of fruit; with rising
freight rates frozen meat rather than iced, then meat with bones removed, later canned,

e. g.,

finally dried, until at last

perhaps only hides are shipped.

(2)

Further processing

(bacon instead of corn; dried eggs instead of barley; butter fat instead of

Volume can be decreased by compression

oil crops)

also.

This diminution in the bulk of the same commodity in areas far removed from
is, as Englander rightly said [Theorie des Giiterverkehrs und der Frachtsdtze [Jena, 1924], p. 118), only a special case of decrease of the yield in weight per
their markets

unit of area away from the market, except that the one case concerns different kinds
ri commodities

and the other concerns

different

forms of the same commodity.

Furthermore, greater durability or ease of handling

per hectare in lowering the freight.

A. Petersen

is

equivalent to a smaller yield

(Die fundamentale Standortlehre

Thiinens, wie sie bisher als Intensitdtslehre missverstanden wurde

lich besagt [Jena, 1936], p. 16)

prises

correctly deduces

from

und was

sie

wirk-

this that certain refining enter-

(such as distilleries, dairies, sugar refineries, plants for the manufacture of starch

and the preserving and canning of food, and grain mills) may have a wholly rational
location in East Prussia, though they are far from their markets. He errs, however, in
believing that the compatibility of such intensity at a distance from the market with
the Thiinen theory had been overlooked until then. Adam Smith had already shown
that the two-fold freight charge causing low agricultural and high industrial prices
is conducive to industrial development in remote areas.
The industries employ the
heavy products of the soil cheaply on the spot and in return ship a smaller weight in
low-quality goods to markets nearby, and a smaller weight in high quality goods to
more distant markets. {An Inquiry into the Nature and the Causes of the Wealth of
Nations [London, "1811], Book 3, end of Chapter 3, where also there are interesting
observations on the dynamics of location.) A large increase in population strengthens,
whereas the scarcity of capital associated therewith checks, this tendency toward
industrialization. Example: Balkan States (see A. Losch, Was ist vom Geburtenriickgang zu halten? [Heidenheim, 1932])
17.

Here we may proceed

separate products.

as

though milk, cream, and butter were completely

47

AgiicnUural l.ocaliun

from the preceding analysis that it does not necessarily

lead to the formation of rings. It is, on the contrary, possible that
one or two of the products are not provided at all. We know,
further, that if rings are formed the sequence of the products cannot
be changed. If with a certain distance from the market it is more
profitable to make butter than to supply milk,^^ but if at the same
time it is always less advantageous than to separate cream," butter
making can evidently not be spatially inserted between milk and
cream but must cease entirely. The inner product must necessarily
realized

show the greater physical

Example:

yield per acre.

E
Yield per hectare

Outlay per hectare

Milk

(pfennigs)

(pfennigs)

(kg.)

25

p
Market price

250

20

II

Cream

2.5

300

160

III

Butter

350

380

Freight per kg. and km.: 0.10 pfennig

a

hence
fl,

10;

= A/E

a2=I20;

As

= 350

m== p a
hence

mi

ma

== 10;

^ 40;

Conditions for ring establishment

I

II

and
and
and

* II

is

II:

III:
III:

< E,m, < E,m.;

E.nis < E,m, < E^iris;
E^m^ < E^m^ < E.m^;
E^m^

mg
^^

between

<
30 <
30 <

100

always more advantageous than

<
250 <
100 >

250

1000: Fulfilled

750: Fulfilled
75:

Not met

III.

who is near his market has a good location, not merely

shipment but mainly because of the high yield per acre
(in Germany the marketable surplus of milk in weight is greater than that of grains)
This yield by weight in sheep breeding is hardly 1 per cent, so that it pays only on
very poor soil.
"
19. This is necessarily the case when m^
mg, even though butter is the " lighter
and " dearer " commodity.
20. See also E. M. Hoover, Location Theory and the Shoe and Leather Industries
18.

The producer

= 30

because of the

of milk

difficulties of

>

(Cambridge, Mass., 1937)

21. See above, pp.

40

f.,

pp. 30-33.

where

this inequality has

been developed.W. H.

W.

Part One.

Boundary

line

between

and

E,-E,

/V

Location

III at kilometers

250 - 30
24

)-0.\

= 92

But at 92 km, the rent from II is already greater than that

from III.^^ Thus butter making is never started. To make it possible, mg must rise above rriz. This will happen as soon as the butter
shortage raises its price to at least 400 pfennigs. Then rriz == 50,
whereas mg is only 40. Now butter will be produced rather than
cream

at distance k

= -

^-^

j=

333 km. With a sufficiently

demand such a price change can provide relief in those

where the production of a commodity seems impossible. For
example, in case 4 of Table 2 only commodity I can be produced,
not commodity II. If the price of commodity II were to rise as a
result, and if the urgency of the demand should drive its price
above that of commodity I, the situation obtaining for case 4 would
change to that for case 6, where the simultaneous production of
both commodities is possible.

pressing
cases

Interregional Trade

t,.

Of course

change in prices does not always occur.

defeated by the shape of the demand curve, or by outside influences. If imports, for instance, prevent the price of butter
It

this relative

may be

from

rising, the

The

single

when

production of domestic butter will be impossible.

broken line in Figure 5 shows the rent from butter

the price

is

depressed in this way; it falls to zero (with dismore rapidly decreasing rent on

before intersecting the

cream. On the other hand, as
tance)

price caused by imports

is

enough

easily seen, a slight decrease in

push the rent on cream below

and dashes and, unless butter is also imported, to
exclude the domestic production of cream thereby. The butter
ring then borders directly on the milk ring.
A threat to the cream and milk rings by competition from
another economic region is much more improbable, of course, than
is

to

the line of dots

Then the paradox arises that as soon

through a lowering of costs, say, is able to
send in not only butter but also cream, and perhaps even milk, the
situation of the domestic butter industry improves again. The
area of domestic production is reduced as a whole, to be sure, but
if the rent from cream should be lowered too it may very well fall
exclusion of the butter ring.

as foreign competition,

22. i?,

>

i?3;

77>21.

E, (p,

- 92/) -A,>E, (p, - 92/) - A^

49

Agricultin-al Location

again somewhere below the previously reduced rent on butter (as

Assume that somewhere abroad there
in B' under
)
"
where production costs are only half as much and,
island
is an
when freight is neglected and with the prices prevailing at O, permit
a gross profit two and a half times as great as that in the domestic
area of supply. Then suitable rings can be established around O
whose radii, of course, will be two and a half times as long. Now
imagine the " island " of cheap production costs to be moved slowly
.

'

from far away toward the market; at first it will not be able to
compete despite its own low costs, because of high freight rates.

"^^Xi^.'^

\
\

miles

Cream [
Bulterarea
L* .-i-

t^

Domestic

Fig. 5.

Rent per acre

tg a: freight

Foreign

as a function of distance

per mile on the physical yield per acre

Moved

farther inward toward the market, this area reaches first

the butter ring, and in order to compete in cream and fresh milk
too it must approach very close to the market. That is to say, the

goods enter interregional trade in the sequence in which they were

prepared far away for the market."^ If this sequence is different in
the importing and the exporting country, that of the latter will
prevail
23.

under similar freight

rates.

For example, the quantities of Canadian exports to the United States increase

in the following order: fresh milk, cream, butter,

and

cheese.

Location

Part One.

50

The

rf.

Spatial

Order

of Production Systems

What we have found for various lines of production can be

employed also for various degrees of intensity of cultivation of the
p2-^^'^^ There is a
same commodity, in the nine cases where pi
boundary line, of course, only when no gradual transition between
intensive and extensive cultivation exists. This holds, also, when I
and II each represent a whole assortment of commodities; that is, if
they represent a production system, if only these commodities are
actually cultivated in both systems, even though in different proportions and with different intensity.-^ As soon as there are transitions
between these proportions and these degrees of intensity, however,

Coslper acre

Fig. 6.

Intersection of two profitability planes

the spatial boundary lines between the systems disappear.

and

But

if

branches of agriculture (i. e., different

commodities) there is a clear demarcation even when both have
variable degrees of intensity (Fig. 6)
Since every commodity can
be cultivated as a rule with any desired variations in intensity,
I

II stand for different

,

24.

Here we can equate the inner ring to intensive, and the outer
meanings previously mentioned), since

cultivation (in any one of the

are the only ones

among

rings to extensive,
case 2

and

case 26

those permitting the formation of rings in which pi

= p^.

In both cases the outlay and the yield per hectare are gieater in the irtner ring, and
a moment's
alternatives

E1/E2

thought will show that rings can be formed only

that only

< A1/A2,

that

is,

commodity
if

intensity

or commodity II
is

is

is

rotation of crops

more advantageous than the three-fallow system

(D)

(if

a^

the

> aal

fulfilled too.

{K)
.

the

for case 2,

thus the second criterion of intensity given on p. 40

An example: Thiinen found

place of
if,

maintained with diminishing returns

may be cultivated) In any case

returns decrease greatly, of course, only II

25.

(in

cultivated)

in the vicinity of a

Thus

his

market

numerical example

5^

Agricultural Location

to the further restriction that in general

Thiinen rings are subject

they appear only with different commodities.

Several Centers of

0.

Consumption

not grouped about one center of consumption as has been assumed up to now, but about several, these select
their own sources of supply from the environment of the foremost
The rings under
producer if they are near enough (see Fig. 45)
region of many
in
a
discussion form around each new center, but
towns there is no room for the outer ones; they are displaced
toward its margin. The number of displaced rings increases with

When

production

is

the density of towns. For the inner rings the individual town is
the marketing center, for the outer ones the agglomeration of towns.
Thus with the growth of northwestern Europe more and more

branches of agriculture with a low yield per acre, such as sheep

breeding, grain growing, and the production of some feeds, of butter
and of cheese, moved overseas and to eastern Europe.- This develop-

ment,

first

described in detail by H. Engelbrecht,^^ has been discussed

recently by H. Backe.^^

must
with

fulfill

our three conditions

compared

to

(p.

the profit per hectare greater within

price

is

in the

1| taler: 1,818

40.)

In fact

the physical yield of rye

>

1,119)

market (1,818/1,710

<

is

(Thiinen: op.

cit.,

p.

121, 14a)

greater everywhere (1,710

>

1,000)

market where the grower's

per bushel, on the contrary, is smaller even

(for instance in the

the profit

1,119/1,000)

would be proportional
example would generally hold also

Since according to

the yield of rye

to the total yield

this

for a

Thunen {ibid., p. 36)

we rather doubt)

(which

comparison of both production systems

as a whole.

Historical significance:

Thunen

the English rotation of crops

is

proved, in opposition to Thaer, that adoption of

advantageous only up to a certain distance from the

market; just as List showed, in opposition to the classical writers, that free trade
profitable onjy

from a certain stage of development onward. In other words,

proved the temporally limited validity of the English theories of the time, so

is

as List

Thunen

proved their spatial limitation.

26.

Exceptions are explained by the fact that besides location, which has been the

sole basis of

and

our theoretical deductions, other factors play a part in

(English sheep breeding on poor soil)

subsidies, natural fertility

(coastal regions like

England enjoy cheap sea

freights)

reality:
,

duties

freight rates

the necessities of joint pro-

duction, extra-economically conditioned curbs on adaptation to

new

situations,

and

so on.
27. See G.

Pavlovsky, " Zur Frage der raumlichen

Internationale Landwirtschaftliche Rundschau,

28.

I,

33

Ordnung der
(1942)

345

Landwirtschaft,"

fF.

H. Backe, Utn die Nahrungsfreiheit Europas (Leipzig, 1942), pp. 35-61.

Part One.

52

2.

Location

Inversion of Thunen Rings

a.

Technique

of Presentation

We shall now examine the formation of rings according to

Thiinen's theory by means of an example that can be subsumed
under case 6 of Table 2. Twice the weight of potatoes (I) as of
corn (II) is harvested from one acre with the same outlay. In
order for rings to be established, the further conditions (see p. 92)
2E2, the connil < ^2 and Ei/E2 > mo/m^ must be met. Since Ei

ditions can be rewritten

mi

piai<p2 2^1 < 2 (pi tti)

p2 ai> pi> P2/2. We start

<
.

<

2mi; or, since a^ == 2fli also

This is true when fli < po/2 and

ruz

6 and
out from a price limit pi
per hundredweight. This is the lower limit for potatoes,
for if the price sank below half that for corn no more potatoes
would be raised. At these prices there should be a demand for
exactly twice as many hundredweight of potatoes as of corn, so
that the area devoted to both will be the same.
In order to simplify Figures 7b and 7d, the demand curves have
the same slope, which involves a greater elasticity of the demand
for potatoes. The example is further clarified if the market is
regarded as a line rather than a point (like a river valley with many
Then the rings become zones, and the demand is proportowns)
tional to their breadth. We also assume hereand this will turn
out to be significant that the commodity with the higher yield per
hectare (potatoes) will be cultivated in the zone nearest the market.
This will be true, as we have seen, if rings are formed at all. Again,
the production of each commodity considered alone is supposed to
be in equilibrium; that is to say, neither potatoes nor corn yields
a rent at their respective margins of cultivation.
As for the technique of presentation, it should be noted that
the scale employed for the quantity of corn is twice that for the
quantity of potatoes, and that it is to be reckoned from the actual
boundary between I and II, whereas the town line is always the

p2 = 12

zero point for the quantity of potatoes.

Thus, in contradistinction

demand curve N2 must undergo a parallel

by the same amount and in the same direction with every
of the zero point. In this way the supply curve K (production

to the supply curve, the

shift

shift

and the

view of the agricultural area can

production costs plus freight for every
point in the area can be read off from a point directly above or
below it on the corresponding supply curve.

cost plus freight)

be directly compared.

aerial

The

53

Agricultural Location

n
10

i
s

5
V -

rs^ Tn

Potatoes

Corn

Wp\

0'
1

SO

[100

M
N/

"^\
^
Fig. 7.

Xvw

Thiinen case

Fig. 8. Inversion of the

Thiinen rings

'

of potatoes (l)](7

0'

A'

'

Centners

K,

>^-->Y"

^^1
^^/
^,y^

J --y^
7

^^K
/?;

^^''^

b)

V;
XTr\

N^/

r-A.

r
'^^op

Part One.

r
54
I

Localio)i

clear that no equilibrium exists. At the

1c (which gives a bird's-eye view) the
Figure
boundary line AB in
rent on potatoes is 0, on corn R2S2, per hundredweight. The cultivation of corn is therefore extended at the expense of potatoes, and pz
falls to po'; on the other hand, pi rises and all the conditions for ring
It is

now immediately

formation are
tion in

tti

gives 9.5
II

and

now

<
> 7.5 >

fulfilled

po/2 gives 2

rising for

5.75)

I.

<

(fli

The

When

= 2;

pi

= 11.5;

=1.5; p2

rent changes with

p^/l

prices, falling for

on a hundredweight

the profit

substitu-

ai> pi>

3.75; substitution in p2

of potatoes

RoSz/t)
equal to half that on the same amount of corn (i?iSi
The cultivation of
final equilibrium will have been reached.
potatoes is then diminished by the area A'B'BA, total cultivation
by the smaller area C'D'DC. So far everything agrees with Thiinen's
is

theory,

and an already familiar

case has

been so extensively

dis-

cussed only to demonstrate the technique of presentation.

jg.

We

shall

Inversion of Rings

now change one

single assumption.

that potatoes are being imported

We

shall

suppose

from America and that the

fields

town are not available for potato raising, their use

being determined by long tradition. The new crop is therefore
assigned to more distant fields, where an unsuccessful experiment
will not cause any serious loss of profit. If we start once more
from the same situation: equilibrium for each individual crop
lying near the

without regard to alternative

at the

boundary

line

AB

possibilities, potatoes are

(Fig. 8c)

now

superior

where corn and potatoes meet.

Their cultivation will therefore be extended at the expense of corn

by the area a until the rent of corn per hundredweight at the
boundary line A^B' is again twice that of potatoes; the return per
hectare will consequently be the same for both crops. When this
point has been reached, equilibrium apepars at first to prevail,
although the Thiinen rings have been inverted!
This is a curious situation. Figure 8a shows ^^ that a shift of
the boundary toward the left would make the cultivation of corn
at the new boundary more advantageous, and that a shift toward
the right would favor the cultivation of potatoes. To this extent
the boundary A'B' in Figue 8c is actually the only possible equilibrium position so far
29. Figures 7a

as

equilibrium really

and 8a show the rent per hectare

the position of the boundary.

at the

is

decided at the

boundary

as a function of

Agricultural Location

55

boundary. But according to Figure 8e, on the contrary,^" the boundary line thus found marks also the boundary between potatoes and
corn; only it appears (this boundary being assumed as given) that
at least for the moment it will be more advantageous to plant the
other crop at every point away from the boundary. To the left of
the dividing line the cultivation of potatoes, not corn, will yield
the greater rent per hectare; the reverse is true to the right of the
line.
y.

The
Fig.

9)

The

Critical

Assumption

contradiction between Figures 8a and 8^ (summarized in

can be resolved. ^^ Suppose it has already been decided

z/'

ti

la

and

and lie from 8e

Fig. 10. Comparison of rent per hectare in Thiinen
(continuous line) and in its inversion (broken line)

case

Fig. 9.

Ila

from

Contradiction between figures 8a and

8e.

8a; le

through historical accident or through tradition, that

corn will be raised to the left; the planting of the individual farmer
is thus controlled by his environment, which leaves him a choice
only at the boundary line. Under these assumptions Figure 8fl
shows where the location of the boundary between corn (left) and
potatoes (right) will finally be established.
But if the economic spirit is revolutionary rather than traditional; if each farmer doubts the whole basis of the customary
agricultural methods; if he raises the question of the most advantageous choice of crops; he necessarily encounters the situation in
Figure 8e. Yet it would be shortsighted for all farmers to the left
of A'B' (Fig. 8c) to change over suddenly from corn to potatoes,
and all those to the right of it from potatoes to corn, because a

arbitrarily,

30.

Figures le and 8e show the rent per hectare as a function of distance from a
when the position of the boundary is given.

market,

31. la

and Ila from Figure

8a; \e

and

lie

from Figure

8e.

Part One.

56

Location

that would
hold,
would
mean disequilibrium.
would
prices
right,
toward
the
shift
the boundary would have to
fall, and, most important, all rents would decrease below the amount
that had induced the farmers to change. Nor would the new situalarger rent was promised for the

Now

moment. Obviously

the solution in Figure 7

The

dotted line in Figure 10 shows the

the
rent that enticed farmers to change crops (from Figure Se)
continuous line shows the rent that turns out to be lasting after
tion be advantageous to

all.

!!

Centners
Potatoes ^

C.

Corn

Die-hards

Fig. 11.

Potato market

(supply and rent of innovators, OE, and die-

hards, B'F)
Fig. 12.

Corn market (supply and rent of innovators, FJ, and die-hards,

Fig. 13.

Rent per hectare during transition. Broken line, former rent

(from Figure 8e)
Continuous line, rent during transition (from
Figures 1 1 and 12)
Horizontal hatching, gain in rent compared

EB')

with the former condition; vertical hatching,

loss

completion of the change (from Figure 7e) and the broken line
shows the rent that prevailed before the revolutionary change (from
Figure 8e)
All farmers between E and 7^ sociologically speaking,
the whole rural middle class or, more accurately, the entire region
of moderate ground rentwill have lost rent (hatched area in Figure
Only a few of the richest farmers (between and E) and the
10)
rural proletariat, and only on the soil at and beyond the boundary
(between F and H) ^^ will have gained.
Will the farmers between E and F, interested in preserving the
traditional order, be able to obstruct the revolutionary method of
planting by ^obstinately continuing to cultivate the original crop,
giving up a merely transitory advantage in order to acquire greater
rent in the end? The change to potatoes, profitable under all cir;

32.

This agrees with our

yield per hectare

is

more

other near the market.

earlier calculation, that the

commodity with the smaller

profitably raised at the periphery of the cultivated area, the

The intermediate area, for which, as it now

may be advantageous, was not considered

sion of the Thiinen order

appears, an inverin that discussion.

Agricultural Location

57

cumstances between

and , and

to

corn between

F and H,

so

lowers the price of both that the rents of the obstinate ones fall.
Thanks to their better location, the rent of the innovators is larger

than before, in spite of the lower price. As even this intermediate

condition is more profitable to them than the old, and less profitable
to the obstinate than the new ^^ (see Figs. 11 to 13) it must prevail
,

in the end.^*

Thus we

arrive at the conclusion that in a

dynamic economy

Thiinen rings must be formed^ whereas in a traditional economy

their reversal may held equally well.^^ The sequence of the rings
cannot be proved in the traditional case as a necessary order, but
only assumed as a possible principle of organization.

3.

Adjoining Fields Instead of Rings

Suppose that an equally large proportion of farmers everywhere

change over to the new crop, whereas the rest keep to the traditional one; or, which amounts to the same thing, that each farmer
plants an equally large area of his fields with potatoes. This can
be most simply represented by having the two crops planted not
in successive rings, but in adjoining sectors. A change in the width
of the sectors causes a rotation of the supply curve about its intersection with the price axis. Since the enlargement of one sector
necessarily occurs at the expense of the other, the supply curves must
always be rotated in opposite directions. It is immediately apparent
that this arrangement results in equilibrium only under special
conditions. It is always possible, to be sure, to change the width
of the fields in such

manner

that the rent at the periphery of

be the same for both

But the rent is equal everywhere and without this there
equilibrium in only two cases:
cultivation, or near the market,^ will

33.

The new

rent to the farmers between

lower broken line in Figure

13.

It

shown by the continuous line.

Corn will be planted in both
35. Of course this reversal is not

is

E and F

is

crops.
is

no

given approximately by the

thus greater in any case than the transitional

rent

34.

land

is

cultivated.

cases only

between

desirable.

It

possible exception

is

G and

B'

(Fig. 10)

and less
commodity of greater

causes unnecessary freight,

the case where a

yield per acre, but lower price, pays considerably less freight per mile.
36. In this case the fields are not only of different width, which would not be bad,
but also of different length. Only when the crop with the smaller yield per acre (com)
is cultivated farther out can its rent by the hundredweight at market be greater than
the corresponding rent for potatoes. And only when the rent per hundredweight on

corn

is

greater

for potatoes.

is

the rent per acre, because of the smaller yield per acre, equal to that

Part One.

58
1.

With equal

a subcase to No.

yield per hectare in terms of weight (Fig. 14) ,^^

18 in Table 2. The radial arrangement offers a

possible solution only in cases 10, 14,

in the others, where E^

2.

When

when

and 18

of

Table

2,

because

the remaining conditions impose a

of

one commodity. Or:

the freight charges are inversely proportional to the

yield per hectare.

get

= E2,

on the production

restriction

Location

lines of

This must be distinguished from the picture we

communication leading out of a city pull the

soil (2)

Fig. 14.

Illustration of case

18 of the

Fig. 15.

Mixed cropping and

rings

complete system

is assumed for both I and II.

be extended in a direction away from
the market (I as far as A, II as far as B) until at the periphery of cultivation the rent
everywhere is zero. In order that rent at the market and the length of the fields
shall be the same for both commodities, field II is broadened at the expense of field I
(and ATi rotated upward thereby, or K^ correspondingly downward) until rent EF is

37. In

First, let

Figure 14 the same physical yield per hectare

each of the two equally broad

fields

GH. Both fields then acquire automatically the same boundary, A'B'.
(However, the length of the fields can now no longer be read off automatically from
the supply curves K^' and K2, as was still possible with Kt^ and K^. To this end it is

equal to rent

necessary to return to the original

D, on K^, give the

field lengths.)

demand

curves,

where the points

/,

on

K^',

and

Agricultural Location

rings

to such a degree that for a distance they are almost

outward

parallel
sectors,

to

we
For

zones.

59

these
still

Here, however, unlike the case of our

lines.

deal with actually rather than virtually separated

should be clear beyond any doubt that our sectors

way of representing adjoining

it

are only an especially convenient

fields.

Adjoining Fields and Rings

4.

There

remains a situation in which sectors (in a schematic

or actually adjoining fields (in reality) partially

still

presentation)

replace rings: where soil

where a

is

of

uneven

quality.^^

Of course

in those

comparison with another, is

more fertile for all products in the same proportion, nothing is
altered compared with the partition of soils of equal quality. Either
the more fertile as well as the poor soil will be divided between
or both will produce the same
the two crops (adjoining fields)
cases

definite kind of soil, in

(rings)

Not so when soils are unequally suitable for different crops.

Here we limit ourselves to one example. Suppose that everywhere
one third of the soil is of quality 1, which produces twice the
amount of potatoes as of corn. The remaining two thirds, of
uniformly produces equal physical yields per hectare for
both crops, which are the same as the yield of corn from quality 1.
Under these assumptions it is: (a) impossible, as long as both crops
are cultivated, that the better soil should produce anything but
potatoes, regardless of the distance from the market. For, as a little
study of Figure 15 will show, the rent from potatoes grown on the
better soil equals the rent that corn would yield on it (transportation costs of the physical yield of corn up to the limit for culquality

2,

tivation of corn, C'E')

plus the rent for half the physical yield of

up to the limit for potato cultivation,

potatoes, calculated as freight

(b)

It is

on the

better

say, of

AB

impossible, furthermore, that the depth of cultivation

and the poorer soil should differ, so that to the right,

nothing more will be raised on the better soil. For since

always as suitable for corn as the poorer one,

This lowers the supply
curve from
to MU. But since potatoes no longer yield a rent
on the line AB, though corn does, corn growing pushes forward on
the better soil

ABDC

is

will inevitably be planted with corn.

ML

38.

Any

local variation in

production cost for other reasons will have

to those of variations in soil quality.

effects similar

Location

Part One.

6o

the better soil toward the left until at the new limit, A'B', the same
rent per hectare ensues for both crops because of the reduced
cultivation of potatoes. Calculated per centner, the potato rent is

only half that for corn, because the yield of potatoes per hectare
is twice as large. This shift raises the supply of corn by the yield
of the area A'B'BA, and the greater supply so lowers the price that
the outermost limit of cultivation

is

moved backward from CE

to

C'E\ As a final result we have adjoining fields of the crops to the

depth A'P", which wholly corresponds to the differing soil qualities;
and to the right of AT' we have a ring of production of the same
crop.^'**

COMPREHENSIVE SOLUTION

b.

We
so far

must now separate clearly the problems of location, which

have interlaced, and consider in particular another important

viewpoint: joint production in agriculture.

1.

The Location for Agricultural Production

This problem, too, divides into questions respecting the location

of the farm and the location of the products.
The problem seen from the standpoint of an individual farm
^^ the
is merely stated here and not solved, in order not to repeat
indusan
the
choice
of
in
discussing
reasoning already developed
trial location. This problem is to find an area for production in
such a region and of such a size, and so to place the farm therein,
that the profit shall be as large as possible.
But on what part of the farm shall a certain crop say, ryebe
planted? In the absence of joint production it will be planted
where it yields a higher rent than any other crop. But it is not a
question of the rent from rye, or from single fields, but from the
39.

The

40.

By a somewhat

area for corn

hatched.

is

different train of thought T.

Brinkmann,

too, arrived at the

conclusion that the whole scale from extensive to intensive cultivation

near a town

progressively restricted, poor soils

extensively

is

possible

whereas with increasing distance the choice is

are abandoned, and goods ones must be cultivated

(radial differentiation)

(concentric differentiation)

("

Die Oekonomik des landwirtschaftlichen

Betriebs," Gruiidriss der Sozialokonomik, 1922, 7 Abt., p. 46.)

41.

31)

Only

to

this

the question

is

extent:

definite crops shall be

as

individual fields depends

to the point of

Upon

no longer one

minimum

exact consideration

of locating the

short as possible;

upon

for

(in

to

p.

29,

note

to fields for

the intensity of cultivation of the

the exact site of the farm

transport cost)

contrast

farm so that the paths

(see the earlier objections

6^

Agricultural Location

farm as a whole.*^ Thus a farmer cannot decide where

rye without deciding at the same time how he is to use
as

a whole. There

is

room

for rye only as

it fits

to plant
his

farm

into the general

production scheme (Betriebssystem) only as it promises the highest

profit to the farm in the long run. One must be clear as to the
consequences: In many fields rye might yield the highest rent provided the remaining fields were employed in a definite way (most
,

favorable for the cultivation of rye in the particular field under

Only in a few fields will the rent from rye still be

consideration)

when every field is cultivated according to the over-all

plan, in such a way that the profit from the farm as a whole is a
maximum. But rye will not be grown everywhere that it yields
highest even

the highest rent; and not everywhere that it is cultivated will it

produce the greatest rent attainable from this field. Nor is it a
question of the change in total rent attributable to this field, since
such an imputation is impossible, for reasons given on p. 62,

note 46.
Total profits alone are decisive; there are no additional criteria
for individual crops. Even the production system {Betriebssystem)
that would be most advantageous for the farm cannot be scientifically unequivocal, as a rule,*^ but can be determined only after
experimentation; even then uncertainty would still remain, since
innumerable combinations are possible and the choice among them
depends in general upon irregular local relationships between supply
and demand. Nevertheless, science can still be of service, as it is
in the case of the industries.

The

general distribution of farms seen from the standpoint of

economy as a whole will be discussed in Chapter 8. Joint

production makes it difficult to determine where the whole of one
crop will be produced a main theme in one-sided solutions as to
determine the plan for the use of the land on an individual farm.
the

The

rye belts of the world, for example, cannot be fixed without

determining the location of

all other belts at the same time, and

thus in the end the geographical distribution of the production
systems of individual farms. In a rye belt, therefore, not rye as

such yields a

maximum

the cultivation of rye.

system favorable to

it

profit,

but a production system that includes

a production

Rye will be grown wherever

is more advantageous than any

that excludes

the cultivation of rye.

42. Industrial

undertakings with joint production correspondingly add the returns

from their various departments and from their various products.

43. Except with simplifications, as on p. 50.

Part One.

62

The Agricultural Production

2.

Localioji

of a Location

Suppose soil qualities to be irregularly distributed and the

markets with their ruling prices ^* given. Let the production at all
but one location be given as well. It is required to find the proIf it is a field, the cultivation of all other
(including those of the farm concerned) must be given; if a
farm, the cultivation of all other farms.
The cultivation of a field is not determined by what will yield

duction of this location.

fields

the greatest profit on

it,

but, because of joint agricultural pro-

duction, by what will yield the most profit to the farm as a whole.
The same end will naturally be sought when plans for the use of
These plans themselves
its fields have to be formulated anew.

depend upon market prices of location and supplies, and the composition and scale of output; upon the relative position of the
various fields to the farm,^^ and of the farm itself to the sales market
and to markets for the factors of production; upon the suitability
of soil and climate, and not least upon the skill of the farmer; upon
the advantages of mass production to the individual farm and to
other farms (thus also upon what is cultivated by other farms in
and, finally, upon the disadvantages of onethe neighborhood)
;

sidedness already discussed.

Location theory can say no more on the subject.*

It

may, of

way in which individual factors act by themTheir co-operation in simple

selves, as has been done under (a)
cases is discussed by locational casuistics. But a systematic theory
course, investigate the

because of the endless conceivable differences in

of most. Here, too, science can only
indicate individual possibilities that deserve special investigation.
is

impossible

situations

44.

That

facilitates

*^

and the complexity

this

is

true in practice because of the radically different market forms

matters considerably in comparison with the problem of industrial location.

would be arranged about the farm building also in Thiinen rings

The fact that land near a village is more expensive indicates
that location plays a role even though in miniature, provided soil quality is the same.
46. Even a more precise characterization of the maximum is difficult. It would not
be correct to assume, for example, that the partial derivatives of cost and receipt must
be equal for every product. It is more likely that for a particular marginal combination
the costs will be covered by the receipts, even when this is no longer true of every
45. Cultivation

if

location alone mattered.

single product

Marquardt

in

This appears

the combination.

in his otherwise excellent

presentation

to

have been overlooked by H.

(Die Ausrichtung der landwirt-

schaftlichen Produktion an den Preiseji [Jena, 1934]. p. 80)

(Schmollers Jahrbuch, [1936], 213

47.
at

The Thiinen procedure

most

ff.)

and even by Schneider

allows only an analysis of the influence of location, and

a consideration of the additional effects of a

few other

factors.

Its

further

Agricultural Location

63

Unlike those of industry, however, mere calculations certainly do

not suffice, because relationships are in part too difficult and, so far
as they are determined by nature, still concealed from us. Only
actual trial (which the great number and the small size of the
interested farms make more easily possible) can help; indeed, since
some effects show only after a long time, only extensive experience
can give an answer.*^

AGRICULTURAL AND INDUSTRIAL LOCATION

THEORY: A COMPARISON

c.

Different Competitive Situations

1.

One
certain

of the

main

industrial

neglected,

is

comparison where
resembling the agricultural can be
that in agriculture the number of production

differences, at least in a brief

situations

the fact

number

of locations for consumpgroup themselves around a

consumption site; in industry, sites of consumption about a producer. The sales market for agricultural commodities is punctiform,
whereas that for industrial commodities is areal. The latter is
supplied by one or a few industrial, the former by many agrilocations

tion.

is

larger, in industry the

Hence

cultural,

industry

in agriculture producers

Thus the typical competitive situation for

limited competition; for agriculture, free competition.

enterprises.
is

This means much

however, than appears at first sight. What

an enterprise, for example, that in industry the demand curve for the single firm generally falls, whereas in
agriculture it is horizontal? At first it might be thought that the
entrepreneur has an influence on the price; but his competitors can
affect the size of his enterprise by alienating customers: partly
through situation, partly through difference in product, and, when
location and product are identical, partly through their mere presence. The individual farmer has no influence on price, but in return
the size of his entreprise is independent of his neighbors. The size
of his farm depends upon how much land, not upon what market,
he controls. Geometrically this means that industry produces to
the left, agriculture to the right, of the point of minimum average
effect

has

it

on the

less,

size of

extension is not to be thought of. One need only bear in mind

duction costs vary from village to village and even from field to

48.

irregularly pro-

field in

order to see

no general procedure for deciding on an agricultural location,

there is none for industry; and for the same reasons.
Marquardt shows why the more cautious and apparently reactionary farmers

immediately that there

just as

how

often fare better.

is

Part One.

64

cost

(Fig. 16) /^ or at that

costs.

point

if

ground rent

is

Location

included in the

But this apparent difference loses its significance when land is

bought and sold according to economic motives (and only
Here, too, the extent of
this case is comparable to the industrial)
a farm is limited by the tendency toward a maximization of the
number of independent enterprises, which in this case is especially
freely

desirable. ^^

Fig. 16.

Size of the

producing unit in

a) industry,

b) agriculture

49.

Neither excludes an optimal supply for the consumer, however, since the higher
costs may be more than compensated in the first case by savings in freight

production

(reu action of the

To

market area) and in the second by a fall in price (increased supply)

complaint of an industry that it suffers from excess capacity is irrele,

this extent the

vant, for such excess capacity

50.

This

is

is

in the interest of the consumer.

easy to understand.

Ki the average cost, and

OB

In Figure 16b

let

the marginal cost curve.

TB

be the horizontal price

The

firm will obviously

line,

expand

beyond O to B, at the intersection of the marginal cost curve with the price
But rent, TUOB, is a cost factor, appearing either as actual rent paid or as
interest on the value of the land. Hence by its nature rent is not a differential but
a price (see J. A. Schumpeter, " Das Rentenprinzip in der Verteilungslehre," Schmollers
The customary presentation, which makes it appear as a
Jahrhuch, XXXI [1907])
at first
line.

residual,

is

in reality only a calculation of the highest

amount

that a farmer can offer

For nonagricultural uses there are other values, and still others for the
rest of the land, and the price of land for industry as well as agriculture is derived
from this competition of uses. Suppose this system to be such that a farmer obtains
the area in question because he offers the most for it; then his cost curve must be
for the land.

shifted

new

upward by the rent, whose total amount is fixed. B is the low point on the
no other amount of production can support such a high rent. Chamused this new cost curve, K2, to whose minimum point the demand curve is

curve, for

berlin

tangent, for industry from the very

first.

He

regarded rent as a cost factor that

is

given

from the beginning. Thus we find tangency of cost and demand curves a criterion of
equilibrium in both branches of the economy.
51. A farm aiming at the minimum size necessary to its existence could add land
as long as there were still larger farms (unless their size depended upon the special
ability of their managers) merely because it produced larger rent and therefore could
offer a higher rental or a higher price. Hence it would buy from neighboring farms
the fields that were less favorably situated for them than for it.
,

Agricultural Location

The

65

limitation works in a

downward

direction also:

division of the farm through inheritance

Even where

customary," farms will

be reduced only to a size actually necessary to support a family.^^
The maximization of the number of producers in both industry
and agriculture is thus achieved in the same manner despite all
formal differences: On the one hand, suitable location of their
locational centers (plants, farm buildings ^*)
on the other, the
close approach of competitors, restrict the area (sales markets, farms)
is

52.

The

effects of a financial

and a

real division

through inheritance must be

dis-

The former cannot render a farm incapable of existence if its value is

correctly computed. One capitalizes what a farmer earns above what he would earn
in an occupation without capital as a skilled worker, say. A farm can carry that much
indebtedness. Real division among the heirs works no harm either, if the share of the
tinguished.

farm or (in so far as the original farm

maintain a family) is used to improve or round out
of parceling out fields (which after all could have favored a

retiring heirs remains in the tenure of the

produced more than enough

The

other farms.

evils

to

co-operative spirit) are therefore not necessarily associated with real division. Trouble
will arise, however,

if

land regularly becomes part of the dowry of a daughter

marries onto another farm. In considering free divisibility, finally,

it

is

to be

who

remem-

bered that with improvements in agriculture and an increased demand, especially

during the past century, with its great increase in population, smaller and smaller
farms have become capable of existence. Real division around growing towns creates
a wholesome transition from small farmers able to

make

a living, through commuters

tied to the soil, to free industrial workers.

This

not extra-economically determined, as it were; it is not an independent

but means merely just enough land to afford a farmer's family, with
or without outside help, the current agricultural equilibrium income. If this increases,
53.

variable at

the

is

all,

optimum

size of

necessarily true:

the farm increases as well.

When

technical development

On

the other hand, the reverse

is

not

the most profitable size of a farm increases in the course of

(hitherto it has decreased for many crops; see H. Priebe, " Zur

Frage der Gestaltung und Grosse des zukiinftigen bauerlichen Familientriebes in

Deutschland," Berichte uber Landwirtschaft, n. s., XXVII [1942], 523; A. Miinzinger,
Bduerliche Maschinengenossenschaft Hdusern [Berlin, 1934]) the rural income need
,

not increase.

The

competition of independent farmers would cause it rather to fall,

and so tend again to reduce somewhat the size of farms. The size that will maintain
a family at any given time is set, therefore, in addition to the income that it is
supposed to yield, by the other factors besides area on which this income depends:
price relations, nature, technique, type of settlement, division of fields, law of inheritance, and so on. Farms of a few hectares, or even of less than one, that are near a
market or situated in a fertile area can make an adequate profit from the most
promising commodities (fruit, vegetables, medicinal plants, flowers, wine, tobacco,
loc. cit.)
The farm with a small income, not the small farm,
As the pay of rural labor at equilibrium should be adequate for
existence, and interest on the value of the farm is additional, an unencumbered farm
could be even smaller and still maintain a family.
54. Here the choice of a location must be considered not only in respect to the
area of production (the farm's own fields and meadows) but also in respect to the

poultry.

See Priebe,

should vanish!

situation of the sales market.

Location

Part One.

56

size,

minimum

necessary for existence (that is, to the equilibrium

which cannot be reduced without decreasing the number of

to the

producers)
To return to the geometrical picture once more: As intruding
competitors in industry restrict the sales area to a point where the
demand curve shifts toward the left until it is tangent to the cost
curve, so in agriculture they restrict areas of production until the

upward and

by addition of the
curve. This is
the counterpart of the process described by Chamberlin and Robinson.^^ The only difference is that in industry, depending on the
competitive situation, the cost curve is given and the demand curve
variable, whereas in agriculture price is fixed and costs are variable.
In either case, however, the variable curve is shifted for the same
reason and with the same result, until it is tangent to the fixed
curve. In short, we find in both industry and agriculture the two
important forces that oppose one another and determine location:
a tendency to maximization of the number of producers and maximization of rent.^ The latter is well known. It remains to sketch
cost curve, displaced

ground

rent,

to the left

just tangent to the horizontal

is

demand

briefly the former.

2.

The Common Tendency to Maximization of the

Number of Independent Economic Units

The longing for an independent and established life in harmony

with his nature is deeply rooted in man. The hope for an independent existence, more than any alleged material advantage, has won
over the nineteenth century to the idea of economic freedom. This
goal encouraged inventors, lured the pioneer into the wild West,
We

When farms grow smaller the

and the income of the actual operator decreases. The
former, because the fields in general now lie nearer the farmhouse and are for this
reason more intensively cultivated, and probably also because of the smaller size of
the farm. The latter, because the rent now goes entirely to the owner, and because a
55.

can only touch upon certain complications.

rents of the owners increase

small farmer needs fewer unusual qualities.

production

falls as

where any further diminution

the proceeds;

i.

e.,

The

average cost of the farm

a whole, but increases per unit of area until the point

in the size advances the costs per hectare

until the land rent ceases to rise.

Then

is

rises;

its

reached

more than

the agricultural equilibrium

income is reached, for the rent could still increase if this were too high, and would
have to fall if it were too low.
56. Even when a few other differences between agriculture and industry are
examined (as in the first edition, page 55) they turn out to be of little weight, so
that in both cases the problem of location is in all essentials the same, in spite of the
different competitive situation and a few differences in degree.
,

Agricultural Locatiu7i

67

drew those eager for great undertakings into the whirlpool of

competition, and made unrestricted divisibility of the land appear
rational to able farmer's sons.^^ It is hard to say whether or not
these expectations were fulfilled, nor did the reaction,^^ the flight
to economic security at the price of independence, fail to appear.

The wide swing of the pendulum between security and freedom

Again and
can be traced far back in the history of economics.
'^^

we

which the successful strugglers limited the

next generation's hope for independence by forcing them to join a
guild, or obtain licenses, or by tying them to the land. And there
were times when they prevented entirely the success of these aspirations through closed guilds and privileged monopiolies or by severely
again

find periods in

restricting the transferability of farms or prohibiting

new

invest-

ments. This was followed by a thinning of their own ranks through

competition or the elimination of the little man by the government.

And

finally,

when

self-confidence

had broken down because

of per-

sonal failure or force majeure, a flight to the protection of the

more

powerful followed, such as the transfer of free farms to great landed

proprietors in the early Middle Ages, migration of artisans to the

and increasingly
government security. After such periods, when
between economic lords and serfs are open only in the

factories, flight to a cartel, to the right to a pension,

since the 1870's, to

the barriers

downward

direction, confidence returns again; social tension inEconomically, too, men wish to live by their own wills

creases.

and on their own responsibility, and a new tendency toward the

maximization of the number of free economic units sets in.

57.

Even poor

best qualified

(H.

held tenaciously to this idea to permit the rise of the

Das bevolkerungspolitische und wirtschaftliche Gesicht des

districts often

Rohm,

"

Dorfes Gruibingen 1838-1938," Berichte iiber Landwirtschaft,

58. In

XXVI

[1940], 430)

German working population were independent.

absolute number rose.

1882, 36 per cent of the

In 1933, 33 per cent; only the

59 At the margin where men hesitated between dependent and independent occuincome was higher in this or that case according to whether the man was

pations, an

ready to pay the price of security or of freedom.

60.

This often leads

to violent social strife.

Chapter

A
tions.

town

is

6.

Site

and Reasons for Town Settlement

a punctiform agglomeration of nonagricultural loca-

Now the question arises, why there should be in any particular

an especially large enterprise, (2) a collection of similar

enterprises, (3) an agglomeration of dissimilar enterprises. It is
well to distinguish here between unrestricted agglomerations that
could form anywhere, and those restricted to a particular locality.
Moreover, from the first we shall avoid one way of answering these
questions mere enumeration of the good features of a location.
These are not always essential to the choice of any particular spot,
and when they are necessary, each by itself is inadequate. A seaport
does not arise on every natural harbor. It must be proved, rather,
why it is advantageous for some entrepreneurs to avail themselves
place:

(1)

of these favorable features.

a.

REASONS FOR TOWN SETTLEMENT

Unrestricted Agglomeration of Locations

(The Natural System)

1.

Even though the earth had a

would still be towns.
a.

The

perfectly

uniform surface there

Large Individual Enterprises

advantages of mass production of one commodity or the

joint production of several

would lead

at

some

locations to the estab-

lishment of a greater assemblage of production: a factory. This may

be so large, indeed, as to constitute a town by itself (Siemensstadt,
Stadt des KdF-Wagens)
(Gary, originally; Radford, Va., World
War II; Oak Ridge, Tenn., and Hanford, Wash., atomic energy;
Longview, Wash., lumber; Anaconda, Mont., copper smelting.)
.

j8.

1.

Agglomeration of Similar Enterprises

advantages of numbers and association

In some places a

number

of similar enterprises will establish

themselves, partly because this increases the

68

demand

for each

one

Reasons for

Town

69

Settlement

individually since buyers like to purchase certain differentiated

goods where they can compare different varieties, partly for the
sake of those advantages which reduce the cost of all and which
are summarized as external economies (large labor market, more
efficient

and

auxiliary industries, mutual stimulation, special fittings,

so on)

2.

.^

ADVANTAGES OF SITE AND SOURCE OF SUPPLY

Production may also gravitate to one place because it is technically tied to an important source of the raw materials and intermediate products that it uses; or because it is technically tied to
consumers, as is the case with craftsmen or merchants, for example.
Or it may simply be attracted by a large labor market, a considerable
local demand, contact with government agencies, traffic junctions, or
the proximity of other towns. Such advantages, which are limited
to a few places, occur also with natural uniformity, as we shall see
later in the model of a simple system of economic areas. Locations
like these are especially rare and at the same time especially favored
The fewer possible
in systems of equal structure (see pp. 130 ff.)
market areas we assume, the larger becomes the number of goods
whose markets around their possible locations is greater than is
.

necessary for the

mere survival of the individual

3.

firm.

INTERNAL COMPETITION

(aa) Division of Local Demand. All these advantages influence

an enterprise established at a favored site, partly through lower costs
and partly through increased demand. Such an enterprise can hardly
be affected from outside, i. e., by neighboring competitors. Its production cost may be so low that another enterprise can survive only
at a considerable distance. When the great demand comes chiefly
from the location of the first enterprise itself, it is impossible for a
distant competitor to attract part of it. In short, the Chamberlin
process (see pp. 109 ff.), which depends on the tendency toward a
maximization of the number of independent firms, cannot be carried
on from outside against the favored enterprise. Instead, competition starts from within. When this leads to division of a town

1.

See the excellent study of the town of Pirmasens by E. Schuster et

al.,

Mono-

Die Schuhindustriestadt Pirmasens (Wiirzburg, 1940)

In
Pirmasens only shoe factories are agglomerated because, among other reasons, they
completely exhaust the supply of every kind of labor available. That this is unusual
another reason for association, and should be added to those discussed below on
pp. 75-76 and 88-89.
industrielle Agglomeration.

Part One.

70

Location

among

the various enterprises assembled there, the situation is

fundamentally normal. Measured by the number of establishments
the agglomeration will become more intense the
(or enterprises)
smaller the size of the firms in an industry at Chamberlin's point.
,

Supplying the Same Market. But what would happen if

demand is divided, but the demand from the market
area in respect to which the individual enterprises enjoy practically
no locational advantages over one another? Let N, in Figure 17, be
the demand curve of the first enterprise to establish itself and K-^^
its average cost curve. As an almost unrestricted monopoly, it sets
(bb)

not the local

Amount

Fig. 17.

its

Supply of the same market by several entrepreneurs

price near Cournot's point.

appear.

Is

demand

curves?

still

valid for

all,

But a second and a third competitor

it be broken into three partial

or will

In other words, will the demand curve of the first

firm be gradually rotated downward and toward the left, as in the
Chamberlin process, until finally, as rii, it is just tangent to K^}

Such a tendency might continue in a few firms because personal

draw attention to the firm and are important in the particular case. But the

characteristics of the entrepreneurs, or advertising, etc.,

more competitors there are, the flatter each partial demand curve
becomes; that is, the more sharply demand reacts on each price
change of a single firm. We are aproaching pure competition and
shall have reached it when the partial demand curves become so
flat that,

in the long run, an enterprise offering

its

goods at a

little

Reasons for

Town

7^

Settlement

above the equilibrium price can hardly continue to sell, whereas

were it to cut the market price a little it would sell all that it
could possibly produce.

The partial demand curve, rV of a given firm, r, coincides at

F and V actually, and throughout the remainder of its length practically, with the broken line FBCV, and where it deviates, it lies
slightly to the right of FB and at first somewhat above and then
,

somewhat below BC. In its last portion it is virtually identical

with the aggregate demand curve.^
What is the shape of the supply curve? With the appearance
of new competitors, external economies may at first lower the cost
curve of the first enterprise from K^ to K. Now workers of all
degrees of efficiency crowd into the competing enterprises. Some of
these firms can secure expensive sites near the railroad station,
whereas others must be satisfied with cheaper but less favorable

Despite these differences all cost curves must be the same, if

the productivity of the factors of production varies only with the
degree to whicli the capacity of the plant is utilized and otherwise
remains constant. The differences in the cost curves, as the figure
sites.

shows

(^1

need not be the lowest one by any means)

rest solely

upon the varying ability of entrepreneurs to use their factors of

production effectively.*
2. We can imagine the gradual increase in the anonymity of the individual firm
by supposing that with a sufficiently large number of small enterprises a particular
firm buys their products and retails them in the vicinity.
3. It would be meaningless to derive the aggregate demand curve by adding these

one another.
might be expected that each entrepreneur would pay every factor
of production according to its marginal product, and that this output would be the
same whether the last unit of the factor were employed by the marginal entrepreneur
or by a superior one. What more the latter was able to extract from it would have
partial
4.

to

demand

curves, because they are not independent of

Theoretically

it

be balanced by the disadvantages of exceeding the optimum

size of

the firm.

Where

the marginal worker (as seen by the individual firm) could be distinguished from other
all would have to be paid according to output, unless their greater output
was due to their own skill rather than to their position in the factory. In so far as
the former is true, it should make no difference, therefore, whether a good or a poor
worker was employed, since each would be paid according to his productivity. In
reality, the better enterpreneurs secure the better workers as well the better sites and

workers,

pay them higher wages than they could get from the marginal entrepreneurs. The
reason is that these workers need less supervision because of their personal charac-

demand per unit of output on the entrepreneur's

through them he can achieve greater profits within
the limits of his own ability. In its details the determination of wages is exceedingly
complicated, of course, if labor is subdivided into groups, and only the qualitative

teristics,

and that they make

time (indirect

efficiency)

and quantitative

less

so that

peculiarities of the efficiency of the individual are stressed.

Location

Part One.

72

now

constructed from the individual cost

Each firm begins to operate
when the price line touches its point of minimum average cost.
If the price goes higher, it follows its marginal cost curve, k', up to
The discontinuous horizontal
its intersection with the price line.

The

total cost

curves. Let the

curve

is

market price

rise slowly.

jumps of the aggregate supply curve show that a new factory has
become able to compete. The smaller these jumps, that is, the
smaller the

optimum

size of a firm in

the particular industry, the

greater the agglomeration of firms will be.

between two jumps are obtained by adding

in so far as they lie to the right of the

The
all

portions of curves

marginal cost curves,

minimum

average cost and

within the relevant price intervals. From this it follows that every
producer, after having entered the total supply curve, is represented
in every portion of

it.

If all

entrepreneurs were equally

efficient

This would
the supply curve would necessarily be horizontal (As)
exclude special profit and would correspond to tangency in the
Chamberlin process. The agglomeration of factories would then be
still greater; first, because the size of each would be less; second,
because at the lower price the demand from the original market
area would be greater; and third, because the area itself would be
enlarged. The last two effects have been taken into account in our
.

demand

curve.^
4.

hotelling's case 5"

Here would belong also that tendency toward agglomeration

which is based on freight cost and which Hotelling^ has tried to
demonstrate. He assumed two competitors along a finite stretch
(such as two ice cream vendors along a beach) with an inelastic
demand. The location of at least one of the two is mobile, and the
f, o. b. prices, which are uniform for all customers, are changeable.
In setting his

own

factory price, every competitor assumes that the

Under

these assumptions Hotelling shows

most favorable from the standpoint of
the individual firm does not coincide with the economically most
price of his rival

is

fixed.

which

that the location

minimize freight
competitor finds
5.

On

minimum

freight cost. The location that would

would be at a distance of one quarter of the
the stretch from each end. In fact, however, each

desirable location of
total length of

is

cost

it

advantageous to move close to the other.

the proliferation of factories in Pirmasens see E. Schuster et

al.,

Monoindus-

Agglomeration. Die Schuhindustriestadt Primasens (Wiirzburg, 1940) p. 22.

5a. Section 4 has been translated from the first German edition, pp. 12-15, for
insertion here where Losch had omitted it to save space.
trielle

6.

H. Hotelling, " Stability in Competition," Economic Journal, 1929.

Reasons for

Town

Settlement

The

objections against this derivation

under very unusual circumstances. The
concerns unlikely behavior of the rivals.

73
'

are that

first

it is

valid only

group of objections

First, it is

hardly likely

that one duopolist will assume that his rival will not react to his
actions. As soon as this assumption is dropped we find, as
Palander has shown, " a pronounced tendency toward deglomeration." ^ If, for example, both duopolists act alike, the optimal
location for each is one sixth of the length of the whole stretch
from each end. Here is a second improbability: Why should the
two duopolists act differently if all circumstances confronting them
are identical for both? It is true that the more symmetrically the
competitors are located along our stretch, the greater will be the

own

both of them together. But the distribution of this profit

would be equally asymmetrical, and why should the competitor who
finds himself on the short end be content with such a situation?
Symmetrical possibilities are rather more probable. Either we
permit the first competitor to locate himself in the center from the
very beginning, in which case the best thing his rival can do is to
imitate him and do likewise; or else the first places himself asymmetrically on the stretch. Then the other will settle near him but
on the longer end of the stretch. In the next round, however, the
first will jump over him, and the two will dance around one another
until they have reached the center. Or else both will start at the
same time and place themselves simultaneously, either in the center
or at any symmetrically located points on the stretch. In the latter
caseand the central location is after all only the limiting case the
profit (of each one separately and of both together) will be everywhere the same, however unlikely this may sound. This follows
immediately from the profit formula. Consistently pursued. Hotelling's case leads, under his own assumptions, to the result that it is
completely irrelevant for both enterprises where they will locate
profit for

long as they are located symmetrically. (Hotelling himself consymmetry merely " improbable," without excluding it by his
assumptions.)
The result is valid only if both rivals assume in their price policy
that they have to share the market. But this assumes a great lack
of foresight and this is the third improbability of their behavior.
Palander ^ shows that the interaction of two possible behavior pat-

as

siders

7. The mathematics will be found in Hotelling, op. cit., and in even more general
form in Tord Palander, Beitrdge zur Standortstheorie (Uppsala, 1935) pp. 232-235.
,

8.

Palander, op.

9.

Op.

cit.,

cit.,

pp. 237

ff.

p. 394.

Part One.

74

Location

terns will lead to continuous price fluctuations, and this is true even
when the firms are still fairly distant from each other, but is certainly

from each other equals half the length of

the stretch. Hotelling's formulas indicate that the price and the
profit of that rival who moves nearer to the other will rise. Instead
of increasing his price also and thus sharing the intermediate stretch

when

true

their distance

with the aggressor, the duopolist attacked will find it more profitable
after a certain distance to lower his price and thus either crowd the
aggressor out of the market entirely or force him to lower his price.
Hotelling does not consider this possible behavior. Such a price
reduction means that the rivals will move farthest apart, until the

been reached, when an increase in price will

again appear to be more favorable. The cause of this incessant
fluctuation lies in the assumption that the rival will keep his price
unchanged. This assumption drives both rivals beyond the stretch

critical distance has

within which an equilibrium would exist, which is bounded by

the end points and the quarter points of the stretch.

The

second group of objections is directed against unlikely circumstances. First, Hotelling assumes a completely inelastic demand,
which is a rare case. Hotelling told me he would agree that with an
elastic demand there would be a tendency for the rivals to move
into the neighborhood of the quarter points. I would go even
farther: In the case of

an

elastic

exactly at the quarter point

since every other point lies
limits

demands and

The

demand an

enterprise will locate

an equilibrium point at all,

asymmetrically in the market and thus
if it selects

profit possibilities.

situation changes, secondly,

if

more than two producers

are

assumed. Hotelling might salvage his argument for several competitors by abandoning the line for an area. On the other hand, for
the line and this is true also for a larger area Chamberlin shows
that more than two producers would spread out even under Hotelling's own assumptions.^" The intermediate producers are all equally
spaced from each other. If one of them moved nearer to his righthand neighbor, for example, he would lose as much area to his lefthand competitors as he gains from the one on his right. Nevertheless,
Chamberlin overlooks the fact that such an asymmetry might be
profitable for him if it were an equilibrium position. But equilibrium exists now only if the rivals are equidistant. However, even
independent of any considerations of equilibrium Chamberlin is
correct: It is impossible that more than two entrepreneurs approach
10. E.

1936)

H. Chamberlin, The Theory of Monopolistic Competition (Cambridge, Mass.,

pp. 194-196.

Reasons for

Town

75

Settlement

each other. A third producer who was located between them would
always gain by jumping over either his rival to the right or his rival
to the left. Only the producers at the ends of the stretch have an
area one and a half times as great as that of the others. As long as
they remain on the interior third point of the end portion of the
stretch, none of the rivals has any incentive to jump over them and
become an end man. To this extent one might speak of a tendency

toward the middle.

tendency disappears completely if we drop the
third restriction. Suppose we have an endless stretch an assumption
quite permissible if we are thinking of conditions on earth. In this
case, each of the two competitors with a finite maximum delivery
distance would gain by moving apart until there arose between them
to an agglomeration

But even

this

a completely unsupplied area.

would be the substitution

of

Even more appropriate for this earth

a circle on a sphere for our stretch.

one of the competitors remains in place while the other approaches

him, the " back end " of his half of the circle will become larger
and larger. But unlike the case where the rivals are situated on a
plane stretch, the " back end " of his rival's part of the circle increases equally at the same time. Since according to the formula,
however, profit increases with the difference of the two ends, and
since this difference remains zero for every position, it follows that
on a circle, the situation on a finite stretch, it is useless for one
competitor to approach the other even if one is immobile.
Since Hotelling's " tendency to agglomeration " has created some
furore and has led to considerable and fruitful discussions in which
not all participants sided against Hotelling, it was necessary to scrutinize his interesting thesis in some detail. We conclude that under
assumptions with even a slight degree of realism, no such tendency
to agglomeration conditioned by freight cost exists.
If

y.
4.

Agglomeration of Different Enterprises

AGGLOMERATION THROUGH INTERRELATIONSHIP

Advantages of Numbers. There are common advantages

agglomeration at one place of a moderately ^^
large output, no matter of what kind. One of the most important
(aa)

to producers in the

n. There

an optimum point beyond which confinement to a town tends to raise

of towns is slowed on the one hand by the increasing disadvantages
and cost of crowding, which manifest themselves particularly as traffic slowdowns and
rising land prices, and on the other by the increasing disadvantages and cost of distance from places of work and from sellers of agricultural and buyers of industrial
products. These costs, to be sure, have been shifted in part to the general public;

costs.

is

The growth

Pa'>'t

1^6

One.

Location

the advantage of having a railway station, not to mention better

streets and drainage, cheaper water and electricity, and a larger
is

labor market.

Advantages of Association.^^ First, under any given market

The preference of consumers for combining small purchases or comparing various qualities of differentiated products is
hardly less important for the formation of towns than for the existence of special business districts within a town and of department
stores in these districts. The mere fact of their proximity not only
lowers the cost of production, especially general costs, but at the
same time increases the share of the demand.
(bb)

situation:

Second, with economic fluctuations:

It

is

advantageous for a

place to harbor industries whose seasonal or cyclical variations

do

not coincide. Of course this alleviates not these fluctuations themselves, but their reinforcing secondary effects on enterprises that are
directly concerned, such as local handicrafts and business.

Third, with structural changes in the economy: Structural

changes in the economy are easier to cope with when a population
has varied interests, activities, and characteristics. On such a soil,
as List emphasized, ingenuity and adaptability flourish more readily
and, in addition, the well-balanced culture that is not only admirable in itself but fruitful for independent and adaptation to new
situations.

Fourth, more general reasons: The ablest members of all proand trades which are not tied down to particular places,
who therefore can live where they wish and are in general the
bearers of a conscious cultural tradition, tend to attract one another
and thus increase their achievements and their enjoyment of life.
fessions

(cc) Advantages of Proximity, etc. First, for "city fillers": W.

Sombart ^^ drew an admirable distinction between " city founders "
and mere " city fillers "; i. e., between occupations that establish
cities and those that exist because a city is already there." By ful-

for example, in the case of expensive railway terminals in metropolitan centers

and

of the expensive supply installations of suburban settlements, but also through the

prevention of speculation in land. In order to

cavise large cities to

have been better, while there was still no municipal planning,

severely but without actually preventing it.

common

12.

These, too, represent

13.

Der moderne Kapitalismus,

14.

This

is

I 5.

spread out

to tax

it

would

land speculation

external economies.

(1922)

pp. 131

f.

a special case of the general difference between occupations that deter-

mine, and occupations that are determined by, location. In a rough classification the
former generally include agriculture, mining, and some manufactures; the latter

Reasons for

Town

Settlement

77

function for a smaller or larger surrounding area the former

create claims on the outside world, so to speak, in return for which
its commodities, and especially agricultural products, are brought
into town. The latter work for the former or are otherwise tied to
their locations: local trades, i. e., trades with a very small market
filling a

radius; ancillary industries; but also certain finishing trades as well as

complementary enterprises such as the textile industry, which gives

work to the wives of the men employed in heavy industry. None
of these would exist in the absence of the founding occupations.
Second, for " city founders ": In one case " city fillers " rise to
the rank of " city founders." It is advantageous in every economic
region to have the market networks for individual goods coincide
at one point, as we shall see later. This metropolis, to be sure,
fulfills functions for the whole area, but its functions could be fulfilled also if the market networks were set down indiscriminately.
Aside from the reasons previously given they will meet in one place
because industries largely determined by consumption mutually
way the advantages of a large local demand for each
other.^^ These advantages consist partly in the feasibility of more
create in this

or larger firms, and partly in the fact that only thus does there
arise a sufficiently large

demand

for

many

goods. This large

has two causes, the size of the urban population and of the

demand
demand

which may amount to three

would be with an evenly distributed population. This
be shown later.

of individuals for individual goods

times what
will

it

2.

The

Chance Agglomeration

pattern of the ideal economic region will

may

show

that location

when

they derive no
advantage at all from one another; when from their standpoint the
coincidence is merely fortuitous. Seen from the standpoint of the
regional system this agglomeration has three important causes: (1)
orientation by a capital city, (2) orientation by main roads, (3) the
of different enterprises

coincide even

relative distances of similar locations

tionships,

which

rest

on the

from one another. These

rela-

original distances between the original

settlements, are such that only compartively few places offer possible
include their followers: handicrafts, service, trades, etc. But this is a very rough
approximation only, which neglects reactions on allegedly independent locations.
Nevertheless it is useful in planning the development of new areas.
15. This plays an important role, also, in the development of a downtown district
(a " city ")
which in general arises for essentially the same reasons as do towns and
,

particularly capital cities within a country.

Part One.

78

locations

for

industrial

enterprises,

Location

which, therefore, necessarily

gather at these points, especially where orientation by a capital city

Finally, the order of the regional system creates certain
is added.
favored points, points where communication routes cross, that offer
special advantages to different enterprises

independently of one

another.
8.

Agglomeration of Pure Consumers

^^

Corresponding to large single producers, there are large single

consumers: royal courts and bishops' sees in earlier times, garrisons
and administrative and educational centers today. The fact that
certain institutions like fire departments, churches, schools, and
places of entertainment pay, causes pure consumers, also, to collect
in one place. This agglomeration of consumers is further favored
by the advantages of association and situation. In short, almost all
the reasons for the establishment of towns by producers are repeated.
.

Summary

Even though the earth were a smooth and uniform sphere towns
would still arise for numerous reasons. These agglomerations of
locations

would be

partly fortuitous,

when

seen from the standpoint

from the standpoint of all, and partly

the result of advantages they offered not from the participants. The
advantages are divided into those of number and association," and
of site and supply. All may be subdivided into advantages of consumption, of sales, and of production. The latter divide into advantages of uniform and differentiated production, and finally into
internal and external economies. At first all these factors favoring
the establishment of towns act everywhere, but they concentrate at
definite points as soon as the capital and the main highways are
located. Under our assumptions, these may be located arbitrarily,
at least in a single economic region. But once they have been fixed
whether because of a historic advantage or by political act, there is
no further room for arbitrariness as to where and why additional
towns shall arise. Thus the general interdependence among all
locations determines not only those points where the advantages of
site suffice for agglomeration, but also where the other factors menof those concerned though not

tioned shall,create towns, either singly or in co-operation.

16. According to Sombart

(op. cit., p. 142) most towns were consumers
Middle Ages, whereas today they are, without doubt, chiefly producers.
17.

well,

Of course the advantages

of

but are not exhausted by these.

number and

association

include those of

in

site

the

as

Reasons for

2.

Town

79

Settlement

Restricted Agglomeration of Location

(The Historical System)

We

have mentioned four factors besides chance that always

determine the establishment of towns: numbers and association,
site and supply. The latter does so only in the sense that it appears
first during locational development, and then in turn attracts other
enterprises. Historical reality, with its spatial differences in population density, topography, and natural resources adds another factor
that operates only from an already determined place: the traditional
source of supply. This concept must be defined in a wide sense. For
producers proper it may include raw materials, water power, a favorable climate, or labor or capital that are already available. For
transport it may mean a river valley as well as a river crossing; for
the consumer, climate and surroundings. This raises no new problems. We have already learned from the discussion of the natural
system of town formation that certain places may offer special
advantages. The field to which this applies is now simply widened
considerably. The difference is merely that under the natural

system favored places do not appear until a location has been determined, whereas here intrinsic sources of supply are present first.
In general such sources of supply limit the number of possible
locations for a particular industry, but increase

the fortuitous coincidence of locations that

natural system
It

is

made more

might be thought

factors.

is

for towns since

important in the

it

so

difficult.

at first that site, too,

Closer scrutiny shows, however, that

is

one of the

all

historical

the advantages of a

can be reduced either to those of the site itself or to

Neither geologic nor geographic differences of any sort are necessary to create differences in the favorability of a site, or even to introduce site as a new factor. All that is
new is, that in addition to location on the basis of consumers,
manufacturers, and routes of communication, we have also location
on the basis of sources of supply.
The great significance of these in the establishment of towns is
this: they not only influence the location of rural towns and highways, but also determine that of the capital city and the main lines
of communication, which in the natural system was left to free
choice. Differences in the earth's surface ordain from the very
beginning that for every town there is only one best site. They
exclude all human arbitrariness in so far as it is unwilling to pay
historical site

those of a source of supply.

Part One.

go

the price.
still

But Part

III will

show

Location

that deliberate intervention

may

be advisable.

THE SITE OF TOWN FORMATION

b.

1.

Location of the Individual Town

He who

wishes to explain or determine the location of towns

mind two circumstances above all. First,
origin determine in general the place of
their
all five reasons for
their settlement: numbers and association, site and supply, and
chance. These may work with or against one another. Only in rare
cases will one factor alone be decisive. Second, towns as a rule are

must constantly bear in

not merely agglomerations of locations of similar types, but above

Thus the explanation will necessarily differ
with the branch of industry or the kind of pure consumer.

all of different ones.

a.

The problem

General Determination of Site

of location for the individual

one. This

town is: Given all

more difficult by

other towns, to find a site for this

far than to determine a location for a firm. For in the case of a
town not only one but many locations are simultaneously variable.
is

Furthermore, they are interdependent, so that the problem cannot

simply be reduced to that other one: To determine the location
separately for each industry in this part of the country, on the
assumption that the town will arise where many of these locations
approximately coincide. This might be acceptable, at best, as a
very rough first approximation. A more precise analysis, in so far
as economic considerations play any role at all,^^ cannot possibly
disregard the interdependence of the locations of the various industries concerned. For example, each individual location within the
area under examination may be favorable for a factory in different
degree, depending
site of

on the exact

site of

the latter depends again

the railway station.

on the location of

all

But the

the other

industries in the district.

A somewhat more
fore,

exact statement of the problem consists, there-

in selecting a location for each industry for every possible

combination of the other locations, and then choosing that site for
the town in whose neighborhood most optimum locations (interdependence having been considered) are situated. Even this state18.

Obviously they do not in the case of

centers,

and the

like.

fortresses,

administrative or religious

Reasons for

Town

81

Settlenieyit

admit arbitrary selection of locations that are not

economically determined, but nevertheless economically significant.
This problem is practically insoluble.
Thus, as in choosing a location tor a single factory, nothing
remains but to calculate roughly which among a few hypothetical
The best that
sites for the town would attract most industries.
location theory can do is to suggest the locations to be examined.
merit

would

still

Important sources of supply, intersections of traffic routes, and the

center of gravity of the polygon formed by the neighboring towns
of similar function are such test locations. But one should not be
deceived as to the gross inaccuracy of such a procedure. Even the

town first in the economy as a

whole, then within a region,"'2 and finally at the place itself ^^ does
not usually help very much. For these three situations are of varying
significance for different industries, and the advantages of one may

excellent rule to fix the site of a

compensate for the disadvantages of the others.

Thus we cannot avoid the fundamental difficulty in locating a
town: We can neither neglect the interdependence of the locations
of the firms directly concerned nor can we grasp it in its complexity.
Even after exhaustive examination towns continue to be founded
with fingers crossed, and the reason for the relatively small number
of failures is the stickiness of the location system. The competition
among possible locations is worse than imperfect. In earlier times,
and particularly during the critical periods of first development,
it was still
further restricted by state privileges or municipal
prohibitions.
^.

Special Cases

town at a favorable point,

which in this context means in particular natural resources, locations of pure large-scale consumers, and intersections of traffic routes.
But again one must beware of regarding such obvious advantages
as sufficient causes of an agglomeration of locations. If the splendid
port of New York, for example, were on a remote island the city
would consist of a few huts at the best and one of the competing
ports, Boston or Baltimore, would take its place; or if necessary an
artificial harbor would be built. -^ On the other hand, if the whole
Easiest to explain

is

the location of a

More

exactly, in the area enclosed by neighboring towns of similar function.

For a short description of all German towns see E. Keyser, ed., Deutsches
Stddtebuch (Stuttgart, 1939 and following years)
19.

20.

Kautz has minutely analyzed the limited significance of a natural coastal

situation for the location of seaports in Das Standortproblem der Seehdfen (Jena,
21. E. A.

1934)

pp. 15, 33,

and elsewhere.

Part One.

82

Location

East Coast hinterland were a desert, New Orleans or San Francisco

would flourish despite the splendid Atlantic harbors. It might be
mentioned incidentally that a good part of the business of New York
has been directly attracted neither by such advantages of site as its

harbor and the rock foundation for skyscrapers, nor by its closer
proximity to American and West European industrial areas than
any of the more southerly ports, nor by its situation at the terminus
of the Erie Canal and of many railroads, etc., but by the advantages
of numbers.
Consider first a few examples of cities whose existence seems to
have been determined to a high degree by their location. The
centers of states or of natural basins often have the advantage of
being optimum transport points in a region that cannot easily be
reduced by outside competition because it is protected by natural
or artificial tariff walls. Such points are ideal locations for consumption-oriented industries ^^ with an extended sales radius.
Leipzig, for example, possesses this advantage in double measure:
It is the approximate center of the basin that is bounded by the
Erzgebirge range, the Thuringian Mountains, and the Harz Mountains, all about sixty miles distant. It is also the central city of
Germany; almost all of Germany lies within two hundred and fifty
miles of Leipzig, or a comfortable day's journey, and conversely,
nearly the entire area within that radius is German. A third advan-

tage of

its

location

is

that the Berlin-Munich,

and Hamburg-Prague-Vienna trunk

Upper

Silesia-Ruhr,

lines intersect there.

Chicago possesses similar advantages. True, it does not lie at the

center of the United States, but, more important, considering the
unequal distribution of the population, it is near the center of
In
population and production (measured by " value added ")
addition, there is its unique situation where the railway between
New York and Minneapolis meets the steamship lines on the Great
Lakes; and, less important, between the iron mines near Lakes
Superior and Michigan and the coal of Pennsylvania. Paris, too,
belongs in this group as center of the basin named after it, as do
Breslau, Prague, Frankfort (midway between the most important
European capitals and banking centers) and the encircled Addis
Ababa and Madrid. The latter, though in the geographic center
of Spain, lies away from the center of population and industry.
Places favored in another way by location are those where traffic
.

22. Industries, that

23.

On

is,

in

to consumers is important.
see F. Ratzel. " Die geographische

which location with respect

towns arising through

damming

Lage der grosen Stadte," Kleine Schriften,

of

traffic

II, 446.

Town

Reasons for

83

Settlement

Points, that is, where lines of

is dammed up by transshipment.^^
communication cross (pure situation) or traffic lines of different
Hamburg
sort meet (situation at sources of supply as on a seacoast)
and Cologne owe much to this.
But the most significant special cases are those where choice of
,

location

than

is

restricted

by a source of supply.

localities that are favorable to traffic,

material that loses

planted

wood

much weight

in smelting

still

such as harbors, are those

which production must conform: above

to

More important
all

sources of coal, a

in production.

Since coal sup-

and ore has moved toward

coal,^*

and

since the substitution of steam for water power, favorably situated

coal fields have

become prominent among those regions that are

Take, for example, England, where nearly

studded with towns.

the large cities are concentrated in the coal districts, or the highly
urbanized zone stretching from the coal of northern France and
Belgium across the Ruhr and the lignite region through Upper

all

Silesia and far on into Poland.^^ Examples of source-oriented consumption are health resorts, many university towns, religious shrines,
and capitals.
But not much is proved by such examples. Dependence on source
does not mean unconditional restriction to a source, still less to one
particular source; for competing sources and other factors which
affect town formation become relevant. Neither does it mean that
all of the industries of a town are confined to this one source. Some
are tied to the source of supply, since they depend in turn upon

industries that are so tied.

Others, however, find themselves in the

town although not one of the

The

forces that

determine their location

town can be explained satisfactorily

in the end only by calculating its advantages over competing sites.
This becomes even more obvious if the problem is to find the most
advantageous location, not to explain its actual location, which is
so often determined by past and fortuitous conditions.
has

its

seat there.

site of a

24. Improvements in the technique of smelting have undermined this rule however,
because the amount of coal required per unit of iron has been reduced. Furthermore,
ore deposits have become more and more powerful locational attractions, as ores with
less

and
25.

less

The

iron content have to be used.

Germany would have been even greater had coal

over great distances, probably far below cost. The low long-

concentration of towns in

not been shipped by

rail

distance rates for coal were one of the most important factors in location and, indeed,
in the decentralization of former times. Electricity, too, which is cheaper to transport

over short distances than coal, has recently had a dispersive

effect.

Part One.

8^

2.

The System

As towns are

of

Location

Town Locations

essentially agglomerations of locations of

economic

the system of town locations is defined simultaneously by

the general equations of location and the geometry of economic
regions, which will be discussed later. The general location problem
activities,

the same for single industries and agglomerations of industries.

In the case of the individual plant it differs only because fewer

is

variables need be considered in selecting a site for a factory than

for a town.

Chapter

We

Site

7.

shall limit

and Cause

of Belt

Formation

our analysis to belt-shaped areal agglomeration

of locations of production (see pp. 10-11)

a.

BELTS OF LOCATIONS PRODUCING IDENTICAL GOODS

1.

Advantages of Specialization

Consider the cotton belt, the corn belt, the wheat belt, and so
in the United States. These belts produce mainly the crop
question; or, which is not the same thing, most of the crop in ques-

on

formed for the same reasons as

and scale.
Thiinen showed more than a hundred years ago how different

tion

is

produced

there.

towns: the advantages of

Belts are
site,

source,

advantages of a site make it profitable to specialize in different crops

in successive zones around a market, and here it will suffice merely
to recall

Chapter

5.

Among the

advantages of a source of supply we included a special

suitability of soil, of climate,^ and of population for the production
of a certain commodity. But it would be no explanation of the
cotton belt, for example, to tell how its natural conditions favor
the cultivation of " white gold." They might favor other branches
of agriculture as well. Certainly it is not only here that cotton can
be grown, for the necessary conditions occur elsewhere too, or at
least could be provided; for example, by transplanting cheap Negro
labor from the cotton belt. Only by comparison can it be proved
that conditions here are exactly suited to the cultivation of cotton.
Of course mere physical yields must not be compared, since these
depend entirely upon input. Where but one crop is grown only
the highest profits attainable per unit of area are really comparable.
Figure 18 provides an example. The profits from two crops,
1 and 2, on two different grades of soil, I and II, are compared.
The technique of presentation is as follows: ^ Profit is greatest where
1.

Differences in climate

and

situation determine agricultural location chiefly in the

large, differences in soil in the small.

See T. Brinkmann, " Die

wirtschaftlichen Betriebs," Grundriss der Sozialokonomik

2.

(1922)

Okonomik

des land-

Sec. 7, p. 91.

After A. Haase, " Die Thiinensche Intensitatstheorie in graphischer Darstellung,"

in Thiinen Festschrift, edited by Seedorf

and Seraphim (Rostock,

85

1933)

p. 202.

Fart One.

86

Location

Geometrically this means

and cost per acre must

marginal cost equals marginal receipts.

that the tangents to the curves for receipts

be parallel. Or, since in the example the cost curve is a straight

line, the tangent to ei, for example at B, must simply be parallel to a.
Then gi is the highest profit that can be achieved by crop 1 on
soil I. On this soil gi > ga, hence cultivation of the first crop will
be more profitable, whereas the second will be more profitable on
soil 11.^ If nature were the only location factor, the area of cultivator crop 1 would have to coincide with the area of soil I.*

Cost per acre,

Fig.

Cost per acre,

in dollars

Suitability of different soils for different products.

18.

a)

Cost per acre, dollars;

e)

receipts per acre as function of cost, in dollars;

g) profit

The

The

in dollars

per acre as function of

cost, in dollars

subscripts refer to products

and 2

respectively.

third cause for the establishment of belts

is

the advantage

which favors regional specialization particularly in

staple products that are not raised for local need only. If every
farmer in the United States were to devote a few fields to cotton,
assuming that climate permitted, the cost of production would be
considerably increased. To begin with he would be less familiar
with, or less well equipped for, cotton growing, or at least his equipment would not be fully used. In short, the scale of production
would be too small on the individual farm and production costs
would rise accordingly. In addition there would be disadvantages
unconnected with the individual farm. The radius of the supply
of numbers,

3.

If

product

were more profitable on both

application of the theorem of comparative

on

soils

We

the situation

would suggest

shall return to this in note 46

p. 252.
4.

is

costs.

The

figure eliminates the influence of site in

the same everywhere.

On

pp. 87

f.

site also will

assuming that the grower's price

be taken into consideration.

Belt.

Formation

87

area for cotton gins and presses would have to be considered because
of the small return in raw material per unit of area. Thus much
higher freight costs would result. The whole sales organization

would be more diffuse and less fully used. No single port in the
country would ship enough bales to make profitable the loading
machinery and efficient export presses that now exist in the two
southern ports specializing in the shipment of cotton.
Similarly, every other belt has its centers: commodity exchanges,
transshipment points, collecting stations, sales markets, research institutes, and so on. Other things being equal, profits decrease with
distance from these centers, either because all shipments pass through
them, or because with increasing distance their facilities can be
enjoyed only with correspondingly greater difficulty. Thus production crowds around these centers,^ whose existence may even

depend on

this crowding.*'

If a belt has several such centers (and the competition of towns

tends to maximize their number), we are, depending on their origin,

not confronted by only one homogeneous belt. Thus, for example,

one should distinguish the cotton districts around New Orleans,
around Houston and Galveston, and around a few smaller ports.
Of course this does not prevent the cotton belt, as far as the other
reasons for its origin are concerned, from constituting a unit
nevertheless.

But the forces which work toward the establishment of belts

seldom operate without interference. Their influence is partly
cumulative, partly compensating. A single example may suffice
(see Fig. 19)
If it were merely a question of site, and if the soil
everywhere were thus of the same quality, I, product I would be
cultivated about the point O up to the distance OC, but from
there on up to OD product 2 would be grown. Now suppose, however, that from A outward the soil is of quality II, more favorable
.

for crop 2.
gi^

Besides the curves for the profit per hectare on soil I,

in the corresponding curves gi" and ga"

and g2^ we must draw

for soil II.

product
5.

2,

This

is

For product 1, the second curve lies below the first; for
above it. The profits per hectare are now equal at distrue of small enterprises, which

especially

depend more on external

economies than do the larger ones.

6.

This would be represented graphically in such a way that with scattered pro-

duction the

demand curve

curve, let alone intersect

the

demand curve

will

it.

for the services of a center

As soon

as

production

be rotated upward about

until finally, with sufficient concentration,

it

is

its

would not even touch

its

cost

spatially concentrated, however,

intersection with the price axis

will at least touch the cost curve.

Location

Part One.

88

tance

OB, and B

between

necessarily lies

A and

C.

The

area for

cultivation of the second product will not include the entire area,

which is
market than

especially suited to

II,

it

could

Crop

Fig. 19.

if

yet

it,

it

will

push nearer

to the

only distance matteredJ'^

Location of crops as a function of

soil

quality

and distance

Disadvantages of Specialization

2.

There

are forces at work, however, that prevent a region

specializing in

one product. This

difficult subject

so thoroughly analyzed that a brief

7.

Hence the

suitability of a location

but also by situation

cultivated even

on

less

is

(producer's price)
suitable

soil.

decided not by

will suffice for the

site

With an adequate

summary

good example

is

from

has already been

(quality of soil)

alone,

price a crop will be

the enormous increase in

conifer plantations at the expense of deciduous trees since the rise of industrialization.
Fir quickly produces the desired timber,

by the cheaper coal. (See H. Koch

untersuchung [Stuttgart, 1939], pp. 92 ff.)
fuel

that with the introduction of a

of

new

We

have entirely disregarded above the

fact

quality of soil into our example the market prices

both produ.cts necessarily change.

farther outward, but not so far as to

and beechwood has been supplanted as a

ah, Die Buche der Ostalb. Eine Standort-

et.

This change would

make

it

shift

point

B somewhat

coincide with C.

Other considerations, of course, favor the cultivation of a single crop in the

Here predatory cultivation can be allowed for sooner than anywhere else, or counteracted with expensive fertilizers instead of by mixing or rotating
crops (see Koch, loc. cit., for forestry, which is subject to the same laws of location as
agriculture)
On the other hand, the cultivation of one crop far from a town is made
8.

vicinity of a town.

possible by rotating or even migrating cultivation.

89

Belt Formation

present purpose.

The

following presentation

is

based on the works

Aereboe and T. Brinkmann.^

following arguments in particular speak against the cultivation of a single crop: (1) It makes only partial use of the soil, and
in the long run requires a greater expenditure of fertilizer. (2) It
leads to seasonal peak demands for labor, which can be overcome
It stakes everything on one
only by an increase in wages.
(3)
a farm is, the less
self-sufficient
economically
more
the
venture;
and the more
prices
selling
and
in
costs
fluctuations
is
it
to
sensitive
in the
changes
structural
permanent
itself
to
easily can it adapt
specializastrict
Moreover,
costs.
market. (4) It raises freight
(5)
tion in one product is often technically impossible. Thus where
wool is produced, mutton also is obtained; where manuring is
required, fodder must be raised, and so on. For these various reasons
a point is inevitably reached where the lowered costs due to
increasing mass production are outstripped by the rising costs due

of F.

The

to increasing specialization.

The

resultant of the forces working toward specialization

It is not the commodity that
is a compromise.

diversification

first sight to yield the greatest profit that is produced,

rather that combination of a limited number of goods that
turn out to be the most profitable in the long run. In general,
particularly far from a market where only a few crops may

appear at

and

may
but
will

but
eco-

nomically be chosen," the combination will include, or, rather prefer

products that, considered singly for the short run, can be cultivated
with greatest profit. But this is not absolutely certain. It is impossible to offer a more concrete theoretical rule for determining the
optimum combination than this general statement. From the innumerable possible combinations " the one that affords the greatest
possible average profit throughout the planning period will be
chosen.

Because of the frequent interdependence of marginal revenues

does not necessarily presume that for every single product in
the combination marginal costs equals marginal revenue, but only
that none of the many possible and infinitely small changes in the
combination, embracing several products at the same time, will
this

yield

an additional

profit.

F. Aereboe, Kleine Landwirtschaftliche Betriebslehre (Berlin, 1932)

T. Brinkmann, " Bodennutzungssysteme," Handworterbuch der Staatswissenschaften,
4th ed.. Vol. II; " Die Okonomik des landwirtschaftlichen Betriebs," Grundriss der
9.

Sozialokonomik, 1922)
10. See p. 88, note
11.

Sec. 7, pp. 27-124.

8.

This does not mean that any combination

is

possible.

Part One.

90

Finally,

it

specialization

may be concluded

of belts, never-

production in these belts of only the single

commodity whose name they

b.

that although the disadvantages of

do not actually prevent the formation

theless they prevent the

Location

bear.

BELTS OF DIFFERENT LOCATIONS

which may be
by industrial districts, has essentially the same causes that
we have already encountered so frequently; the advantages of site
and source of supplies, of scale and association. The advantages of site
brings about industrial agglomerations independently of all natural
inequalities. Even in the ideal economic district, as will be seen

The

areal agglomeration of different locations,

illustrated

later,

the

there are sectors that are especially rich in towns, because

main

communication can thus be used to best advantage.

economy there are the additional advantages of situa-

lines of

In the actual

tion at a source of supply and, above

As

all,

of these sources themselves.

the weight of coal does not appear in the finished product, coal

fields are especially attractive to industry.

It has already been
pointed out that up to the World Wars almost all the large towns
in England, with the exception of her seaports, lay in one of the

coal regions.

Especially fertile soils also

agricultural population offers a

may

attract industry,

good location

for a dense

for enterprises that

consumer oriented. Climate, too, plays no small role.

and southerly limits of the North American
industrial belt were undoubtedly fixed in part by the fact that the
climate beyond them was too strange to northwest Europeans, who
composed the bulk of the immigation and of the industrial population up to the end of the nineteenth century. Similarly, the
ancient Greek colonization appears to have been restricted to a
climatically uniform region.^^ But even more striking is the intense
are strongly

Thus

the northerly

agglomeration of populations along the seacoasts in antiquity,

which resulted fiom the advantages of site and sources of supply.
According to Gillman ^* colonization in Africa depended critically
upon water supply. Not least in importance are the locations of
men with special gifts, since the most favorable environments for
industries is found in those places where an unusual intellectual
activity has developed.
H. Schultze,

13.

"

Zur Geographic der altgriechischen Kolonisation," Peterm.

(1941), 7-12. With a map.
Geographic Review (1936).

12. J.

Mitteilungen,

LXXXVII

Belt Formation

The

91

advantages of

the

more do

size

The more

wise obvious.

and

scale of production, finally, are like-

industrial production exceeds agricultural,

the same causes underlying the establishment of a city

in an ideal system favor the development of industrial areas, which,

because of the cost of land, transportation, and labor are often merely
sprawling cities. But just as we found it impossible to offer more
than a very general formula for a system of agricultural enterprises,
so one should not expect a demonstration of how the location of
industrial areas must necessarily be determined. There are usually
plausible reasons in favor of certain regions, of course, and the
better
tain

we know

it is

that

the possible factors

none of the

be overlooked.

and

their effects the

more

cer-

factors operating in individual cases will

Chapter

8.

The Problem

of General Location Patterns

Certainly it is more than a mere coincidence that the theory of

economic location has been almost entirely confined so far to the
point of view of the individual firm.^ As in price theory, the interdependence of all economic events was eliminated by simplifying
assumptions, and the problem thus made susceptible of geometric
treatment. But in contradistinction to price theory, the proof of the
existence of a general equilibrium and of its conditions is of far
less interest here. After the Walrasian equations had confirmed the
belief of the Enlightenment that even an economy given over to
competition will hover in equilibrium,^ nothing fundamentally new
seemed to have been added when this proof was complicated by the
introduction of space and time. Later, when many had entirely
abandoned that belief, there seemed on the other hand to be little
sense in trying to prove for the particular what they had long been
unable to see in the general: that there is a reason in things preserving them from chaos, and as a rule without any human assis1.

200

Weber {Ueber den Standort der Industrien, P. I [Tubingen, 1909], pp.

has already described the reciprocal effect between the locations of various

Alfred

ff.)

branches of the economy.

as

He

distinguished strata according to whether, like agriculture

the basic layer, they were

more influencing

uppermost stratum, more influenced. According

like

or,

to

" central organizers "

Predohl

der Wirtschaftstheorie," Weltwirtschaftliches Archiv,

XXI

("

the

as

Das Standortproblem in
the systems of

[1925], 304)

equations that determine the prices and distribution of production factors with respect
to

interdependence implicitly solve also the problem of location. E. Schneider

(" Preis-

bildung und Preispolitik unter Beriicksichtigung der geographischen Verteilung von

Erzeugern und Verbrauchern," Schmollers Jahrbuch [1934]) set up price equations

which take account of

Weber's description has

But

locations.

application where the agricultural sector

all

rich countries or in those that import their food;

factor:

and

the influence of locations for consumption.

problem of individual economic

the

them merely touch the problem:

of

all
less

units,

is

smaller, as in

his explanation selects only

Predohl

treats actually

and Schneider assumes locations

one

only the

as given

from

first.

2. It seems to me the chief contribution of classical and neoclassical theory to have

proved on a simple model no one can take everything into consideration that when
certain assumptions are guaranteed a free economy will work. Whether it will work
in a desirable manner is another question, and here the classical proofs are no longer

convincing.

But such

reflections

must not shake our

tance of the contribution just mentioned.

92

belief in the

fundamental impor-

General Location Patterns

93

tance whatsoever. Once the self-confidence of thinking men that

culminated in Hegel had been destroyed, the world founded on it
was put out of joint socially, politically, and economically in turn.
Because of his lack of belief in a pre-established harmony man
believed that he himself must set things in order; but the more
eagerly he went about it and the more planlessly he acted in opposition to the conditions of that harmony, the more surely was it
destroyed. Today, when we are sensitive once more to the natural
rhythm, it seems time to ask who, or what, really failed in the
economic sphere during the years of decline: the rational and therefore natural order or we?

not true that

man must

supply the world with an organizing

human relations it functions
unconditionally just as little as man acts morally of himself. The
natural equilibrium of economics differs from the equilibrium of
nature exactly as the moral differs from the mechanical. Nature
works according to laws, but man acts according to his idea of laws.
In other words, nature must, man may, act correctly. In order to
do so he must have some conception of how he shall act. As to
economic equilibrium this means that in order to guide his activities
he needs insight into the conditions of this equilibrium. This is
especially true for the lawmaker, since all others are bound by his
precepts even though unable to perceive their rationality. What
matters is that statesmen shall act correctly; the comforting assurance
that all will come right of itself is no longer granted us. Actually
they need plan little, but it is essential that this little be planned
with enconomic insight.^ Knowledge of the conditions governing
the most general equilibrium is not enough today; it is necessary to
know also how it works under conditions that are more nearly
real. It is for this reason that time and space can no longer be
It

is

principle! It already exists, though in

neglected.

The following paragraphs will discuss the conditions of general

equilibrium in space.*

The few

economy works basically,

which it works desirably must be strictly observed
of course; then there will seldom be need of interfering in details. This is the
meaningful sythesis of restraint and freedom.
3.

great simple principles according to which the

and the few more according

4.

The

was laid
interest

when

to

center of gravity of theoretical economics

is shifting once more: Emphasis

on a price theory that neglected time and space; then the theories of
and business cycles introduced time; and now the third period has dawned,

at first

space

is

seriously considered.

Part One.

94

a.

Location

THE EQUILIBRIUM OF LOCATIONS

is determined by two fundamental tendencies: the tendency

from the standpoint of the individual firm and hitherto
alone considered, to the maximization of advantages; and, as seen
from the standpoint of the economy as a whole, the tendency to
maximization of the number of independent economic units. The
latter is affected by competition from without, the former by indus-

This

as seen

trial struggle

way

The

within.

individual chooses his location in such

as to athieve the highest profit as a producer, or the cheapest

as a consumer. But in so doing, as though it were a trick of

the idea, he makes possible the existence of more competitors. They
crowd into the market and reduce his living space until his advantage

market

There is constant struggle between two forces; what is

gained by the one is taken back again by the other.
The point where these forces balance determines location. This
equilibrium, born of the interdependence of locations, can be understood only through a system of general equations of location. As
soon as the conditions expressed by these equations have been fulfilled the struggle for space dies down, and when the equations are

disappears.

solved the locations themselves are determined.

now present the general conditions of equilibrium that are

We

valid for independent producers

and consumers,

for agriculture as

well as for industry, and develop the pertinent equations briefly for
the latter (Tables 3

and

The

4)

.^

must be as advanentrepreneur therefore makes his choice

within the whole district and within his market area in such a way
that his profit, within the narrow limits still left by the general
interdependence within the economy, shall be greatest.*' With the
same purpose in mind the farmer decides where he shall buy land,
and where he shall place his buildings on it. Consumers select a
location in accordance with the same principle.
Condition

1:

tageous as possible.

location for an individual

An

all extra-economic factors for the time being we assume

raw materials are evenly distributed over a wide plain, in which the
agricultural population also is evenly distributed and lives in a similar fashion. All
industries and their production methods are assumed to be accessible to everyone. This
5.

In order to eliminate

that industrial

simplifies the equations, yet alters

6.

for

If all

S",

locations but

Table

3,

is

nothing in the conditions that they formulate.

one are thought of

as given, everything in

constant except the coordinates

(x, y"^)

The

the equation

partial derivatives

with respect to them then hold the condition that the location p"* will be chosen at
the point of greatest profit (equation 1 Table 4)
,

General Location Patterns

Table

3.

95

SYMBOLS OF SPATIAL ARRANGEMENT

Market Boundaries

Place of Production

Product
No.

p1 (x} y}); Pj

Pf (xfyr);Pi

Pi

ai, Pi
2 2
ai, ^1

PrCx^yH

Abbreviations of their
equations

Number

Site

ai

= 2a

ej, a2,

Pi

(Together)

jji;

P2

2 2
a2, ^2

dj

a2

Number

A
B

P2

(Together)

|=2A+B

b 4-q|

+ .Q

Given

d"'

Individual

/'"(n")

demand

product

for

V
V
Qf pioduct m at site q as a function
Average cost
,^
^

j^m ^
m/)
demand D"* = )i'(f',x"y"',a'"fl'"
A .
.,,;,. q^q
of production
J
= D" (tt k"") Profit on product m at site q

'^

<i)

"^

-^

S"*

of the total

"^v

<i

(7"
e'",o-,
q'"'"*

')

Rural population per

0-"

Urban population

Freight rate

Number

Size of entire area

To

find

sq.

of the

km.

town

P""

of products

Number of
Unknowns

1.

tt""

Factory price of product

2.

Sales area of location

p"

at location P'J

in sq.

km.

3.

No. of towns that produce product

4.

X, y

Coordinates of location P'"

2n

5.

a, /3

Equations for the boundaries of the market area of P"

e""

+ ni + N

Sum: 4n

Now

for

the opposing tendency

the following three assumptions the

(see

p.

number

8,

note

8)

Under

of independent enter-

in individual industries and in the

whole: The locations must he so numerous that the
entire space is occupied (Condition 2)
Furthermore, in all activities
that are open to everyone abnormal profits must disappear (CondiThus, in production, prices must correspond on the whole
tion 3)
prises

is

economy

as large as possible,
as a

Part One.

g6

In consumption, so far as comparison

to costs. ^'^'

is

Location

possible at

all,

the advantages must be evenly distributed.

This condition would be fulfilled when the individual volundecided not to exhaust all possibilities of profit. Nevertheless,
there would still be room for new competitors since the areas, as
they developed under the existing conditions, could be made yet
smaller without detriment to the profitability of the industries or
tarily

farms already established. In addition, therefore, the areas of

supply^ production, and sales must be as small as possible (Condition 4) for only then has the number of enterprises that can survive
,

reached

its

maximum.

now push

in,

If still

enterprises

all

more farmers or entrepreneurs should

would become unprofitable. Inde-

pendent self-employed producers always tend in general toward

this point, for behind them is the inexhaustible reserve army of
dependent employees, poised and ready to jump into any breach.^""
7.

may happen

It

ducers will

an exception that even the greatest possible number of pro-

as

leave the marginal entrepreneur a profit small but within these limits

still

maximized: for example, when an area

but not large enough for

The

six.

offers conditions so favorable for

enough

closely

to take

away

is

larger than necessary for five entrepreneurs

situation

is

on the one hand, a place

similar when,

production that no external competition can approach

all profit, but,

on the other hand, a competitor who has

unable to develop because his market is too small.

8. To these, of course, belong three sources of income that sometimes flow in an
abundant stream. The entrepreneur's wage for his personal efforts, which falls with
decrease in the size of the business until the income of the marginal entrepreneur is

established himself in a place

is

own

so small that the influx of entrepreneurs ceases; the

payment

capital; rent for the productive contribution of the

land that happens to belong to

him, which
9.

is

of interest

on

his

limited in area, situation, and quality (in place of contractual rent)

This gives for each of the n locations an equation of the general form

or like equation No. 3 in Table

4.

tt^

geometric explanation will be helpful.

k">,

The

market area that can be supplied from a location depends on the one hand on the
shape of the demand and on the other on the shape of costs within the firm. Both
are illustrated in Figure 16a; the total demand, D, within this market area as a function of

f.

o. b.

intersect at S
10.

price,

and

total

where

costs

and price are equal.

costs, k.

The

curves

demand
when the demand
shifted demand curve

In geometric terms, a diminution of the area means a shifting of the

curve toward the

curve

production as a function of the

is

left.

The

limit of this diminution

tangent to the supply curve.

and B the point

of tangency.

Equation

is

In Figure 16a, D'

reached
the

is

3 contains the first algebraic condition for the

tangency of the two curves; the second condition

is:

(ir^)

'

(k">)

',

or like equation

4.

might appear at first sight that condition 1 is contained within condition 4,

since the market area can be as small as possible only when the factory is so situated
in it that the profit is as large as possible. But condition 4 relates only to the size
of the area, independently of whether it's shape is appropriate; and conversely,
condition 1 relates only to the shape of the area, independently of its size. For the
location of all other firms, and thus the order of magnitude of the market area of the
selected firm, is assumed to be given, whereas under condition 4 the distance between
11. It

General Location Patterns

97

For consumers, on the contrary, the space necessary for continuance

an individual enterprise is a minimum only in overpopulated

of

regions.
Table

SYSTEM OF EQUATIONS

4.

Number of

Pertinent Equation

Equation which

Condition
1.

Maximum

profit

as^

^-

(so far as 2-4

Maxi-

'2.

mum

3.

permit
Total area used
No unusual

<
Gf +
<P'^

num-

profits

ber of
Producers

4.

-^

Area

<G

Gl' -f

= X

(Dq)

as small as

condition

as-- =

o;

dTTq

possible

.5.

fulfills

dGl

Equations

2n

= G

m
n

(Dq)

akq

aG^

Boundaries

Indiff'erence lines

Sum: 4n

+m+N

Condition 5: At the boundaries of economic areas it

must be a matter of indifference to which of two neighboring locaFinally,

tions they belong.

They

are indifference

lines.^^'^^

locations is variable. Hence for a given shape of the area, condition 4 is supposed to
maximize the number of producers; condition 1, on the contrary, maximizes the profit

of a given

number

number

For example, condition

of producers.

ensures that once a definite

of producers has been reached the shape of the area

on a uniform plain will

this hexagon shall be

be that of a regular hexagon; whereas condition 4 ensures that

as small as possible.

not in general.
is

Profits

Nevertheless, the

small.

would disappear

number

of producers

also

if

made

rectangles were

would be maximized only

sufl&ciently

for rectangles,

therefore required in addition that the shape of the area which

It is

being reduced be economically the

best.

For any given point {x,y) on the edge of the industrial market area (factory
price
freight rate x distance) must be the same whether one buys from P" or Pi.
For the geometric form of the border see pp. 165 f.
12.

13.

Everything can be obtained from these

five

equations: size

and

limits of

market

production locations within them and within the entire area,

and f. o. b. prices. The equations from which possible exchange rates could be determined (Condition: equilibrium in the balances of payments) have been omitted from
areas, the situation of

the system in the interest of simplicity.

only in the ordinary sense but in the

which excludes

it

presupposes equal currencies, not

be employed on subsequent pages,

money by banks. Otherwise the price levels of the

as unknowns instead of the exchange rates, which
be determined in such a way that the balances of payment would

also the creation of

various bank districts

would then have

to

be in equilibrium.

The

Thus

strict sense to

would appear

We

shall return to this in Part III.

system of equations under discussion could be expanded

be desired to find, say, which source of supplies

prices of land parcels

and who

receives them.

is

used,

still

and how

further.

It

efficiently;

might
or the

Location

Part One.

98

b.

THE SEPARATION OF LOCATIONS

preceding five basic conditions must be fulfilled if the

spatial order of the economy is to have meaning and permanence,
but they do not guarantee that the best locations for production

The

and consumption

will

coincide.

On

the contrary, these general

equations of location show that they may be separate." The best

location for producers is not necessarily also the best for consumers.
With free competition the best location for industrial production
is also the most favorable for consumers of industrial goods, to be
sure, and if centers of agricultural production could be regarded
exactly as are those of industrial production, all would necessarily
be in complete harmony. But this cannot be done. Unlike a city,
is not the center of a market area, but merely part of a
production area. Agricultural production cannot be concentrated
as industrial can; dispersion and small size of its ultimate units are
of the essence. Hence the fundamental contradiction remains: The
best location for the production and consumption of industrial goods

a village

14.

town in its role as production center may me repreand as a center for consumption by (^, tj) The first
equations determines x and y, and | and t] can be determined by a very

The

location of any given

sented by the coordinates

system of

(x, y)

similar one that will not be derived here, however, in order not to linger over extra-

the system would be

17
If we were to expect that x := | and )>
Consequently the best location for a town as a production site
location as a site of consumption. Just as little do their supply and

economic matters.
overdetermined.

from its
market areas coincide, except at the level of the economics of a self-sufficient town
where otherwise the balance of payments between town and country would not be in
differs

equilibrium.

and production are interconnected.

between D and (x, y) is supposed to be determined not only by varying freight costs from P to consumers but also by production
costs, which in turn depend upon the situation of P with respect to its sources of
supply, that is to say other towns and the open coiuitry, the best locations for producer
and consumer are combined from the standpoint of the industrial entrepreneur. As
long as an approach to the best location lowers labor costs for the consumer of agriNevertheless, the two locations of consumption

If,

in the equation for D the relation

more than

cultural goods
his products.
if

the

He

optimum

it

raises his freight costs, there will

will therefore leave the location that

location for a producer as

be more demand for

best for production

would be

consumer were

left

out of account, for the

latter location.

Something similar will occur in the case of a town that is a center of consumption.
too, will approach an industrial location. Thus we obtain two new best locations
for towns as producers of industrial and consumers of agricultural commodities, in
the determination of each of which the other location was taken into account. Now
the two locations may be nearer to each other, but still they do not coincide. Something similar can be shown for farmers as producers of agricultural and consumers of
It,

industrial goods.

General Location Patterns

99

by themselves is a great city, whereas the best one for the production
and consumption of products of the soil alone implies an even
distribution. This is confirmed by the distribution of populations
in earlier times and today. Formerly, when the consumption of
agricultural commodities outweighed that of goods produced by
artisans, there were many small towns. ^^ Later, when food made up
only a part of living costs, even for the workingman, there was a
tendency toward concentration in large cities. Today, thanks to
improvements in transportation, the complete separation of loca-

become a reality. Farmers, of course, find it difficult to

away from their farms,^** but industrial workers are often faced
with the question whether to live where they are employed, or
whether the cost of commuting will be balanced by the lower living
costs and greater intangible advantages of the country such as light
and air. That it frequently is regarded as so balanced is shown by
many workers who daily pour into industrial towns from the country,
no less than by the rural and semi-rural suburbs of the large cities.^^-^^
tions has
live

c.

CONCLUSION

our derivation is not that we can heave

many equations as there are unknowns.^^
be expected that among locations, as elsewhere in the

The

significant thing in

a sigh of relief at having as

It was to
economy, equilibrium would be possible under certain conditions,
but it is important to be clear about these conditions. ^ For the

At that time agriculture could still constitute the determining basic stratum.
Yet sometimes they do. Many ranch owners in Texas pass the week ends in
their town houses, but stay on their ranches during the week.
17. The cheaper becomes the automobile, the farther beyond the real suburbs does
the commuting area extend. Distances over forty miles are not unusual in the United
States. According to a Gallup poll, only about three per cent of American workers live
in the immediate neighborhood of their places of employment, whereas 45 per cent
15.
16.

commute
18.

either in their

own

cars or in car pools.

Another important example

and vacation

is

the separation between places of employment

resorts or places for retirement.

Many

persons

move from

localities of

lower wages and living costs to those where both are higher, but where the absolute

amount

spend these savings later in their

This is the attitude,
for example, of many who emigrated to America. Conversely, regions of lower wages
and prices are less attractive to those who wish to spend their savings later in more
of possible savings

places of origin

expensive

is

also higher, in order to

and thus considerably increase

their real value.

localities.

In the case or regional boundaries the equations themselves rather than the
single variables have been counted, as an exception, among the unknowns (see Table
19.

3,

point 5)
20. In

no other

my

opinion, systems of general equations of equilibrium like this one have

I consider it Utopian to assume that they can be gradually

significance.

Part One.

lOO

Location

economic equilibria, must first be

framework or by economic policy.^^ They are the basic principles of all governmental
intervention where the restoration of equilibrium is concerned; and
they form the framework within which measures for obtaining other
public objectives must be kept if the entire economy is not to be
endangered or incessantly regulated. Next in importance, after
establishing that an equilibrium exists, is to show how it looks.
The derivation of the equations ^^ shows likewise which levers can
be easily regulated if the need should arise.
As a matter of fact, most phenomena fall between these general
economic principles of location theory and the empirical methods
of the theory of the individual firm, which we can neither comprehend nor control by general principles or individual calculations.
If only we had a method that combined the generality of equations
with the clarity of geometrical figures! Such a combination would
inevitably have weaknesses, of course, since in a strict sense it is
impossible. But does not the path of science include many precarious emergency bridges over which we have all been willing to
pass provided they would help us forward on our road? And so I
hope that the theory of economic regions to be developed in the
following pages will turn out to be a path into a rich but almost
conditions of

as of other

this,

validated, or at least respected, by the legal

unknown

country.

improved, and employed to solve practical problems more precisely than with our
all, the physicist does not derive the law of freely falling

present coarse methods. After

bodies from a universal formula, nor the physician his remedy from a general formula
for treatment. Still, see the gallant attempt of W. W. Leontief, "Interrelations of

Output, Savings, and Investment. A Study in Empirical Application of the

Economic Theory of General Interdependence," Revieiu of Economic Statistics, XXIX
109 ff., and later publications; and, more recently, that of H. Peter in Finanz(1937)
Prices,

archiv
21.

und Archiv
This

is

fiir

matliematische Wirtschaftsforscliung, 1941.

least true for condition 1, the fulfillment of

which

is

ensured by the

individual's self-interest.

These are the independent variables that affect equilibrium without its reacting
in our case, for example, the size of an area, the direction of demand, the
technique of production, and the level of freight costs.
22.

upon them:

PART TWO. ECONOMIC REGIONS^

1.

The

basic ideas for the following discussion have already been developed in

probationary lecture of 1936 before the Faculty of

University of

Bonn

and

my

Law and

Political

Economy

my

at the

(" Wirtschaftsgebiete als Grundlage des internationalen Ilandels ")

paper read before the Econometric Society at its 1937 meeting in
Atlantic City (" The Nature of Economic Regions ")
The English lecture was published in the Southern Economic Journal, V (1938) 71 ff.

also

in

THEORY
THE
assumption
now on

of international trade has proceeded until

that states are the most important, if

not the only, economic units. It was argued, for example, that if
Germany had to pay reparations to France the German price level
would have to fall and that of France would have to rise in order

the

to

make

the transfer possible.

But no doubt

it

might

just as well

have been said that the price level between 10 and 20 degrees East
longitude and 45 and 50 degrees North latitude would have to fall,
and that between the Meridian of Greenwich and 10 degrees East
longitude and 40 and 50 degrees North latitude would have to rise.
In other words, it is highly improbable that the line dividing falling
and rising prices coincides exactly with political boundaries. Even
though it could be shown statistically that the German price index
was falling, this would prove neither that prices had fallen everywhere in Germany nor that they had fallen only in Germany.^ For
instance, it is very unlikely that the coal mines in the then Polish
Upper-Silesia would have been able to maintain their prices if
German mines a few miles away had had to lower theirs. The fact
that Upper Silesia constituted an economic unit would seem to be
more important in many respects than the fact that it was politically
separated from Germany. On the other hand, suppose large subsidy
payments to flow from western Germany toward the east. In such
a case the economic consequences would resemble those of war
indemnities to a hair. Prices would necessarily fall west of the Elbe

and

rise east of

it.

Two

economic regions would

arise in the

same

country.

Of course no one any longer thinks of denying that political

boundaries are also economic boundaries.^ The preceding examples
are meant to show only that there are economic regions within
political boundaries and others again that extend beyond them.
This has not remained unnoticed, and a few writers on international trade, Ohlin above all, have endeavored to take it into
account. Their investigations belong therefore in the small group
2.

It

probable, rather, that price changes, which according to the old theory

is

affect a particular country, really

extend only to parts of

it,

but extend to neighboring

In the case of small or long and narrow countries like Canada and
immediately obvious, but it holds also for those whose shape is better

countries as well.

Chile this

rounded,
3.

is

as

we

To what

But the

shall see later

(pp. 302

ff.)

degree they are so will become

differences lie elsewhere,

still

clearer in the course of

our inquiry.

and are more important than the old cylinder-piston

theory of the price level assumed.

log

Part Two.

Economic Regions

economic regions,^

Actually they

104

of fundamental inquiries into

more than words; they began to speak of interregional,

in addition to international, trade; and what had held for states
now held also for regions. But the structure of these economic

altered

little

regions was not examined. To give but one example: The fallacious
idea of a general price level was merely split into fallacious ideas
of regional price levels. Yet even cursory examination of the nature
that the price surface was much
country than a calm lake. Certainly all that is
included in an economic region must have something or other in
common. But it would be premature, though it is a mistake that
suggests itself in consciously logical procedures, to conclude from
this that since prices are the central phenomena in all exchange
processes, the best definition of an economic region would be a
region throughout which prices are approximately the same. This
definition is unsuitable, however, because there are no such regions;
and even if there were they would be without significance and thus
not worth our attention. In order not to fall into a similar error
we shall proceed in the opposite direction and try to discover
whether and how, under rational assumptions, an economic boundary can be expected to arise. Instead of starting from a preconceived idea we shall look first for actual differences, and not until
then for their logical common denominator.

of such a region

more

4.

would have shown

like a hilly

These inquiries have many

different origins.

Writers on location theory have

provided a few of them (besides Thiinen, Launhardt in particular, and recently

H. Ritschl in his theory of the economic regions [Kreise^, " Reine und historische
The
Dynamik des Standortes der Erzeugungszweige," Schmollers Jahrbuch, 1927)
.

history of economics has

village,

town,

contributed others;

G. von Schmoller's economic stages-

and national economy,

territorial,

"

Das

Merkantilsystem

historischen Bedeutung," Schmollers Jahrbuch, 1884: also K. Biicher's

in

seiner

home, town, and

national economy. Die Entstehung der Volkswirtschaft (1st ed., 1893)

Among the works on economic geography that of W. Christaller is especially to be

recommended. Die zentralen Orte in Silddeutschland (Jena, 1933) and " Raumtheorie
vmd Rauraordnung," Archiv fiir Wirtschaftsplanung, I (1941)
The American economists N. S. B. Gras (for example, " The Rise of the Metropolitan Community," in The Urban Community [Chicago, 1926], edited by E. W.
Burgess) and R. D. McKenzie (The Metropolitan Community [1933]) among others,
have written on the economics of large cities. Factual inquiries are much more
numerous, but all suffer from a lack of the theoretical background. Ohlin's book was
mentioned above because it has much in common with the writer's volume, at least
in the goal set though not in the solution (C. Brinkmann to the contrary, in FinanzIt, too, endeavors to combine the theories of location,
archiv, 1940, pp. 210 ff.)
economic regions, and international trade. Yet in many respects, including its concise
presentation, Alfred Weber's neglected essay on this subject seems to me more successful
("Die Standortlehre und die Handelspolitik," Archiv fiir Sozialwissenschaft, XXXII
;

[1911], 667-688.

A. Economic Regions under Simple Conditions

Chapter

Among

The Market Area

9.

the factors that can create an economic region we

economic.
shall consider market areas that are
not the result of any kind of natural or political inequalities but
arise through the interplay of purely economic forces, some v/orking
all

shall select the

We

toward concentration and other toward dispersion. In the

first group
and of large-scale production;
in the second, those of shipping costs and of diversified production.^
In the following derivation we start from radical assumptions
in order that no spatial differences may lie concealed in what we
assume: that economic raw materials are evenly and adequately
distributed over a wide plain. Our area shall be homogeneous in
every other respect as well, and contain nothing but self-sufficient

are the advantages of specialization

farms that are regularly distributed.

How

can

this starting

point

lead to spatial differences?

Let us select any one of these farms, and ascribe to its owner
the wish to produce manufactured goods over and above his own
needs. Will he be able to sell them? The savings due to mass production will favor his enterprise, whereas transportation costs will
hamper it. How large will his market eventually be? Suppose his
neighbors are of the same stamp and live similarly, so that the
demand curve for one is typical of all. Let d, in Figure 20, be such
an individual demand curve for beer. If OP is the price at the
brewery, which is at P, those living at P will buy PQ bottles of beer.
1.

As the advantages and disadvantages of specialization may be reckoned among

the advantages of mass production,

we

contrast only these latter with shipping costs.

io6

Part Two.

Economic Regions

Farther away the price will naturally be higher by the amount of

and the demand consequently smaller. Still farther away,
at F, where Freight costs amount to PF, no beer at all can be sold.
the freight,

Thus PF

will

be the extreme

^ for beer,
and total sales
volume of the cone that would
PQF on PQ as an axis (Fig. 21)

sales radius

in this district will be equal to the

result

from rotating the triangle

Quantity

^Quantity
Fig. 20-22.

demand curve

Derivation of the

demand cone

(Fig. 21)

for the product as function of distance

and the market area from the

(Fig. 20) and the cost curves

(Fig. 22)

volume must

Its

still

be multiplied by a constant that

the population density.

The

result

is

is

given by

the total demand, D, at the

brewery price OP.

2.
it is

Freight costs expressed in marks, not in kilometers.

necessary only to divide the value for

PF by

To

reduce to kilometers

the freight rate per kilometer.

107

The Market Area

Expressed algebraically,

D=^bX^ f
where

D = total
b

demand

as a function of

f.

o. b.

price p;

= twice the population of a square in which

to ship

7r=3.14d

f{p-\-t)XtXdt.

= f(p

it

costs

mark

unit along one side;

-\-t)

individual

demand

as a

function of price at

the place of consumption;

= price at the brewery;

= shipping costs per unit from brewery to consumer;
R = greatest possible shipping cost {PF in Fig. 20)
p
t

The

derivation

is

simple.

The volume

of a solid of revolution

is equal to the area of the generating surface times the path of its
in Figure 20 have the area
center of gravity. Let the surface

PQF

center of gravity (for P as the origin)

be Jo. The center of gravity therefore revolves along the path 27r);o,
and the area of the generating surface 27r)?o X F, or
F,

and

let

the ordinate of

its

2^/
(since according to the

f (p

-\- t)

X X
t

dt.

formula for the center of gravity

R

yoF=f
Taking into account,

f{p

+ t)XtXdt).

finally, that

obtain the formula given above for

the population density

as a function of the

is

-^

we

brewery

price p.^

Actually the brewery price is not yet given, however, as we have

assumed thus far, but depends on the total demand. Thus the
volume of the demand cone must be calculated for various arbitrary
had already been given, as I discovered in the meantime, though in somewhat
by W. Launhardt (Mathematische Begrundung der Volkswirtschaftslehre [Leipzig, 1885], p. 152) as well as by E. Schneider, following Launhardt (" Bemerkungen zu einer Theorie der Raumwirtschaft," Econometrica, 1935, pp. 79-105;
E. M. Hoover (" Spatial Price Discrimination," The Review of Economic Studies, June,
and in a wholly general form by G. Tintner (" Die Nachfrage im
1937, pp. 182-191)
Monopolgebiet," Zeitschrift fiir NationaWkonomie, 1935, pp. 536-539)
3.

It

different form,

P<^^i

io8

Two.

Economic Regions

prices. The result can be drawn as a new curve, A in

Figure 22, which gives total demand as a function of brewery price.
In the same system of coordinates we draw also a so-called planning
curve TT, which gives the smallest average cost at which any given
amount can be produced.* Only if the supply curve tt, and the
demand curve A, intersect can our farmer open a brewery. If they
do not, beer cannot become a marketable product, because shipping
costs are too high or the advantages of large-scale production too
small. Every farmer will then have to brew his own beer as best

brewery

MN will

be the total amount

of beer that our farmer can sell. The longest market radius, or
shipping distance, for beer in this case will be equal to the radius
of the base of the demand cone with a volume 2MN -f- B, or simply
to MF. And, like beer, every economic commodity has its own
maximum shipping distance, beyond which it cannot be sold.'^*'
he can.

4.

the curves intersect at N,

If

minimum

This

this capacity.

Its

runs to the right of

individual plant

can be reached only by a plant that has been built especially for

average cost curve touches the planning curve once, but otherwise
it.

Consequently the low point of the average cost curve for an

below the point of tangency with ir. However, a

to the right,

lies

plant does not produce more cheaply than any smaller or larger one the

corresponds to

its

minimum

amount

average cost point, but only the

amount

that

that corresponds

to its point of tangency. This point represents the capacity for which it was built.
For since the point of minimum average costs already lies above the planning curve,
another and larger plant would evidently be more advantageous. This is easily seen

from the average

cost curve,

K' in Figure 22 for the capacity M'N'.

The planning

curve represents geometrically the envelope of the average cost curves for plants of
various

See E. Schneider, " Statische Kostengesetze," National0konomisk

sizes.

LXX

Fig. 9, p. 423; J. Viner, " Cost

schrift fiir Nationalokojiomie, 1930.
skrift,

5.

(1932)

Weber {Vher den Standort der

particularly p. 244;

translated

by

Industrien, Pt.

C.

J.

Tids-

Curves and Supply Curves," Zeit-

[Tubingen, 1909], pp. 240 fE. and

Weber's Theory of the

Friedrich as Alfred

Location of Industries [University of Chicago Press, 1928]) treats this problem in

essentially the same way, as an " agglomeration of originally evenly distributed small

The difference is, first, that this deduction is not correct, because
demand as independent of local price. Secondly, his (marginal) method

scale producers."
it

regards

different, and less suited to the Chamberlin process. And thirdly, he does not
employ this process. A further difference is didactic in nature: He starts with an
unequal distribution of natural resources and introduces agglomeration later, whereas
is

we proceed
6.

in the opposite direction.

As soon

as

there are several marketable goods

and so are
agglomerate, and thus

their

price

relationships

different at different points

their receipt relationships as soon as

production

strictly

sites

different, too.

So, for

brewery and for those

neglect

it

for the

speaking their

example, the demand curve for beer

at a distance.

moment. See

p. 143,

But however
note

10.

demand

curves are

differs for those

significant this

may

are
their

be,

near the

we must

Chapter

The Network

10.

of

Markets

CONTINUOUS DISTRIBUTION OF POPULATION

a.

The deduction

Region

Size of

1.

would be relevant
form. But they are not. Even
so far

economic regions were

if our district were full

if

circular in
of breweries lying so closely together that their sales areas touched,
one or another farmer would still be tempted to start a brewery

And he could do so. First, because all the corners

between the circles would not yet have been fully turned to account;
and second, because the size of the individual brewery could be
reduced from MN, in Figure 22, to M'N' without making the plant
for himself.

unprofitable.^

The

corners can be utilized by pressing the circles together until

As a consequence of this diminution in
results.

honeycomb

regional size the total

demand curve A

will be shifted

downward.^

This procedure has become familiar for product differentiation through the work
Chamberlin {The Theory of Monopolistic Competition [Cambridge, Mass.,
1933; 5th ed., 1938]) and of Joan Robinson {The Economics of Imperfect Competition
[London, 1933]) but it holds just as well for differences in location. For those un1.

of E. H.

familiar with the literature

on the

subject, Chamberlin's

fundamental ideas will be

With product differentiation (which here includes differences in the

location of the seller) the demand curve for the individual seller is not horizontal,
as with homogeenous products, but slopes downward. If, for instance, a seller raises
his price, not all his customers will desert him. To some of them his product will
briefly sketched: (1)

offer advantages, such as

As long

(2)

as the

convenience of location, that are worth even the higher price.

demand curve

competitors are possible.

These

intersects the cost curve, surplus profits that attract

will turn out differentiated products or,

which

is

of

special interest in the present context, will choose the location of their establishments

way

in such a

consequence of

that they are particularly convenient for

this loss of purchasers, the

demand

some

of the buyers.

As a

curves of the earlier enterprises

will shift to the left until they are tangent to the cost curve

and

all

surplus profits

The

tendency to the maximization of independent enterprises that underlies

the process just described now reaches its limits. Small surplus profits may still remain,

disappear.

an area is larger than necessary for n producers, but not large enough for
n
1, there is a monopoly which, of course, is restricted by latent competition that may become actual if the monopoly is exploited to the full. Then comes
a struggle between the earlier and the later firms, one of which must finally succumb

however,

if

If

since there
2.

With

is

not room for both.

increasing curtailment in the size of a region, the point of rotation, G,

109

Part Two.

10

Economic Regions

But the hexagon can be made even smaller, until the

curve A'

still

just touches the supply curve

Then

tt.

total

demand

the market

is

another brewery were to be established, the market

area would not be large enough for all, and the two curves would
no longer be even tangent. If the longest possible sales radius R
^
corresponds to the total sales MN, the shortest possible radius p
would correspond with the total sales
p also is characteristically
different for different goods.* Figure 23 shows the transition for
full.

If still

MW;

the same

commodity from the

largest to the smallest possible sales

area.^

Fig. 23.

Development

of

market areas from the large

2.

circle to the final small

hexagon

Shape of Region

Geometrically speaking there are two other possibilities for

utilizing the corners between market circles: triangular or square
economic regions can be imagined. But the hexagon has the advantage of being nearest to the ideal circular form. Consequently
among all three possibilities the demand per unit of area is greatest
with the hexagon.
moves upward on

A.

It

is

determined by FE, which

region at the time, expressed as freight costs.

is

equal to the radius of the

V, the lower end-point of the shifted

curve. A', is determined by the fact that OV must equal the volume of a cone
developed by rotating the surface OABT about OT as an axis. OA again is equal to

demand

the radius of the region.

3.

p represents the radius of the inscribed circle.

This we know from daily experience. Suppose one is to have a cake baked near
home. Nobody would carry the heavy pan of batter across the whole town, even to
the best baker. Bwfno one would mind a long trip to leave a watch for repair with
a skillful watchmaker, and one would go even outside the town to a medical specialist.
5. Diminution of a region is disadvantageous for the established entrepreneur,
because his profits disappear; it is welcome to the newcomer because then there are
more possibilities of making himself independent; and it is often advantageous for the
consumer because although the price at the plant usually rises, the average freight
4.

costs fall.

Network

of

Table

Markets

5.

DEMAND

AS A

FUNCTION OF REGIONAL SHAPE

Size of

Demand

Per unit of area

Total

Shape of
Market Region

of
entire region

Large

circle^

Small

circle^

R2H

0.302

1.047204)

r2H (2.598 -J^l.575)

of

Hexagon

0.907

of
region utilized

H -0.550

0.333

H^3)

H- 0.606

H^4)

r2H (2.598-^1.580)

H -0.608 H^O

H -0.608 H^

r2H (2.598-' 1.602)

K

H-0.617 H^

H-0.617 H^

r2H (2.598-^1.690)

H-0.651

equal
area

Square

Triangle
1.

R = radius

of base of original cone.

H|

H-0.651

(Largest possible shipping costs,

H^
PF

in

Fig. 20.)
r

= radius of the circle circumscribed about the hexagonal area of

base removed

(r<R).

H = height

of

b/2
2.

Large

3.

It

is

hexagon

if

4.

The

is

demand

cone.

demand

(Individual

For the sake of simplicity

Fig. 20.

it

is

at

site

of factory,

PQ

in

assumed that the population density

1.)

circle,

radius R; small circle, radius G.909r.

that this quantity is smaller than that corresponding to the

given the limiting values of O and R.

easily seen
r

is

highest value in the column concerned.

For the case of a linear demand curve * a more rigorous proof

can be adduced. Let the ruling QF of the cone in Figure 21 be a
straight line, and let the height P(l be equal to
and the radius
of the base PF be equal to R. If the cone is cut by a plane parallel

6. This will be assumed more frequently, for it is not only an especially convenient
assumption but an especially reasonable one. If OF, as in Figure 20, is the price at

which nothing more will be sold, and OT the amounts that would be consumed if
the good were free, then OF and a line parallel to it through T, and OT and a parallel
line to it through F, will in almost all cases delimit the area in which the demand
curve must lie. We now choose our scale in such a way that OF is equal to OT, so that
these lines and their two parallels form a square. If we draw in this square all conceivable forms of demand curves and the diagonal FT, the resulting triangles and all
portions of the possible demand curves lying within them will be congruent and
symmetrical in resepct to FT. The sum of the deviations from FT is zero. The straight
line FT is the average value of every possible form of demand curve. In all cases
where no details are known about the actual shape of the demand, the linear form is
the only well-founded assumption.

Economic Reaions

Part Two.

to the axis of rotation at the distance

p,

the

volume

of the portion

of cone cut off will be

^= f

^- 2pV^^^ + 2.302632 |- log ^+^^^^^^

(i?^ arc cos

We now

cut the

in such a

way

demand cone through

that

an equilateral

planes parallel to the axis

triangle, a square, or a

hexagon of

equal area appears as a base. The volumes of the portions of cone

remaining above are then proportional to the total demand for the
market areas concerned. These volumes are calculated by the
formula given above, and Table 5 shows the result. For comparison
the cone is cut also by a vertical cylinder the base of which has
the same area as the figures just edscribed.

The

result

is

greatest

when

this area

that the

curtailed sales area

is

is

demand

of the

market area

not curtailed at

greatest

when

it is

all.

as a

whole

The demand

circular in form.

is

of the

But per

unit of area of the market region, the demand of the small circle,
not that of the large circle, is greatest because in the latter case the

average for the area is reduced by the small demand near the limits
for shipment. The average demand in the small circle is obviously
greater than in any polygon of equal area. But because circles
leave empty corners, the demand per unit of the entire area in the
case of the hexagon exceeds not only that of a square and a triangle,

but even that of a

circle.

In other words,

among

all

the same total demand, the most land

the possi-

required
with a triangle, and the least with a regular hexagon. The honeycomb is therefore the most advantageous shape for economic regions.^
The advantage benefits consumers as a whole, ^ whereas for the
bilities of realizing

7.

is

Professor C. H. Sisam, of Colorado Springs, was so kind as to derive this formula

me. Arc cos

be taken as an arc, not as an angle.

is the most advantageous shape for a market area just as
it is for the true honeycomb, but for not quite the same reasons.
With the true
honeycomb the ratio of perimeter to area must be especially favorable; with the
market, the ratio of cone to area. In both cases the circular form would be best were
for

8.

it

The

is

to

regular hexagon

not for the empty corners.

other the demand,

is

The

result of these

not utilized to the

full.

is

that in one case the wax, in the

Among

all

the possibilities of utilizing

the corners, the hexagon retains most of the advantages of the circle.

The

size of

the

hexagon depends, of course, upon totally different factors.

9. So far we have proved only that the hexagon is superior to other regional shapes;
nothing has been said about the best size of the hexagon. It remains an open question
whether the Chamberlin process (incomplete utilization of the capacity of a region
with a concomitant rise in price because of an increased number of competitors) is of
advantage to consumers.

In the proof given above, the producer's price could be

regarded as practically constant in so far as the market areas differ only in form, not

Network

Markets

of

113

individual producer the uncurtailed large circle would be most

favorable. But because free competition results in the elimination
of undeserved profits,

it is

a matter of indifference to the entrepre-

cut down. Yet the honeycomb shape contributes to the advantage of producers as a whole also, since it makes

neur how

his region

possible the largest

It is

is

number

of independent enterprises.

easy to see from the table

how

great

the advantage of

is

As compared with the other polygons, the advantage

R, where as it disappears
varies with r; it is greatest when r
0. As compared with the small circle, it is almost
entirely for r
independent of r. In the maximum case the demand in a hexagon
the hexagon.

is

2.4 per cent greater than in a square of equal size; always

about

empty corners are

included; and at a maximum 12 per cent greater than in an equilateral triangle of the same area. The superiority of the hexagon
over the square is least, and of no practical importance in many
10 per cent greater than

instances,

triangle
is

in

circle,

if

the

advantage being greatest in comparison with the

least when the individual demand curve

its

and the circle at

a straight line.

For curves of other form the advantage of the hexagon may be

less, but it changes to a disadvantage only in a few of
those unusual cases in which demand increases with rising price.
Compared with a linear demand, the advantage of the hexagon
becomes greater, the more elastic the demand at the boundaries of
the region, and smaller the more inelastic is this demand." In the

greater or

In judging the reduction of sales areas it is important to know, however,

whether the average saving in freight will be greater than the increase in costs of
production; that is, whether b, in Figs. 20, 22, and 41, will be exceeded by a. This
need not always be the case. An entirely similar problem is posed in governmental
organization. Not every simplifying of administration makes matters easier for the
governed as well. If it is proposed, for example, to merge small administrative districts
into larger ones, any possible economies in government must be weighed against
in size.

traveling expenses for the citizens.

is a somewhat different question whether these differences in expenditure are
enough to be statistically shown; that is to say, whether it can be decided from
differences in nominal costs of the order of magnitude here considered, in which case

It

large

the real costs will be greater.

below on pp. 327

An

analogous situation will be discussed in more detail

and on pp. 490 ff. in connection

with the cost of living. See also H. Schmidt, Die wirtschaftliche Mengenteilung des
nationalen Bedarfes eines Erzeugnisses (Berlin, 1942)
f.

in connection with free trade,

In comparing the hexagon with the square, for instance, the boundary region
to be reckoned from the inscribed circle of the hexagon to the circumscribed circle
10.

is

of the square.
parison,

The

and the

elasticity

within the inscribed circle

elasticity outside the

is less

circumscribed circle

is

important for the com-

of

no consequence

at

all.

Part Two.

11^

Economic Regions

example, the demand will fall rapidly with the distance

from the production site, a fall that becomes increasingly greater as
larger portions of the market area such as the corners of triangles
first case,

for

from the center.

and shape of the entire region also exert an influence
on the favorability of the honeycomb shape. Thus if the whole
lie relatively far

The

size

region is small in relation to the area of the individual market, or

very irregular, wide departures from the shape that imply an
enlargement of the region may become necessary if the whole region
is

to be fully utilized.

In

summing up

it

may be

said that the regular

hexagon becomes

shape the larger and more rounded-off

the whole area, the more elastic the demand at the boundaries, and
the more closely the necessary shipping distance approaches the

more favorable

as a regional

possible one.^^
b.

DISCONTINUOUS DISTRIBUTION OF POPULATION

For every commodity the proposition holds good, that a market

area with the form of a regular hexagon and an inscribed circle of
radius p that is specific for this commodity, is necessary and sufficient
to make its production possible. On the one hand, p depends upon
the cost curve, which for the time being is assumed to be given;
and on the other hand, upon the demand. This, rgain, can be
traced back to two factors: The individual demand curve, whose
influence we have so far been examining; and the consumers, whom
we have for the sake of simplicity assumed to be equally and continuously distributed over our area. If this were so, p could have
any value. But in reality the number of possible values of p is
limited, because the population may be equally but not continuously distributed.

Whatever the smallest settlements may be single

11. I have found the hexagonal shape discussed in two places in the literature,
though without adequate proof. First, by W. Launhardt (Mathematische Begriindung
der Volkswirtschaftslehre [Leipzig, 1885], p. 181)
who assumed it only by way of
example; and recently in the admirable book by W. Christaller (Die zentralen Orte in
Siiddeutschland [Jena, 1933])
who at least advanced a general though inadequate
proof. According to Christaller the hexagonal arrangement of central sites has the
advantage " that they are neither too few nor too many, and also that no districts are
left without regular supply" [ibid., p. 69)
H. Haufe {Die geographische Struktur des
deutschen Eisenbahnverkehrs [Langensalza, 1931], pp. 14 f.) finds hexagonal networks
of transport lines most favorable for the uniform spherical surface of the earth because
with them, though not of course with the triangles into which they necessarily divide,
,

the relation of these lines to the regions they serve

is

advantageous; and because

hexagons, like triangles but unlike squares, can cover the earth without a remainder.

Network

1^5

Markets

of

farms, hamlets, or villages ^^they are separated from one another

by certain distances that may be neglected only when they are small
in relation to the market area. With most commodities, however,
the situation and size of the original settlements exerts a considerable

on the

influence

we

shall

now

situation

and

size of the

market

area.

This influence

proceed to examine.

Let a be the distance between the smallest settlements Ai, A 2,

so on, which we have assumed to be farms. Again the most
suitable shape of their area is that of the regular hexagon. Consequently their centers, where the buildings are set, lie at distances
of a kilometers on straight lines that cross at an angle of 60 or
120, not at right angles as on a square farm a distribution that
may be described as honeycomb scattering.^^

and

For farmers as producers the advantages, for farmers as consumers the disadvanmay preponderate. Scattering shortens the distance from

12.

tages, of scattered settlements

farm buildings to

fields

the center of the village

except with mixed cropping, but lengthens the distance from

and

generally, also,

from the town

to the

farm buildings or

farmer in uncultivated country, not only as pure consumer

but also as producer, in so far as he employs such outside aids to production as the
help of neighbors, co-operatively owned machines, water power, electricity, coal, or
artificial fertilizers, and in so far as he sells his produce. This variation in distance,
its

fields.

This

affects the

the net effect of which depends

greater

it

is,

upon circumstances, becomes more important:

(1)

the

as in the case of districts that are especially large because of limited or

sporadic productivity in regions that are mountainous, wooded, or rich in lakes; or

because wide areas are used, as on ranches in Texas;

(2)

the heavier the road

traffic

is,

whether because of the size of loads, for example, with extensive fertilization or
naturally high yields, or because the number of trips is larger (as with cattle, schools,
churches, government offices, daily requirements in so far as these cannot be cheaply
produced in small quantities, as with goods needing a large market area; (3) the
higher the costs per mile and the more they differ for villages as against more dispersed

which were formerly more important than they are

if distances could be shortened at all
thereby; and without question they are higher in areas whose settlements are widely
scattered because roads are worse or more expensive and transportation on a small scale
more costly despite the motor truck.
Thus the type of settlement that is economically most advantageous varies with
circumstances; only the intermediate form, a sprawling village, generally combines the
disadvantages of both kinds. Nor are the effects of recent developments by any means

These

settlements.

differences,

today, favored a scattering of the population

unequivocal; inventions like the telephone and the radio encourage scattered

settle-

ments, whereas the increasing interlacing of markets favors the establishment of villages.

The

issue

is

often decided by extra-economic considerations.

the greater vulnerability to attack by nature and by

In scattered settlements

man must

be taken into account,

but above all the high price that is paid for greater freedom. Isolation does not suit
most people and seclusion may easily destroy community life, for culture flourishes
better in the stimulating life of not too large towns.

See p. 28, note 31, and

Die Idndliche Siedhingsweise im deutschen Reich (Stuttgart, 1937)

In Latin it is called quincunx, and in English lattice. The distribution

W.

Christaller,
13.

is

that

Part Two.

ii5

Economic Regions

Let b be the distance between the small market towns ^i, B2,
and so on, as we shall call the smallest places where industrial goods
are produced for sale, b corresponds to the diameter of the inscribed
circle 2p of the market area, except that p is expressed in freight
costs

and

b in kilometers or miles.

nV

he the necessary shipping distance; that is, the greatest

distance at which a commodity must be sold to make its production
worth while. But this does not mean that all farms lying within
this circumference will be supplied by the market town concerned,
except where nV equals the radius of the inscribed circle. Nor can
wF be simply identified with the radius r of the circumscribed circle
of the hexagon, for often there are no settlements at all along the
boundary, or at least in its corners. Thus with a discontinuous
population, n F is independent of r and of p or b/2, respectively.
Let

1.

Relative Positions of Settlements

We shall now examine

to size

and

location.

The

the ten smallest market areas with respect

smallest possible value for the necessary

shipping distance is obviously the distance between the farms as

long as we assume that production takes place on one of these, A-^
(settlement site) and not in a building erected between them for
this purpose. The smallest possible value for the number of settlements supplied, however, including A^ itself, is not 7, but 3. For
it is conceivable that there is a product for which A^, which develops
,

need the entire demand of the

It might share
its costs.
instead with the neighboring market towns B2 and B3 in supplying
the needs of farm A 2, and similarly supply only one third of the
When these shares
needs of each of the farms A^ to A-, (Fig. 24)
quivale
[the
nt of] three fully
contains
e
1
are added, market area
and the distance
F,
is
a^-Sy/S-^2,
supplied settlements. Its areau
between market towns is ay/ 3.
For the next larger, area 2, nV is still equal to a, but now the
demands of neighboring farms are so shared among adjacent cominto a market

town

B^, does not

6 neighboring farms in order to recover

demand of three neighboring

own makes four (Fig. 25). From this

petitors that Bi receives the entire

farms, which together with

its

follows that area 2 must be oriented differently from area 1. Its

borders are not simply parallel to those of the latter. Consequently
b also is now larger, namely V4, though nF is still equal to a.
it

of the crossing-points of strips in a fence where one series

angle of 60 and the other

is

nailed over

it

is

inclined to the left at an

at a similar angle

toward the

right.

Network

of

117

Markets

There remains

yet a third area for

which

nF

is

equal to

a,,

though it is the sole supplier of seven farms. Area 3 offers an

example of a boundary line that runs through open fields without

.-^

.^

X'^\/-^-\.

Figs. 24-26.

The

three smallest market areas

Though such a boundary has,

no immediate economic significance, the survey is facilitated if we know how it runs. This border, again, is not parallel
to the boundaries of the first two areas.
The three smallest market areas show three typical orientations
Assuming that one of the straight lines
at the same time (Fig. 27)
on which the farms follow each other at distance a, is horizontal
in the figure, the first orientation is such that the hexagon rests on
one side (e. g., areas 1 and 5) In the second orientation it stands
on one corner (e. g., areas 2, 4, 7, and 10) )
In the third, it is
inclined to a varying degree (e. g., areas 3, 6, 8, and 9)
Table 6 contains the most important measurements for to 10
smallest possible market areas. From it is derived an extremely
simple relation between n, the number of settlements supplied, and
b, the distance between the market towns that supply them. It is
touching any settlement (Fig. 26)

therefore,

= a^/H

Part Two.

ii8

Economic Regions

Expressed in words: The distance between tiuo enterprises of the

is equal to the distance between the settlements supplied
times the square root of their number. Furthermore, the number
of whole settlements included within a market area increases
according to a definite law, as can be seen from Table 7."' Finally,
the size of a market area can be very simply calculated. It is always
equal to a"nV3-f-2.

same kind

^'

l\

+^

1^

iV,

1^

^1

/;/'}

10

^^^J^

Fig. 27.

The

are hatched.

10 smallest

economic

represent original settlements.

areas of sizes indicated

13a.

areas.

The

sectors containing

Alternative regional centers are in parentheses.

by the

Those enclosed

in circles are centers of

August Losch did not give the actual formula for

Werner Kanzig

of

this

From

(feV3)

Z-

=r

r?,

/jth

where n

area.
is

law by means of which

inspection of Table

7,

the Department of Physics, University of Illinois, has

number of settlements
The general formula used by Losch has the form
number of settlements. Let the number of the area.

kindly supplied the following general method of finding the

corresponding to the

market

figures.

n could be calculated for any desired market area.

Professor

many towns

Simple points

the

Network

Table
Area
No.

THE TEN SMALLEST POSSIBLE MARKET AREAS

6.

nV

.f^

i9

Markets

of

11

= number
plied,

Those partly supplied are reckoned

terms

al/7

a)/ 4

of settlements completely sup-

including the point of supply.

equivalent

the

of

in

number

of

fully supplied settlements.

aV,

12

.f^

1)

= distance

2a

al/,2

between points of supply c=

between

distance

centers

diameter of inscribed
13

a|/l6

16

.f.

al/,3

nV

= necessary
of seller

2a

of

areas

circle.

shipping distance

from farthest

= distance

still

necessary

customer.

a|/l9

2a

19

21

a|/21

.fy

10

25

a)/ 25

al/7

Table
Area
No.

7.

= distance separating original settlements.

CALCULATION OF

Area
No.

(1

1/3)2

02

(1>^

(1

.1/3)2

12

(2

1/3)2

02

12

(2

1/3)2

12

(2

1/3)2

22

11

(3

1/3)2

02

1/3)2+

(^)2

(1^^1/3)2

(1>^)2

(2K n)^

(>^)'

19

13

(2 >^ 1/3)2

(1^)2

21

16

10

(2K

1/3)2

(2^)2

25

27

15

(3>^ 1^3)2

(>^)2

37

which the number of settlements is to be found, be called /(. The problem is to

and /.
First, find an integer m such that (m + 1) (m 2) < /j
(m + 1) (/n 2) + 2m.
Call the expression (m + 1) (771 2)
2m
There are two cases:
/?ofor

find k

h ^ m,
ho
> m,

a.

If ho

b.

If

/z

then

fe

2m

+
1

and

2in

{hg

h)

then
k

=m

I;

and

==

(m

1)

{h^

h)

-W.

F. S.

Ecor.oniic Regions

Part Two.

120

The most important

result of the preceding argument, however,

market
and the number of settlements they contain also grow discontinuously. This, again, makes surplus profits possible. For if
sales in 32 settlements, say, were required to make a certain commodity profitable, area No. 13 with 31 settlements would be too
small. But the next area is the unnecessarily large market area 14,
with 36 settlements, so that sales must extend to 36 settlements.
The demand curve would then intersect the cost curve instead of
merely touching it, and surplus profits would thus arise in this
industry."'^^ Such moderate surplus profits are actually the rule,
for it would be pure chance if the demand curve in its jumps should
is

that with discontinuous settlement, the possible size of the

areas

still "

touch the cost curve."

point must be emphasized. Not all the possible
market areas need occur in reality. There may not be any commodity whose commercial production would be profitable for only
three farms. Then area 1 would not exist. But conversely, every
actual market area must be on the list of possible ones.^^
just

One more

14.

As a consequence of

jumps if it
Chamberlin

this discontinuity in

the size of areas the

demand

curve

by a diminution of area in the course of the

process. With mere price increases, on the other hand, the demand falls
continuously, if one moves up along the old curve, although a gradual price rise also
eliminates settlements discontinuously at the shipping limits then prevailing. This
apparent contradiction is easily explained: Before a place is suddenly and entirely
displaced toward the

is

eliminated from the sales area,

price;

area

i.

its

e.,

its

left

demand

has gradually fallen to zero with the rising

elimination no longer affects total demand.

The

different questions.

borders

ment.

a market

discontinuity of settlements has an effect only in the

case because here, in contrast to the second case, the

15.

Thus whether

reduced by the approach of competitors, or by rising prices, are two entirely

is

is

demand

of settlements

first

on the

not zero.

They may even

An

soften the impact of business cycles with continuity of settle-

oligopolistic struggle for the distribution of surplus profit

a discussion of which

not warranted by the insignificant object of

is

distribution of chances.

The

may break

strife

out,

and the even

solution of Frisch, Schneider, von Stackelberg, Moller,

Zeuthen, Palander, and others can be adapted to the problem.

16.

Among

the

10 cases the realization of Nos. 3, 6,

first

several supply

centers.

seems to

political centers as

is

me

especially

divided

Various circumstances are against such a partition.

hardly occurs in administrative

populous

districts,

places.

only recall earlier- conditions,

(2)

and

Here, in contrast to the remaining cases, no settlement

probable.

when

and trade has a tendency

Political division

several

lords

is

had

to

in

(1)

It

turn toward

possible, however;
serfs

among

the same

one need
villages.

Division would create, not theoretically but practically, an unstable economic

situation:

division

is

thiee competing for one place!

wholly improbable.

neighboring

market

areas

market strategy even more

If

with

it

(3)

discontinuous

difiBcult.

If

the settlements are single farms,

does not occur a no-man's-land arises between

settlement

that

makes

oligopolistic

Network

of

2.

181

Markets

Location at

Center of Gravity

might be established between three settlements instead of in one of the original settlements. This we shall
production

site

location at a center of gravity.

call

Compared with

location in a

has the disadvantage of no local demand worth mentioning, but the advantage of being nearer to the next sales points.
Hence the smallest possible value for nF is 0.58a instead of a, as is
the case with location in a settlement. Except for nV, however, the

settlement

it

possibilities show an astonishing agreement in respect to the

and situation of the market areas. Thus all but the last column
Table 6 is valid also for location at the center of gravity. On

two
size

of

the other hand, the distribution of sales points within otherwise

similar areas is essentially different. The question of whether one
of the

The

two locations

is

definitely superior

criterion for superiority

would
demand.

must now be investigated.

same number of

be that the

places permitted a greater total

Unusual demand curves may be imagined that actually favor

one of the locations throughout; but
regarded as the average of

all

if

possible

the straight line

demand

curves,

it

may be
can be

shown " that, at least for the 10 smallest areas examined, location
at an original settlement entails a greater demand in half of the
cases (areas 3, 4, 6, 7, and 9) and location at a center of gravity in
the other half.^^ However, in those cases where location at the
center of gravity is more economical, its advantage over location in
a settlement is more pronounced than the reverse.
Thus whereas location sometimes appears more favorable in a
settlement and sometimes at a center of gravity, if each is considered by itself it may be presumed that when everything is carefully
,

considered location uniformly at either one site or the other is to be

preferred on the whole for many reasons. (1) With a split location
structure the number of industrial sites would increase, and consequently the advantage of a concentrated local

demand would

17. The proof, though not difficuh, is too long to be given here. In any case, it is
unimportant for the development of our ideas.
18. Consequently it may happen that with appropriate location of a factory fewer
places will provide a greater demand for the same commodity. This is possible with
goods whose longest shipping distance is too short to make the demand at points on the

borders of the large area

felt,

either strongly or to any degree, so that the

favorable situation of the remaining places in respect to the factory

small area.

With

relatively

short

is

shipping distances other unusual features

appear, but their discussion would lead us too far afield.

more

decisive in the

may

Part Two.

128

decrease.

This

mine the

sites of

economic

especially true of

is

other

locations, as

we

Economic Regions

capitals,

which

shall see later.

(2)

deter-

The

splitting of towns would also bring about a splitting-up of transport

lines.
(3) With larger areas the advantage of one situation over
another is negligible; with the smallest ones it is greatest for areas
1

and

3.

Above and beyond all

why the uniform pattern

this there

is

number

of practical reasons

of locations will generally favor original

Industry first arose as a side occupation, or as

(1)
production on a socage farm or in a village. (2) Location in a
Lines of
settlement assures better contact with consumers.
(3)
communication even between economically self-sufficient settlements
are already in existence, but may have to be provided for locations
settlements.

at a center of gravity.
c.

REGIONAL NETWORKS

We

have seen that there is only one suitable shape for market
and only a limited number of possible sizes and situations.
Because of the restricted number, the most favorable area is uniquely
determined for every commodity.^^ One and the same area will
usually be the market for several goods, since there are more products
than regional sizes. But beyond the market area these goods need
areas,

have nothing in common. In particular, they will generally realize

sales of entirely different magnitude, even though local demand at
the factory price is the same, since even with the same market area
they will generally have different possible shipping distances. Indeed, one might almost establish the rule that goods having one of
these three properties in common market area, possible shipping
distance,

two

and necessary

others.-"

things are

Thus with

no longer

sales

volumewill

differ in respect to the

a discontinuous distribution of population

as they are

with a continuous distribution,

where every product can be as unfailingly recognized by its area as

the chemical elements by their specific weights. But now the forms
can be deduced a priori in which the sale of all known goods and
With

19.

the area,

From this
demand at

20.

local

a discontinuous population the

must be

number

of settlements, not the size of

as small as possible.

a few apparent anomalies follow.

the factory the total

throughout a larger one. This

area has a longer

maximum

is

demand

easily possible

For example, even with the same

may exceed that

over a small region

when the product sold in the smaller

The greater the possible shipping

shipping distance.

distance, the fewer settlements will be required to achieve a certain sales volume, for

a long distance implies

fall in

demand with

little sensitivity

increasing distance.

to shipment;

that

is,

only an inconsiderable

Network

of

Markets

123

Market areas are no

commodity, but the commodity
takes the most suitable size from a fixed assortment. We can therefore continue our deductions without first considering the actual
sales situations for the various goods. The actual must be conof all others

still

to

come must

take place.

longer specially tailored for a single

tained in the possible. ^^

Market areas need no longer be classified according to goods,

Goods whose necessary market areas
are equal are included in one class. Because of their shape the
areas of the same size lie in immediate contact with one another,
and form a honeycomb network that covers the whole area. Their
centers, that is, the production sites for the same commodity classes,
are all separated from one another by the minimum distances, 2p,
and are distributed in regular honeycomb fashion. But how are
therefore, but according to size.

production sites for different

to one another?

21.

What

experience.
p.

126.

On

classes of

goods situated with respect

can be deduced need not be derived laboriously yet imperfectly from

I disagree with Euckens, Grundlagen der Nationaloknonomie (1940)

Here

the contrary, reason opens

new

possibilities that fructify daily experience.

Chapter 11.

The System

of

Networks

THE GENERAL PATTERN

a.

Market areas for the various kinds of goods resemble narrowmeshed or wide-meshed nets of hexagons that to start with can be
thrown at will over our plain. ^ Despite the resulting confusion,
every place would lie in the market area of every good.- Yet it is
worth while to bring order out of this chaos by means of a few
reflections.

we lay the nets so that all of them shall have at least one
common. Here a metropolis will arise, with all the advantages^ of a large local demand. Second, we turn the nets about
this center in such a way as to get six sectors with many and six
with only a few production sites (Figs. 28 and 29) .* With this
arrangement the greatest number of locations coincide, the maximum number of purchases can be made locally, the sum of the
First,

center in

minimum

between industrial locations

consequence not only shipments but also transport
to a

distances

minimum. With discontinuous

least,

and in

lines are

reduced

is

settlement, of course, only the

networks of those market regions described on page 1 1 7 as lying

Figure 27 shows that there are always
two possibilities for their location. If, for example, a circle with
the diameter of area 3 as radius be drawn about the central town,
it will pass in the first quadrant through three settlements, which
are thus possible locations for centers of the neighboring area 3.
There is now a choice between the two outer settlements whose
distance is likewise equal to the radius of the circle, or the middle
settlement together with a fourth possible point at the proper dis-

obliquely can be rotated.

1.

With

the limitation, aheady established, that their middle points coincide with

original setlements, not with centers of gravity

2.

The

situation

is

wholly symbolic.

We

roundings and cannot, without harm, neglect

and
live
all

certainly not with arbitrary sites.

simultaneously amidst

many

sur-

others for the sake of one single

preference.
3.

This presupposes that in a number of branches the planning curve does not
See Figure 48 and the accompanying text.

fall

steadily.
4.

More

places are indicated in Figure 29 than in Figure 28,

which shows only the

centers of the four smallest areas, whereas Figure 29 shows all regions.

124

The System

of Nclivorks

125

tance in the next quadrant not with one of the other two, which
are too near.

Once network

is

selected, the choice as to position

of the remaining networks that can be rotated

Fig. 28.

Theoretical pattern of an

Fig. 29.

economic landscape

is

no longer

free,

Theoretical pattern of an
economic landscape, but

without nets

Fig. 30.

Indianapolis and environs within

a radius of 60 miles.

Handatlas, 8th

(From Andree's

Fig. 31.

Toledo and environs within a

radius of 60 miles.

{Ibid.)

ed., p. 198.)

provided the separation into sectors with many or few towns is to

be carried through. Depending on the decision as to the position
of area 3, the middle or two outer sectors in the first quadrant will
contain but few towns. ^ The cogwheel-shaped immediate environs
5.

The

following consideration makes this clear: In Figure 27 the middle

sectors of the first

and lower

quadrant are mirror images of one another in respect to possible

Part Two.

J26

Economic Regions

of the metropolis are also necessarily poor in towns, for only a

few local goods can be produced with profit in its neighborhood.

Neither are the outlying environs, even within the same sector,
uniformly settled. Some localities have no production of their own
at all, whereas at other places the centers of several market areas
" cenof varying size coincide. Such agglomerations of locations, or
found
upon
are
calls
them,
tral sites," as Christaller so appropriately
(Fig.
regularity
certain
closer examination to be distributed with a
Smaller agglomerations can be found at distances of V3a, Sa,
32)
from each other; many of medium size at distances of 6a;
and
and larger ones lie 1 2a apart.^ Yet it is not true that when an equal
number of areas have their centers at two places these areas them.

2V^

selves will

possibly

be of equal

fulfill

size.

of the same size may quite

economic functions; that is, they

Towns

entirely different

can harbor entirely different industries. A smaller agglomeration

generally lies about halfway between two larger ones. The size of
agglomerations increases with their distance from the metropolis.
The greater the accumulation of industries the cheaper, obviously, are industrial goods on the average. Their wholesale price
level is therefore lowest in the metropolis.^ In the ring containing

few towns, and somewhat farther out, industrial prices rise sharply
until at last, with minor fluctuations, production sites again become
so numerous that the local price level falls (unless the index is
heavily weighted with goods having a very large sales area that can
be purchased only in the metropolis and therefore become increasingly dear with rising freight costs)
If the entire regional system has the radius L, goods for which
p is somewhat greater than L/2 can be produced only in the metropolis.^ Even locations on the borders between two regional systems
can no longer compete in such commodities. Consequently, at a
distance of something more than L/2, no new competition arises
for the metropolis. With a distance of something more than L/2,
.

locations.

On

the other hand, the distance between these pairs of possible locations

is

than the radius of the circle on which they lie. Hence they are too near together,
and a choice must be made between them. If a location in the lower sector is chosen,
The possible
its mirror image in the middle sector must necessarily be relinquished.
locations in the two outer sectors, on the contrary, are separated by the proper distanc^^.

less

6. The minimum distance between two production centers of any given size is aV3,
and every center has at least one neighbor at this distance.
7. Living costs, on the other hand, which include agricultural products, rent, and
extra expenses, and take retail markups into account, are highest in the metropolis,
at least when fuel is disregarded for reasons discussed on p. 42, note 10.
8. Such a typical metropolitan function, for example, is bank clearing at the highest

level.

The System

of

Networks

127

^\/5
Y^
7\^i

V/
V J^^^f^ I

1^
0^

^^

V/

11

>i.v

/\i.</
_

o-.te.

7i,i^

V
...

\^

s\i^:...-^j3__iz

__3oc

v/
^^>
^

?j

.i^':..t-#-:-,--

"750
Fig. 32.

The transport

The numbers

lines in the ideal

refer to the

number

economic landscape (one sector only)

of centers

which coincide

In the middle of the landscape there aie 150 centers of areas

in a particular point.

all of

which are smaller

than the landscape to which the pictured sector belongs.

The

lines:

The number of centers along the heavy lines is twice or more that along
number of centers along the thin lines is approximately one and
the number along the broken lines. The difference in traffic density

the broken lines; the

a half times

betM'een the left city-rich

and the right city-poor

sector can easily be seen.

P(nt.

128

Txuo.

Economic Rarions

f4

11.

1*10

1.33
23

2*8

/i,
1*t

2?.

15

25

f.|

/i

24

f9

n\
>

13

.37j^

iVy^
.i,.f

2*

16

^mq

12

,.

/..

fn/

./

fi.

ll
^*

Ipll

n/5

13

Z*^^

21/

21

15

^/

35/.

9'

26

16

32

31
''

20

1.39

'i

S'

28

IjtiZ

Z
Fig. 33.

Location of regional centers in the complete system.

The

Fig. 34.

centers bear the

Regions with equal structure.

numbers

(I)

of their region.

3.

Every town controls two complete

towns of the next lower rank. The numerals indicate regional centers with the same
number as in Figure 33, from which this one was made by omitting all regions without
a center and two complete places of next lower rank.

The System

of

Networks

129

prices will thus rise again, since goods with a large sales radius

become more expensive with increasing

freight,

and

their

(uni-

lateral) price rise cannot be counteracted by local production. Thus

from the metropolis to the boundaries of its region we find wholesale prices first low, then rising, then falling, and finally rising
again.^'^

upon drawing

communication,
(measured by the number of area
centers per unit of length) occurs along the sectors. Thus twelve
such main lines radiate from the metropolis; " i. e., six lines cross
in it. Elsewhere in the region there are junctions of only two or
Finally,

we

find that the busiest

in the principal lines of

traffic

Cross connections in the vicinity of the metropolis are

worth while and seldom exist in practice.^^ In
sectors containing but few towns, the lines of communication are
fewer and generally not well developed. In an over-all view, they
three lines.

theoretically not

spread out like a cobweb around the metropolis.

Order has now suddenly been brought into our market areas.
The position of individual regional networks is no longer a random
one, but follows from economic principles. Now we realize that
there must be at least one metropolis, around which its market area
and competing locations lie concentrically." It is, so to speak, the

9.

Instead of spatial price differences tfiere are spatial differences in profits wtien a

government enforces the same prices everywhere.

" crater field " of price
10.

This

is

is

For any individual product the

then replaced by profit " cones."

one reason why

it

is

generally meaningless to speak of the price level

around the average for the whole region is

and price funnels about single points of supply and production give rather the impression of a mountain range. We shall encounter the other
reason later: not only the height, but also the change in prices varies locally too much.
To conceal these variations by calculating their average would lead to error in many
of a region; the dispersion of local prices

too great.

The

price cones

cases.
11.

Eleven through railway lines run out from Berlin, for instance; from Paris,

including branches within a radius of about 25 miles, exactly twelve; directly from
London, twelve through highways. This orientation of main arteries toward the
metropolis was noticeable after the incorporation of Austria and the Sudetenland into
the Reich. Their main roads formerly ran toward Vienna and Prague, and good connections with the old Germany were often possible only by way of their own capital
cities.

In endeavoring to travel by railroad around

12.

finds that this

is

possible only at a distance of

Munich or Nuremberg,

some 50

say,

one

miles.

Further important results are: six sectors containing few towns and six conmany are grouped about the metropolis; in its immediate environs a region
having the form of a cogwheel remains free of towns; the towns show a honeycomb
13.

taining

distribution,

main

and are separated from one another by the same minimum

communication meet in the metropolis; and so on.

lines of

distance; the

joQ

Part
" isolated

industrial corollary of Thiinen's

Economic Regions

TtL'o.

We

state."

shall

not

apply this political concept to a situation that is at first entirely

nonpolitical, but shall call this system of market networks, this
highest phenomenon in the hierarchy of economic spatial arrange-

ment, exactly what

it is:

an economic landscape.^*

SPECIAL CASES

b.

Market Areas of Similar Structure

1.

It has already been mentioned that our series of market area

includes all cases that are logically possible, though not all need
exist in reality. They cannot exist, either because there is no product

whose necessary market area is exactly as large, or because extraeconomic factors above all, political division into administrative
units influence spatial economic arrangement.
Political division

is

frequently carried out in such a

way

that a

certain number of smaller regions are combined into a larger

administrative district. In France, for example, three cantons make

an arrondissement and three arrondissements a departement. We

shall therefore briefly examine regional systems in which every area
includes k regions of the next smaller size.^^ All other regions that
are possible according to our analysis will accordingly be disregarded.
If k
^, say. Tables 6 and 7 show that regional sizes I, 4, II,

and

30,

on may

so

but not 2 and

exist,

3,

and

10,

and 12

to 29.

14. Economic empire, economic region, or economic area (in the narrower sense)
would be suitable, especially if one recalls the original meaning of regio and Gebiet:
an area of authority, according to Grimm's Worterbuch. It is, in fact, the economic
domain of the central metropolis. On the other hand, economic district, or province,

emphasizes the lack of self-sufficiency that

raphers
to

may

object to the

consider that

closely the true

it

way

in

which

is

generally encountered in reality.

employ the word landscape, but

common

not only corresponds with

meaning

of the word.

the beholder, or the metropolis.

ask

Geog-

them

usage, but approaches very

In both cases the environs relate to a center

Only by way

of

these economic relationships

do

geographic peculiarities influence the region that has sprung out of pure space, as
with R. Hapke's more general " economic landscape " (" Die okonomische Landschaft

und Gruppenstadt

in der alteren Wirtschaftsgeschichte," in Sozial-

und

Wirtschafts-

On the other hand,

G. von Below, 1928, pp. 82-104)
the " industrial landscape " of E. Winkler, who, following the general usage of geog-

geschichte, Geddchtnisschrift

fiir

geography toward the landscape as its sole object, represents

which industry alone dominates (" Stand und Aufgaben der
Induslriegeographie," Zeitschrift fiir Erdkunde, IX, 597 ff [extensive bibliography]. Also,
raphers,

would orient

all

a geographical unit in

E. ^Vinkler, "

and

Raumordnung

der Wirtschaft,"

Neue

Ziircher Zeitung, October 18, 1940;

in correspondence.)

15.

These regions may

also be pieced together

from parts of

others. Strictly speaking,

therefore, the large region includes k centers of next smaller regions, which, however,

are

made up

of parts of

more than k such

regions.

TI>e System of Networks

131

For only region No. 4 is large enough to embrace three regions

No. 1; only region No. 11 embraces three regions No. 4, and so on.
Table 8 gives for a few values of k the most important data for the
corresponding regions.
Table

REGIONS WITH HOMOGENEOUS STRUCTURE

8.

Each Other

Size

(actual)

Regional Size,

Distance of the Centers from

Regional

the

Number

in

Complete System

afsi

a 1/41

ai/;;

a 1/32

a 1/42

a 1/72

19

a 1/38

ay43

a 1/73

11

24

106

.f^'

30

81

a 1/35

3^45

77

a 1/38

a 1/46

a 1/76

.^v

al/4T

a|/7T

= distance of the original settlements, k = number of next smaller sub-areas.

number under

the radical sign

is

at the

same time the

total

number

The

of settlements in

the region concerned.

Figures 34 to 36 show how much simpler the spatial picture is

than in the complete system of regions. This simplicity is gained
by some sacrifice of economy, to be sure, since it seems certain that
the necessary market areas of many goods have sizes that do not
appear here. Such goods have unnecessarily large markets in a simplified system. ^^ Nevertheless, such a simple landscape has something
16. Hence it is not correct to regard the
ment according to the principle of most

zentralen Orte in Siiddeutschland

fact that

when

/t

=3

all

places

lie

special case
efficient

where A

^3

as " the " arrange-

supply, as does Christaller, Die

(Jena, 1933)
pp. 63-85. Furthermore, the chance
symmetrically with respect to each of the six through
,

and thinly settled areas appear, has misled him into estabon the " communication principle " (ft = 4)
In this
arrangement the greatest possible number of important places lie on main lines of
communication. But this is true anyway (see Fig. 32) especially in a complete system
of market regions. The communication principle was one of the axioms by which
the final position of regional networks was determined. In our economic landscape
both this principle and the principle of supply are therefore united. It would
disrupt logical geometrical development if one were to suppose that cheapness,
rapidity, frequency, and extent of communication over long distances could create a
special locational advantage that would result in more industries being established
lines

and hence no

thickly

lishing a different arrangement

Economic Regions

Part Two.

132

about it, and above all it is probably the most that can
be attained today by conscious planning. Adapted to individual
cases it forms, furthermore, the very basis for the new organization
attractive

in the East.

O/O o\o

of/

o/o O/O

y ,-'-<o \

Fig.
/t

Regions with equal structure.

35.

4.

Every town dominates three

complete towns of next lower rank. In

contradistinction to Figure 34, regional

Fig.
(3)

36.

l.

o.o

O /

^v
V o\o
O/O

(2)

'"

Regions with equal structure.

six com-

Every town dominates

plete towns of the next lower rank.

boundaries and, instead of one sector, the

whole interior of the landscape have been

drawn.
than otherwise would be the case; partly because they could manage with smaller
regions, partly because these regions would be narrower in the direction of the com-

munication line and therefore broadened

Whoever wishes

to

at right angles to

it.

take all this into account must either incorporate

in

it

the

general location equations or content himself with a partial geometrical presentation.

In any case, he has to forego the advantages of a complete geometrical presentation.

For the same reason we did not consider, among other things, the fact that in the role
of important consumers towns mutually distort their own market regions. For instance,
the smaller towns are displaced excentrically in their regions toward the larger, as
rightly considered

by Culemann in

his

planning

("

Zur Stadtplanung

in

is

den neuen

With
deutschen Ostgebieten," Raumforschung und Raumordnung, 1941, pp. 100-230)
larger towns it is supposed that the local demand and the demand from the environs
.

can be met by separate regions; this

justifies

the assumption that the market region

for a given product will be as large as in smaller places.

The

special case

ft

=7

is

called by Christaller {op.

on the administrative principle.

place

is

divided

with twin
Kansas)

cities

among
like

He

cit.,

aptly characterizes

several administrative districts

Ulm and Neu Ulm,

pp. 84-85) a structure based

it

by the

(as is

fact,

first,

that

no

often the case, of course,

or Kansas City, Missouri, and Kansas City,

secondly, that the market regions of the places in question are cut

up

as

The System

of

Networks

2.

133

Square Market Regions

We

have already found the second best market region to be the

square." In utilizing demand it frequently is not much inferior
to the hexagon and has the advantage of simply drawn boundaries,
but also the disadvantage of longer roads. In the square, too, the
relation between the number of settlements, the size of market areas,
and the distance of their centers is extremely simple. If a be the
minimum distance separating the original settlements (which is
perhaps 5 per cent less with a square than with a honeycomb distribution) and n the number of settlements in a market region,
the size of the region
nearest rivals a

is

a-n

and the distance

of

center from the

its

V" exactly as in the honeycomb shape. The smallest

=

7 is, in fact, a
by political boundaries. For these conditions ft
ft
13 would be another. In the first case, however, the regional
boundaries are not as Christaller has drawn them, but as they appear in our Figure 36.
Christaller's figure is possible only because he departs from the most rational distribulittle

as possible

possible solution;

Besides, the political principle does not contradict

tion of the original settlements.

the economic principle, as he believes; rather, a few of the possible market boundaries

same time possible

are at the

The complete

political boundaries.

regional system considers all principles at once.

Whenever only

the

smallest possible market areas of similar structure are taken into account despite their
slight flexibility
plicity)

(as is

often done in practical spatial planning for the sake of sim-

each of the three smallest regional types

Thus

different standpoint.

principle, because

=4

ft

^3

is

is

especially advantageous

from a

really the best solution according to the supply

under these circumstances

it

still

provides the largest assortment of

communication principle, and ft

7
according to the political principle. In this sequence the central sites become less
numerous and larger and the whole system, of course, cruder and more rigid. Yet
regions;

ft

is

the

best

according to

the

although Christaller has limited himself to these special

know

that I

in all the literature

on the

subject,

and

cases, his

at the

inquiry

same time

is

the best

a distinguished

example of research in economic geography. It has visibly influenced planning in the

East (see, for example, Reichskommissar fUr die Festigung deutschen Volkstums.
Stabshauptant. Planung und Aiifbau im Osten [Berlin, 1941], 7. Hauptdorfbereiche
bei

Kutno)

That not only the

into our

own

system

is

but also the manner of its presentation, fit so perfectly

more remarkable in that the present system was developed

subject,

the

without knowledge of his.

17. Thiinen assumes it as an example
wirtschaft

(Der

und Nationalokonomic [Hamburg,

isolirte Staat in

Beziehung auf Land-

1826; Schumacher-Zarchlin edition, Berlin,

and C. Culeraann (" Aufbau und Gliederung gebietAufgabe raumlicher Gestaltung," Raumforschung und Raumordnung, 1942, pp. 249-256) recommends the rectangle because, unlike the hexagon,
through lines of communication do not cut up small regions and thus disturb local
1875], Vol. II, Pt. II, 4, p. 11),

Bereiche

licher

traffic,

as in

cut

but run tangent to them. Nevertheless, either long detours often result or else,
cities, diagonal streets are subsequently laid out, so that the regions are

many

up

als

after

all.

Economic Regions

Part Two.

134

regions include 2, 4, 5, 8, 9, 13, 16, etc., settlements, thus increasing

in size rather quickly as in the honeycomb form. Here, too, there
is a choice as to how a few regions (Nos. 3, 6, 9, etc.) shall be placed,

and with proper positions

sectors are likewise obtained that are rich

or poor in towns; four per quadrant in

12

2 t
1'

^l 10 i

However, they are con-

all.

i5

r ^

^t

&

>4

'

7\.

'

p4

>'3

^i!

j4'

y^

2
10

iSI/ fX
^

^
y(\ X X
/
^
A
)
K Ni

-^-h

l/^5

<'*y^ )t\
-J-

2I

4
V
w

^^

>/

"y^ 5

'

--

>9

'Vil/^n

v.^

/v.

;[> p "v yr

'v

s^
i

Fig.

37.

^J

4-

/6\

y\ ^

"x

-^\>\

^\\
h^

^sj^

9y"

/'.

5r

.7

4/V
Ni^
7<r7

V
23

Part of a square economic landscape.

The

right quadrant.

central site of the landscape

ten smallest regions surrounding

it

7*

Upper
and the

are in the lower left

numbers of the
Comparison
with Figure 32 shows the difference between quadratic and
hexagonal arrangement. In the former up to eight, in the
latter up to twelve, routes run together at one point. The
angles at which they meet are 45, 30, or a multiple
corner.

The

original settlements bear the

ten smallest regions whose centers they are.

thereof.

agon

siderably less

why square

Thus

also,

pronounced than in the hexagon one more reason

regions are

and the distribution

The

right-angled intersections occur in the hex-

and oblique-angled in the square.

less

economical. Figure 37 shows the shape

of the centers for the 10 smallest regions.

cut shows the most important lines of communication as

through lines intersect; in the smaller,

well. In the larger places four

two. But although two square road networks that are turned 45
degrees in respect to one another are superimposed, most connections
in the honeycomb road network are obviously shorter (Fig. 32)

Chapter

a.

The Network

12.

of Systems

THE RELATION OF LANDSCAPES TO ONE ANOTHER

In comparison with the

sary market area

may be

size of

our plain, even the

The

largest neces-

not smaller than

this largest market region, for this would mean abandoning without
cause the production of goods with a large necessary shipping distance. But the landscape will hardly become larger, for this would
mean that all places farther away than L (see p. 126) from the

Figs.

38

and

39.

landscape

is

Location of landscapes in respect to one another.

connecting routes between large

sectors with

small.

cites.

Broken

lines:

Double

landscape boundaries.

lines:

Hatched:

many towns

metropolis //i would have to give up without reason the establishment of a second metropolis, Hz. In these distant parts the advantages of agglomeration of producers at //i are no longer noticeable,
since they buy nothing more from there; secondly, the difference

between sectors rich and sectors poor in towns and the advantages
of communication associated therewith disappear progressively.
Hence a second metropolis arises at a distance of 2L from the first,
and so on, until finally the entire plain is filled with landscapes.
When these have become numerous enough, they assume the
135

Part Two.

ig5

Economic Regions

shape of regular hexagons. But it is still undecided how the sectors

with many towns in the various landscapes lie in respect to one
another. Figures 38 and 39 give two possible solutions. The first
has the advantage that the trunk lines of communication, between
Hi, Ho, and H^, run straight as a string, and yet along the route
containing the largest number of towns. In the second case, only
a few towns lie directly on the main lines, but many lie within a
relatively short distance to the right or left of them. It might be
thought at first that the position of the largest market region would
determine the boundaries of the entire landscape, but the demands
of communication are much too imperative for them not to pre-

dominate over

it.

b.

THE BOUNDARY REGION

All industries find at least one location in every landscape. Only

those goods with a necessary shipping distance, p, that is not much

L/2 are produced at more than one place. If p lies

between a little more than L/2 and somewhat more than L/3, all
further locations will be on or near the boundary (at the most a
distance of L/3 away from it) and their market areas will generally
encroach upon the neighboring landscape. But even with goods for
which p < L/3 it is impossible that the network of their market
regions should end exactly at the boundary of the landscape. Empty
corners always develop. Once in a while, and especially at a corner
where three landscapes meet, a factory erected on the boundary can
piece together an adequate market region from the empty corners

greater than

of neighboring landscapes. Should the corners be too small for this,

one of those situations arises again in which market regions can be

somewhat larger than necessary and moderate

possible, which are particularly large in those

To

summarize:

transgressed;

if p is less

if p

lies

than L/3,

first

cases

of all boundaries will be

between L/3 and L/2, some

boundaries and some

larger than L/2, excess profits

excess profits will result; if p

1.

Only

these,

is

considerably

These producers
|

export also^

These consumers
import also

These consumers

buy only domestic goods

Thus where

transgression of

arise.

These producers
supply only the domestic market

become
where L/2 < p.

excess profits

on the other hand, can also be displaced by foreign competition.

boundary is at the same time a customs frontier these pro-

a landscape

ducers alone are interested in protective duties

if

they fear a competitive struggle.

The Network

The

of Systems

137

landscape boundaries can be more easily surveyed

if they are arranged not according to the shipping distance of goods,
but according to the locations of those concerned.
The area within which consumers are affected by boundaries is
thus larger than the corresponding area for producers; that is, the
region dependent on imports is larger than that participating in
exports. Of course, this says nothing as to the relative size of imports

and

effects of

exports,

though

it

may, nevertheless, be concluded that more

persons buy from abroad as consumers than export in their capacity

of producers. If imports and exports are equal, the individual consumer imports less on the average than the individual producer
exports.
c.

Upon

RESULTS

examination, many more regularities could be

extracted from our system of market regions, but as the assumptions
of our analysis are seldom completely fulfilled in reality there would
be little profit in pursuing it to the last detail. The findings so far
have been surprising enough: an area from which our assumptions
have actually wiped out all differences can be divided on purely
economic considerations into regions that do not represent simply
homogeneous logical constructs, but form, if the expression be
allowed, an organic whole.
First we discovered simple market regions surrounding every
center of consumption or production in the form of a regular hexagon. Second, for every group of products a net of these market
regions was found. And in the third place, a systematic arrangement of these various nets appeared. This self-sufficient system is
closer

the ideal type of an economic landscape, or economic region in the

narrower sense. Finally, such landscapes are distributed throughout
the world like a network and in accordance with definite laws.

B. Economic Regions under Difficult Conditions

So

far

we have derived economic

distance, mass production,

regions simply as functions of

It must not, of course,

and competition.

be expected th^t we shall now consider all the factors thus far
neglected, in order to derive a theory that fits reality. This sounds
good, but is humanly impossible. Were we to try, we should either

end up with equations and be forced to give up observation (visualization) and application, or else deal with an infinite number

We

of individual cases without general validity.

discuss the effects of only a few interesting changes

shall

therefore

from our assump-

(Chapters 13 and 14), and then give conversely a more

realistic picture of economic regions, though without endeavoring
to fathom all their causes (Chapter 15). No simple rule for the
application of theory to practice should be expected, since that is
more than science is able to give. There art and venture begin.
tions

138

Chapter

Some New

13.

Factors

ECONOMIC DIFFERENCES

a.

Local Differences

1.

Price^

in

Within the Same Market Region

a.

possibilities of geographical price policy

1.

Three

entrepreneur for only his

can adapt his prices to the
or keep them so rigidly fixed that all buyers

possibilities are

open

to the

price policy will be discussed here.

individual case

pay the same

f.

(A)
o. b.

He

price (F) or the

same

(or " delivered ")

c. i. f.

on the
Depending on
average and from place to place. We shall now examine how they
are set, how high they are, and how they affect the entrepreneur
himself and his customers. In order to do so we must first free
ourselves completely from the notions of traditional price theory,
which regards demand as though it were concentrated at one point.
price (C)

his policy, his prices will differ

.^-^

Preliminary Study (1) ; Local and Distant Individual

DemandA Comparison. Among other factors the extent and vari(aa)

ability of the

demand

of

consumers

its

(in various places)

will

depend on the geographic price policy of a firm. For the sake of

simplicity we shall start once more from the assumption that individual demand is linear, and the same for all individuals.
Those who

1.

results are these:

dislike
(1)

mathematics may skip

Spatial price differentiation

up

to

makes

it

p.

The

167.

principal

possible to decrease the

of market areas still further. Hence it is enforced by the tendency toward

maximization of the number of independent enterprises, though it eliminates again

size

the

profits

interests of

from differentiation.
nearby consumers.

(3)

Differentiation

(2)

not so great as to be damaged by resale.

(4)

Uniform

f.

contrary

generally

is

The most advantageous

differentiation
o. b.

prices

is

to

the

generally

would be more

favorable to the consumer as a rule.

2.

This should not be confused with the irrelevant technical question of whether
is, whether or not

the carrier collects the freight from the buyer or the seller; that
it

appears on the
3.

There are

bill.

several combinations

of zones with equal prices

fictitious location

in

mind

in

what

(A

+F

and variations of

or

(basing-point system)

-f C)

The meaning

follows.

139

this.

For example, the creation

or calculation of the freight from a

of A, F,

and

should be kept

Part Two.

140

demand with regard

Let do in Figure 40 be the individual

the delivered price.

It is

close to or far

from the

paid by each;

i.

The demand

e.,

Economic Regions
to

the same for all buyers, whether they live

factory, since

it

relates to the price actually

to the local price prevailing at the destination.

curve of a customer in the neighboring place with

This demand curve, d^,, lies below

i, which is the unit
freight cost from the factory to the neighboring place, d^ is valid

respect to the

the

f.

o. b.

demand curve

only for

all

price

vertical distance

it is based on
payment to the manubut which is of no particular

customers at a particular distance since

the factory price, which

facturer

is <ii.

by the

do

and which

represents the net

varies with distance,

Amount

Comparison of individual

Fig. 40.

demand with
price
i.

o. b.

(do)

respect to the

and with respect

price

(dj),

c. i. f.

to the

the latter as seen

by a buyer in a neighboring town.

Vertical distance
dj:

unit

freight

between do and
from factory to

neighboring town.

interest to the purchaser.

We

determined. Let a vertical

assume that prices have already been

line,

UT,

intersect do at the level of the

uniform c. i. f. price. It will cut di at the level of the distant f. o, b.

price. Let a horizontal line, HJ, intersect do and di at the level of
the uniform f. o. b. price. The corresponding c. i. f. price then lies
on do vertically above the intersection with d^. A straight line, KL,
bisecting UJ for reasons to be given later, cuts do and d^ at the level
of the differentiated f. o. b. price (policy A)
The corresponding
c. i. f. price lies on do vertically above the intersection with d^.
From this it follows that with C the seller pays the whole freight,
with A half of it, and with F no freight at all. As as consequence
the individual market under C is everywhere equally large; under
F it declines, independently of the level of the unit price in the
neighboring place, by an amount proportional to the freight. The
same is true of A, except that the amount is lost is always half as
large as under F.
.

Some New

^4^

Factors

Geographic differences in the

difficult to

The

determine.

is ci

are

more

UR -^ QU;

in E,

demand

of

elasticity

elasticity in C7

==

= KR^ QK; in /, = JR-~ QJ. Since

= ES^ DE; in K
QU = DE, and UR > ES, ^ > Corresponding comparisons give:
e,

it is 3

e.

2.

>

Cl

In words:
price

is

The

(1)

more

policy for

individual
price

o. b.

>

demand in respect to the c. i. .

demand as a function of

than the individual

elastic

the corresponding

>

one and the same

>

(ei

place,

This is true of every price

any demand curve; not,

2) .*

and

for

like the following propositions, for the linear only.

If

(2)

o. b. prices for

f.

(C)

freight costs

(A)

costs

4.

The

or not at

reason

>

(ei

increasingly distant places differ by total

(F)

all

that a certain percentage change in the

is

the same in both

(see

" Spatial

Studies, June, 1937, p. 183, note 1)

c. i. f.

say.

Discrimination," Review

Price

Since the same effect

when

The same change

a market center

is

is

is

of

produced by
it is

greater.

surrounded by a

town affects the distant

by the amount of the freight
price is more elastic than in respect

of price in the

seller

more

costs.

Therefore his supply in respect to the c. i. f.

price (contrary to Hoover, op. cit.,
f. o.b.

to

price causes a smaller

o. b.

price, the elasticity in respect to

exactly corresponding situation holds

supply region for milk,

f.

whereas the absolute change

price,

c. i. f.

M. Hoover,

E.

a smaller percentage change in the

An

they differ by only half these

demand in respect

if

the elasticity of the

percentage change in the corresponding

Economic

'

falls;

2)

strongly, because his net receipts are smaller

the

profound areal
also explains

191).

p.

Besides explaining the

even a small shrinkage in the radius of the supply region, it

agricultural supply reacts so strongly on world market prices, particu-

effect of

why

and within these countries in their outlying parts.

Here we meet a further difference between agriculture and industry. In the former,
supply, in the latter, demand, is especially elastic in respect to the c. i. f. price. Hence
larly in distant overseas countries,

changes in

demand

in the former, in supply in the latter, influence the

relatively little; as, conversely,

food)

and supply

demand

in the latter

in the

(because of fixed costs)

drops should exert an equilibrating

effect

c. i. f.

price

former (because of the fixed need for

react less

in agriculture

upon

it.

Thus

price

by increasing demand

than they decrease supply, whereas in industry they should decrease supply

less

less

than

But the market price is a c. i. f. price in agriculture only; in

on the contrary, it is an f. o. b. price. Consequently the producer pays the
in the case of agriculture, the consumer at least half the freight in the case of

they increase demand.

industry,
freight

industry.

In regard to the
cially of

at the

in

mining,

is

f.

o. b. price,

the

also less elastic,

demand

though

it is

of the customers of industry,

boundaries of the market area (except under C)

demand,

especially

elasticity relationships,

more than the market

as

it

is

and espe-

nevertheless elastic enough, particularly

.

At any

rate, a cyclical decline

greater here, must, depending

on the geographical

lower unregulated market prices in heavy industry and mining

prices of agricultural goods.

overseas marginal farmers

who

Only the

excess supply of those

are really bankrupt but generally subsidized,

and the

reduction of supplies by industrial combinations, often lower agricultural prices more.

5.

Except, perhaps, with goods that are not strictly comparable.

,,

Economic Regions

Part Two.

1^2

to current

more

the

f.

with the distance

o. b. prices increases

rapidly the smaller the difference in

(ea

>

csl 2

o. b. prices (3

f.

This holds true for a comparison between different

> u)
> u)

-^

places.

In respect to the c. i. f. price, demand becomes continuously

with increasing distance from the production site than
in respect to the corresponding f. o. b. price (with increasing distance from the factory the superiority of ci over e, becomes greater
and greater) under C, because the elasticity in respect to the current f. o. b. price, which corresponds to the constant c. i. f. price (ca)
falls absolutely according to proposition 2; under F and A, because
the elasticity of the demand in respect to the current factory price
rises with distance, though less than in respect to the local price.
This is plausible because ci > 2 > ^3 and ti > 2 > 4-^ Thus 2
increases absolutely, but decreases as compared to ei.^
(3)

more

elastic

Elasticity in respect to the

(4)

>

(fi

>

c.

price increases with

i. f.

it

in all places, so that at a distance even small changes

4)

may

in the local price

on the demand under

greater reaction

elicit a

certain circumstances than large changes in the vicinity of the factory.

Preliminary Study

(bb)

(2)

Local and Spatial Total

Demand

comparison of the demand at the location of a

demand throughout its whole market area is
but a comparison between individual and aggregate demand. The
demand of n fellow-townsmen of the manufacturer is equal to n
times the demand of any one of them. It is different, except with
C, when these n buyers are distributed over the entire market area.
Comparisoji.

factory alone with the

To
6.

Proof: If d^

nearer to

its

is

continually shifted

the rapidly falling factory price,

factory price that
7.

If

is

is

and

not falling at

With

in respect to the

by coincidence equal,

it

is

c.

more

HJ

it

smaller,

will intersect

nearer and nearer to

UT
its

and

nearer and
(i. e.,

HJ's)

in the latter case

more and more

strongly on the

all.

taken as any arbitrary

interpreted also as follows:

demand

downward

is

former case demand reacts more and more feebly on

to say, in the

is

demand

regional

lower end, and

UT'%)

(i. e.,

upper end; that

the

The

anticipate the result:

c.

i. f.

price unconnected with E, ei>e2>e4 can be

the same sales

i. f.

price

is

elastic at the

f. o. b. and c. i. f. price)
on the contrary, if the prices are

(associated

(ei>e2)

same place

in respect to the

f.

o. b.

price

(f2>e4).

This

true even though with increasing distance the

same change in the factory

and less percentage change in the local price. Proof for F: In calculating Ci and 2 the denominator is the same {QU
DE) If d^ is shifted downward,
the denominator in the new calculation of the elasticity decreases in both cases by the
same absolute amount. But only with ej is the numerator increased by the same
amount (Fig. 45: Cj
P2L -i- AP^, 62 = p^K -^ Bp [where Bp^
Ap^]. New calculations:
P^L + P7P2 -^ AP2 - P.P^; 2
1
pj ^ Cp, [where pj = p^K and Cp, AP^ - P.P^]).
8.

is

price causes less

Some

i43

i^exu Factors

than the local demand. In both cases,

with price and distance.
The regional demand is smaller: If there are n persons in P
(Fig. 21)
their demand (urban demand) will be rz X PQ,, other
things being equal. But if the same persons are evenly distributed
over an area with the radius PF, around P, the demand of each with
price policy F, and generally with A also, will be smaller than PQ
If the straight-line demand curve is taken once
(rural demand)

generally also

more

elastic,

elasticity increases as a rule

we can even say by how

urban demand: It amounts
to one third of the urban demand.^ For since the volume of a cone
equals the area of its base times one third its height, the demand
at any one point in the circular area would amount on the average
to PQ/3, and at n points to rz X -PQ/3. Now we see why the metromore

as the average of all possible shapes,

much

the rural

demand

short of the

falls

so much more attractive to industry

not
only, and not always, the greater
than the rural demand:
number of consumers that attracts, but also the demand of each,
which is about three times greater in the limiting case; that is, when
the actual sales radius is equal to the possible one. But competition
reduces the size of the area considerably, and it is precisely the boundary zones, which have the smallest demand of all, that are eliminated. In the remaining area the individual demand is still smaller
on the average than PQ, but generally, and above all with A, considerably larger than PQ/3.^

demand

politan

(n

PQ)

is

It is

9. If,

on the other hand, the demand curve

is

concave upward, the

demand

of

country dwellers (compared with that of a person living at the factory site) will be
less than one third, and if the individual demand curve is convex, more than one

what would correspond

numbers.
now, modify this result. Affluence, or at any rate
population density, decrease with distance from a town. For since farmers living away
from the city pay double freight in the manufactured products that they buy and the
agricultural products that they sell either their income will be smaller or their farms
larger than in the vicinity of a town. But even with the same income and at the same
price, especially if this is high, the individual buys fewer and fewer urban goods with
increasing distance from the town; for his demand depends upon price relationships
as a whole, and these shift more and more in favor of rural products. Consequently
third, of
10.

few

the individual

demand curve

intersection with

individual

the

demand

curve, but

demand throughout

is

rotated

The

;-axis.

abruptly as prices increase.

rural

to their

factors, neglected until

sales

more and more toward the

left

about

its

cone cannot then be constructed from the

must be constructed from a

special

one that

falls

more

Because prosperity and the desire to buy decrease, the

the entire region

amounts

to still less

than one-third that in

the town. Only the decrease in population density counteracts this: More farmers with
a more even distribution then live near the town, where their demand is still relatively
large.

Since for

all

three reasons

their elimination raises

perhaps absolutely not

demand in
demand

the rural

much above one

the boundary zones

to

is

particularly small,

a comparatively high degree, though

third of the

urban demand.

Economic Regions

Part Two.

1^^

The

demand

regional

is

more

elastic.

Strictly

speaking, this

statement holds only for the average form of the straight-line demand
curve; but it is therefore valid for the majority of conceivable, if not
actual, cases. It is a rule of thumb. It seems plausible because a rise
in price, for example, diminishes not only the individual demand
(the height of the demand cone), but also the number of buyers
(the radius of its base). Of course the average height of the cone
(which is the relevant magnitude so far as total demand is concerned)
is decreased by less than its maximum height (which represents the
It is therefore necesindividual demand at the center of the region)
sary, at least for the average case in which the demand is linear, that
rigorous proof of the statement be given. It is offered herewith for
the case where the market region is restricted by nothing but transport costs. In this case curve A in Figure 41 represents the total
demand." Now let d be the individual demand at the site of produc.

D the total demand throughout the sales region, and R the unit

tion,

transport costs, borne by the consumer, from the production site to

the boundaries of the region (the highest freight) at the factory price

d\ D', and R' be corresponding values at price p'. Then

R^d -^ R'^d'
d'
d'\ since with
a straight-line demand curve R'
d'R -^ d. If p > p', ci < d';

p;

and

let

D-^D' = 7ri?2rf/3 ^ ^i^'-'dys

= ^

d^d' > d'^ d'^; d^d' > D-^D\ U p <

d^^

d^ <C

D ^- D\

falling prices

That

and decreases with

demand

individual

p' then,

on the

contrary,

demand increases with

prices more sharply than the
in short, it is more elastic in

the regional

is,

rising

at the factory site;

respect to the factory price.^^

To

give an example: with a linear

= R^ -^ R'^.

That

is,

the regional

are related as the cubes of the

demand

demands

maximum

D -^ D' = d^ -^ d'^

at various factory prices

freights.

If,

for instance,

by half the highest freight, the regional

demand will fall to 1/8, but the individual demand to only 1/2.
A similar proof could be brought for the case in which the market
the factory price

11.

The

12.

In

raised

following symbols, however, do not refer to Figure 41.

still

more general

effect of a price

a town, the
elastic

is

than

demand

is

The

terms:

change on the

total

therefore least elastic.

When

is

the

the area becomes a point, as with

Consequently outlying demand is more

elastic than domestic, which is of

and foreign demand more

examining the transfer problem.

local,

importance in

smaller the necessary area the weaker

demand.

other side of the situation

also.

The

It is interesting to understand the

lower the price, the more does a change in

demand, as is readily seen from curves A' and A in Figure 41. But
more effective is its change, even with a high price. In the
limiting case, point concentration, G coincides with F, and the effect of a division of
the town among several producers is percentually the same at every price.
regional size affect

the smaller the region the

Some New

area

145

Factors

restricted

is

by competition (A" in Figure 41 corresponds to

this)

between the price and elasticity, total demand,

demand, is more elastic the higher the price
This is easily seen from the
(always assuming a linear demand)

As

for the relation

exactly like individual

Oz

Os

TO

0,
Individual

Transport funnel

Fig. 41.

OV

Volume
Volume

OW

Volume

OJJ

Total

Various types of total

WA

demand

demand

of cone resulting from revolution of

demand

curves

O^FT about O^T

of truncated cone resulting from revolution of

as

O^ADT

an axis

about O^T as

an axis
of truncated cone resulting

from revolution of O^RST about O^T

of truncated cone resulting

from revolution of

as

an axis

OX

Volume

OiPQT

about

O^T

as

an axis

Greatest possible total

A'

Demand

demand

as a function of factory price

within the circumscribed circle p

{^M'P

= O^A = EF)

as a function

of factory price ^^

A"

Total demand as a function of factory price when price and distance of competitors are given

A'"

OM'

Total demand as a function of factory price when price at areal boundaries

OP

is

supposed always

is

the price, p the size of the area, which together result in equilibrium.

to

be

shipping distance, that

is

is,

the circumference beyond which no

supposed to come to O^, does not reach the value p with every factory

equation

The

more demand
price.

D -^D' = R^ -^ R'^,

if it is recalled that consecutive equal

(and even more so percentage) price increases diminish
successively more and more. So much for the elasticity of curve A.

absolute

13.

From

factory price

OE upward

influence on the extent of the total

this restriction in regional size has no further

demand. Hence A' coincides with A from here on.

Economic Regions

Part Two.

146

The matter is exactly the same if the radius of the market area
cannot be greater than r (or p in equilibrium) regardless of what
the possible shipping distance R may otherwise be (curve A', Fig. 41).
We let R increase slowly; that is, we let the price fall. As long as
R <i r, the given boundaries are irrelelvant. But when R becomes
greater than r, an increasingly large part of the possible demand
will not be realized because of the restriction of the region; i. e., for
this reason, too, total demand will become less elastic the lower the
,

price.^*

not the maximum distance of the

boundaries of a producer's market, but the distance and the prices
of competitors that remain constant (curve A") this situation, too,
provides an additional reason why elasticity should increase with
price. In Figure 41, O. is the location of Oi's nearest competition,
which limits the highest f. o. b. price obtainable by O^ to O^H; that
is,
to the equilibrium price, p, and the corresponding doubled
shipping distance 2p. At any given price, OiB, the extent of sales
obtainable, BK, is equal to half the difference between the actual
~- 2)
and the highest possible price {BK
Again it is true

on the other hand,

If,

it

is

= BH

that

an equal percentage

more the higher the

centually

rise in price shortens the sales radius per-

absolutely, the shorter absolutely

price.
is

For the higher the price

the sales radius.

Now

since this

already shorter than under the conditions of curve A, it follows

that the elasticity of curve A" increases the factory price even more
rapidly than that of A.
is

Finally, the elasticity of

interesting; that

is

demand

of persons living at a certain distance

in the

same proportion

individual

in respect to distance itself

to say, in respect to transport costs.

demand

from a factory

as the distance

(r)

The

in respect to transport costs,

is

The number

(c27rr)

increases

elasticity of the

on the contrary,

with distance, as can be seen from Figure 40 if one thinks of

the X-axis as passing through
and thus obtains the elasticity of do
in respect to the freight drawn into the figure from
upward. The
elasticity coefficient of the total demand in respect to distance may,
for the first reason, be low or even negative, but for the second reason
it increases with distance.
On the other hand, the elasticity of the total demand is independent of population density, since this influences total demand
to the same degree at all price levels.

rises

14.

One may

demand. Yet
reach

it

in

say also:

cannot

The

smaller the region the

less

the elasticity of the total

below the elasticity of the individual demand, but only

the limiting case if the whole region coincides with the manufacturing site.
it

fall

<

Some New

^47

Factors

Geographical Price Discrimination. With price discrimination the seller asks of each buyer the factory price that will yield
the highest profit. Where it does not involve too much trouble,
(cc)

price policy

therefore the best.

is

Now how

is

the most favorable

price to be found at any given time?

1.

The

Size of Price Differences.

The

factory price of

an

isolated

and, conversely, marginal revenue does

not equal price. Hence the equilibrium condition also does not
price) but only in its
hold in its limiting form (marginal cost
enterprise influences

sales

its

marginal revenue). In this case price

general form (marginal cost
when this condition is fulfilled
advantageous
most
is
discrimination
with F and C) for all buyers
(as
only
not
for each single buyer,
upon the strength and elasdepends
revenue
together.^^ Marginal
upon distance. Everydepend
ticity of demand, and both in turn
thing is to be related to the f. o. b. price, for the entrepreneur is
interested only in the effect of the price he receives, not that which
the buyer pays.

Now

let

= freight per unit from factory to buyer

P = delivered price \P = {n)
p = factory price {p = P
n = individual demand at delivered price
= elasticity of demand in respect to delivered
t

t)

P X dn
n
c

= marginal

dP'

price

percentage change in quantity

'

'

percentage change in price

costs.

Then marginal revenue

is:

+ nXdP
^_ Pxdn dn

d(Pn)

dn

^_^

Marginal revenue equals marginal costs when P t (P -^ e)

Hence it follows that the most profitable factory price is p

=
=c
c.

(P-^e), or p
c nf\n); or, more correctly, since no quantities
containing p remain on the right side of the equation,^"

15.

Only

in

(in preparation)

is the marginal condition not

"
See Losch, " Geographic der Preise

the case of a prescribed market area

necessarily fulfilled at the point of greatest profit.

.

On

the contrary, total revenue

> total

costs

must always be a second

condition.
16.

The

Economic

derivation

is

E.

M. Hoover's

Studies, June, 1937, pp. 182-191)

("
.

Spatial Price Discrimination," Review of

Economic Regions

Part Tiuo.

1^8

Obviously the factory price is not the same for all buyers, but
depends upon t, c, and c. We shall now discuss the influence of
these three factors

on

p,

using the simple

The

greater the distance of the customer from the

factory, the greater, ceteris paribus,

to pay.

increases with

remain constant

formulation

= C+{P^e)].

[p

Distance}^''

first

when

is

the factory price which he has

and

c are constant.

does not

but increases with distance exactly

as a rule,

as

t.

While p rises with

increasing t, it falls with increasing e. Whether p rises and falls
with distance therefore depends on the relation between e and t.
What are the conditions under which p will rise with distance?

on

(See the preceding section

this

point.)

Let ^1 be nearer the factory than An. p^ will then be greater than
pi

if

i-C

From

^2

^1
1

this it follows that

2(^1

<^)

^1(^2

But

>^ gig

^ r-^ is
1(^2

+ + c)
(^2

^1)

necessarily smaller than

The remainder

1.

of the

c)

But e.c
than one if (co^i +2^) < (ei^i
ic).
than eiC. If the inequality is to hold, t would
have to show a greater percentage increase than e. But this is highly
improbable, since e can become infinite while t always remains
finite. If in the absence of better information we assume a straightline demand curve as the average shape, e will increase more rapidly
than t. That is, the very shape of the demand curve makes it unlikely
that p will increase with t. But, in addition, even in the few cases
in which p might increase with t as far as demand is concerned,
it can actually happen only in the still fewer cases where A^ can be
prevented from buying through A-^ rather than directly from the
factory. It follows that the factory price will fall with distance as a
inequality will be
is,

less

as a rule, greater

rule.'^''^^'''^

16a.

The

subsections " Distance," " Elasticity,"

17.

This

is

shown

constant, then p'

in Figure 42 as

is
1

and

"

Marginal Cost " have been

German edition, pp. 96-98.

follows: If p and e are variables but

translated from the fuller version of the

first

a rectangular hyperbola which, for

>

1,

lies

is

held

entirely

Some

N<?zv Factors

149

The more elastic the demand the lower is the I'actory

must be paid. This statement is absolutely valid for
If demand is very
and usually holds also for t
/().

Elasticity.

price that

constant

t,

elastic, the factory price virtually

coincides with marginal cost: the

c. The price canhyperbola p'

0(e) approaches its asymptote p
not fall below marginal cost. Yet if e < 1 this would have to be the
case. It follows that the equilibrium point must lie on the elastic

stretch of the

demand

curve. ^

within

quadrant

Its

the
t

P"
e

Finally,

1.

must

first

= p' -\-p".

rise at least as

with increasing
greatly, that

constant

asymptotes

are

p^c

and

l.

Since

represents a family of similar hyperbolas with the asymptotes

is,

much

only
if

if

For

>

1,

as p' falls, if

p' falls with increasing

is

even small increments in

increases very rapidly.

the factory price will increase

the factory price increases by

less

less

with

to increase
e

raise the

e.

=
=
t

f (e)

and

Consequently p"
c.
But p" can increase

corresponding hyperbola

Figure 42 shows furthermore that with

with distance the greater

is e.

For

>

than the freight. This follows from Figure 42 and

from the equation

which

is

fulfilled for

2.

Fig. 42.
18.

Since the excess profits of the nearer entrepreneur are greater, therefore, than

more distant ones, the former have a greater influence on the choice of
would correspond to their demand, to say nothing of their numbers

those of the
location than

a further reason for the concentration of industry in large

19.

This

instances in

is

not only rational but also

realistic.

which a product has a uniform

cities.

One need

price, or in

think only of the

which the

seller

many

pays at least

part of the freight.

20.

left branch of the hyperbola p' = <p (e) is limited by p

c in the upward
and by e
1 toward the right, and it always goes through the origin.
With

The

direction

it is too low.
For
< e < I, the
This would make marginal revenue, which for
< e < 1 is negative, positive again. As production increases, total costs rise and
subsidy payments fall. Hypothetically speaking, production is expanded in this case
until marginal cost equals the marginal savings in subsidy payments. For e < 1 the

a negative elasticity the price

is

thus positive, but

price becomes a subsidy payment.

Economic Regions

Part Tu'o.

i-o

Marginal Cost. The higher the marginal cost the higher is the
factory price which the same buyer must pay. How does a change
in c affect the spatial price dispersion, i. e., the dispersion of the
factory prices which are established for different distances? Since p'

changes proportionately with c, while p" is independent of c, a

change in c affects p == p' -\- p" more the greater p'/p'' is. Since this
fraction increases with distance, an increase in marginal cost raises
the factory price for distant buyers more than for near-by customers.
Thus an increase in marginal cost reduces spatial price differences
and a decrease widens them.-^ As the reduction in the market area
that

is

made

Example: We now apply the

which the individual demand is
solution.

From

follows that

and thus

possible by price differentiation raises cost,

diminishes spatial price differences,

e=

demand

the
{p

-\- t) -i-

{b

it

brakes

itself.

results to the characteristic case in

linear,

and

equation, p

p t)

-\- t

offer first

an algebraic

= [{b/a)n'\ +

h,^^ it

and hence, according to the

c t). Since b and c are given,

^{b -\formula for the factor price p

^{t2 ti).
places we get pi p2
different
For
two
falls
t
rises.
as
p
Thus with a linear demand schedule the factory price falls with
distance, and by half the freight.
As for the geometrical solution, do to dz in Figure 43 are

demand

individual

curves in respect to the

f.

price in three

o. b.

Bo to Bo, separated successively from one another by the

i.
Bo is the site of the factory. The marginal revenue, Uo',
is easily derived from the demand curve do by drawing the line AN'
in such a way that N' bisects ON.~^ The curve for marginal revenue

places.

distance

means minimization of losses rather

and marginal revenue
therefore only one equilibrium condition; the other is that there must be a true
and marginal

equality of marginal revenue

than maximization of
is

The

profits.

cost

equality of marginal cost

maximum.

profit

21. I

doubt that the intensification of spatial price differences that has been

repeatedly noticed during a depression requires an explanation as complicated as that

it.
A general reduction in costs acts differently from a
which alone our analysis is valid. H. W. Singer ("A Note on
Spatial Price Discrimination," Review of Economic Studies, October, 1937, p. 77) who
attempted such an explanation, based his argument solely on the improbable case that

given above, or even admits of

partial decrease, for

constant.

6 is

22.

Where

p,

t,

and n have the meaning given above, and b/a and b are the para-

meters of the particular straight-line

23. Proof:

total

demand curve.W. F.

S.

General equation for the linear demand curve: y

revenue curve,

ginal curve, R'

i2

h
= 2-x

= ( _x + b)x;
b

= _x

-(-

6;

for the

""

whence by

differentiation

is

derived the mar-

^
-f-

b.

(For a geometric proof, see

Imperfect Competition [London, 1934],

p.

32-W.

F. S.)

J.

Robinson, The Theory of

Some New

Factors

151

Amount

Fig. 43.

(a)

Three individual demand curves

with respect to

f.

o. b.

price as function of dis-

tance from site of factory,

total

revenue curves,

port cones.

(c)

(b) Corresponding
Corresponding trans-

Economic Regions

Part Two.

j_2

function of total sales, /', is derived from the individual marginal receipts by horizontal addition. This intersects the marginal
as a

cost curve,

hence
of

it

HG

K\

at G.

Here marginal

costs

the point of highest profit.

with the individual marginal
is

optimum amounts

equal marginal revenue;

The

points of intersection

revenue curves give the

The

that will be shipped to each place.

factory

prices, po, pi, and p2 (which, incidentally, all lie on the straight
line HPo) can be read off from the corresponding demand curves.
Finally, the corresponding delivered prices, Po, Pi, and P2, lie on doIt is easily seen that these prices differ by f/2. According to a
well-known theorem P^L, for example, is equal to AH -^2 and
p^K + f/2, and so on.
i, P^L
p^K
CH 2. Since

AH-CH =

Furthermore,

is

it

and that price at which nothing

where the elasticity of the gross

between the variable direct

costs

more would be

is,

sold;

profit in respect to the

clear that for every place the price lies halfway

that

amount

sold

is

equal to

(for

example,

one were to try to dispose of a larger or smaller

from the buyers concerned (that is, receipts
would
be smaller in both cases (Fig. 43b) .^*'"^
costs)
variable
less
All this is made especially clear by the traffic funnel in Figure
43c, where the symbols are the same as for the corresponding lines in
Figure 43a. D'L is marginal costs, assumed to be constant for the sake
of simplicity; LPq is the monopoly profit from home buyers, and PqA
the line of c. i. f. prices. ALX would be a cross section of the traffic
funnel if no monopoly profit were taken but a uniform factory price
at the level of the variable costs were asked. APqX is the funnel
with monopolistic prices. If one unit were sold at every point on
the line OD'r^ the area OWLD' would represent variable production
costs, the triangle WAL transport costs, and the triangle LAPq the
gross monopoly profit without deduction of fixed costs. Or, from a

I)
yp_^ -^ p^C
amount, the gross
.

If

profit

different standpoint, the quadrilateral area

WAPqL

is

the

amount

paid by buyers over and above the variable costs of production. One
third of it goes for freight paid by the buyers themselves, one third
for freight paid

by the shipper, and one third for monopoly

profit.

24. Construction of the curves for gross profits assumes that the single buyer exerts
no influence on marginal costs.
25. A similar but somewhat simpler diagram is given by J. Robinson, op. cit., p. 183.
Mrs. Robinson treats also a simple case of curvilinear demand curve. W. F. S.
26. The sales radius, which would be represented in the demand cone by the highest
possible freight, may be shown in this so-called traffic funnel also by the greatest
amount sold per buyer the line OD'.

Some New

Factors

153

The three triangles of equal area into which the quadrilateral is

divided correspond to these amounts. ^^
Now of course the same amount will not be sold at every point
on a radius

market

of the

even when

area,

buyers are evenly distributed.

On

it

is

assumed that the

the contrary, the sales, d, per

buyer fall from OD' to zero with the distance from D'. On the
other hand, the number, n27rt, of buyers (n per freight unit) at a
certain distance (measured in transport costs, t) increases proportionately with distance. From this foUoAvs the equation for total

=dX
D* =

sales at a certain distance:

t

4^ -d
a

bola, with

h.

Therefore

Dt

d'^

vertex at the point

its

riZ-irt.

{a

sumers

It

-=r-

This
as

2)

of

is

a para^

drawn, with

follows that

combined demand

at the distance -^ will generally

demand

a linear

+ nZTchd.

^- ^/abirn

the ordinates shortened, in Figure 43c.

radius of the market area, the

With

if

all

is

the

the con-

be of the greatest importance,

and more distant consumers

Consequently the monopoly profit,
YPm
LPo -^ 2, is at the same time the average profit per unit, and
the total monopoly profit is equal to this quantity no longer multiplied by WL, however (and thus no longer equal to the triangle
A LPo) but multiplied by the content of the area enclosed by the
parabola Dt and the line OD\ It is assumed here that the market
area is not encroached upon from without.
whereas the

total

demand

of nearer

will decrease symmetrically.^^

The Limits of Discrimination. Besides the normal shape of

demand curve there is still another reason why the price at the

2.

the

factory

is

by (^1)
27.

The

rarely higher for distant buyers (A 2)

otherwise

it

would be advantageous

than for those near

for A 2 to purchase

Thus profits decrease with distance exactly as do

is LAPg.
However, the farmer gets the same rent on each unit, which thereonly among different farmers, whereas the profit of the industrialist varies
profit triangle

agricultural rents.
fore differs

with the location of the buyer.

why competition is so keen at their boundaries when market

by competition: most of the demand of factories which themselves
are located in small places is here. If areas are curtailed but little, here is one of the
reasons why foreign trade also decreases with distance. In Germany, powdered and
broken pumice has a market area limited only by freight, and linoleum a market area
that is limited in certain directions only by freight; because all the former is produced
in one single district and the latter made chiefly in but a few factories. In 1938 the
most frequent shipping distance by rail was about 300 to 375 miles for the former
and about 375 to 430 miles for the latter, or, in accordance with theory, almost
28. It

is

now

clear

areas are reduced

exactly half the

maximum

(about 750 and 800 miles respectively)

Part Two.

154

Economic Regions

Conversely, the factory price for A^ can exceed that

A-i_.^^
only
by the freight, /, from A 2 to A^ at the most; else A-,
for A2
would order through A2. As for the c. i. f. price. Pi can be above
or below Po by / at the most, and similarly the extent of fluctuation
for P2, when Pi is given, is equal to twice the freight between the
two places; whereas the difference between Pi and P2 can be equal
througli

to the single freight at the highest.

Amount

Fig. 44.

Geometric solution of limits of price differentiation

How must the demand be constituted

in order that factory prices,

differentiated irrespective of the possibility of intermediate trade,

never differ by more than the freight? We shall discuss this

question only briefly because it is rather difficult, and because it is
important only for those demand curves that differ widely from the

shall

average, as will be seen later.

Geometrical Solution: Let ^0 in Figure 44 be the marginal costs

without freight at the factory site Bq-, (ki
i)
the marginal
^0
costs including freight for delivery to the place Bj; [kz
2z)
^0
for delivery to B2, twice as far away; and so on. For purchasers at
5o let OPo be the price that yields the highest profit, and P^Ao the
amount sold to each buyer at this price.

29. It must be remembered, however, that interrupted hauls are more expensive
than direct hauls.

Some New

Factors

155

How

must the individual demand curve d look in order

same for all buyers wherever

First:

that the factory price shall be the

they may be, despite the tendency to discrimination? So far we

know only one point on d: Aq. We draw through A^ the rectangular
h-^, whose asymptotes are the };-axis and the horizontal
As the product x {y ko) which represents profit, is the
same for every point on this hyperbola, d must touch the hyperbola
at Ao, and otherwise lie to the left of it. Else OP would not be the
most advantageous factory price for a buyer at Bq. Next we draw
through Ao the rectangular hyperbola /?/, whose asymptotes are
k^. If d and /z/ touch at Aq and if d lies otherwise
and y
X
to the lejt of /z/, a greater profit cannot be obtained at B^ with any

hyperbola

Kq.

other delivered price than OPq. The factory price for B^ is, therefore, lower by / than that for Bq. The condition that would have to be

Bi is to lie above OPq is that d must

Aq
and
the
right
of
pass above
to
/?/. Hence not /z/, but a hyperbola
with the same asymptotes and lying to the right of it, would touch
If the point of tangency were between y
d.
ks and y
ki, it
would be advantageous in shipping to B^ for the entrepreneur at Bo
to absorb part of the freight. The condition under which B^ would
pay all the freight is that the point of tangency must lie on the line
A/Ai. The nearer it is to /ii the greater is the profit from buyer ^5^.
k^ and y
Thus, between y
k^, d must lie within the vertically
hatched area, and in such a way that no hyperbola of the group
defined by the asymptotes x
and y
k^ touches it anywhere
else than at y
ki. Similarly two hyperbolas can be drawn through
A I, of which the steeper, ho (asymptotes x 0, y ki) limits the
farther course of d toward the right. The flatter one is superfluous,
since the left limit for d is given by the flatter of the hyperbolas
passing through /i/ (asymptotes x =0, y == kz)
If the construction
is carried further a cornucopia-shaped area, vertically hatched in
Figure 44, is obtained, within which d must lie if the factory price
is to be independent of distance.
To this is added, as a second
condition, that d must lie within this area in such a way that the
ordinates of the points of tangency of the profit hyperbolas must
differ by exactly the freight.
fulfilled if the delivered price in

=*

Second:

If

the factory price

is

to rise

with distance, the cornu-

more steeply inclined above A-^'A^^, as can readily be

Then h-^ and /?/ still constitute the extreme limits above /4/

copia must be
seen.

30. All

to greater,

demand
and

all

curves that rise above the upper limits {Ao, A^, A^,
that fall beneath the lower limits

price differences than

would correspond

{Ao, A^',

A^

to the freight differences.

and

so on)

lead

lead to smaller,

Part Two.

jr6

Economic Regions

/zz and hz. In this case, therefore,

in respect to the delivered price must
slowly, if at all, than in the preceding case.

and Ai, and they are steeper than

the elasticity of the

demand

with distance more

This we have already seen on page 149.
Third: If the factory price is to fall with the distance of buyers,
the cornucopia, and with it the demand curve, obviously must be
less steeply inclined. This means that with a rising price the elasfall

of the

ticity

demand

is

deserves special attention.

subcase
increased relatively quickly.
Suppose that the group of hyperbolas

k^ touched the demand

and y
determined by the asymptotes x
k^. This would mean that
k^ and y
curve halfway between y
the delivered price would rise with increasing distance by only half

and that the price at the factory would therefore fall

amount. It could easily be shown ^^ that the limits of
same
by the
the cornucopias in this case would be straight lines,^^ the steeper
one of which would have the equation
the freight,

whereas the equation for the

one would be

flatter

4-

Xo

2yo-f

Xo
Po^o and yo^KoPo. The scope of d is horizontally
hatched in Figure 44. In this case among others the demand curve
itself can be a straight line. Conversely, it is true that when the
demand curve is a straight line the entrepreneur always pays half

where

the freight.^^

Algebraic solution:
follows as the

c, i. f.

From

the formula for the factory price there

price for B^,

gjC -f- ^iti

ei

and

for Bz,
eoC

31.

The

32.

This

2^2

omitted in order not to overburden the text with mathematics.

only when / is very small. Otherwise at least the points of
intersection of the branches of the hyperbolas lie on a straight line.
33. Strictly speaking, he does not pay half the freight, which represents variable costs
proof
is

that the buyer

is

strictly true

must make good in any

case,

but he foregoes profit or compensation for

his fixed costs to the extent of half the freight.

Some New

*57

Factors

Let Bo be farther away from the factory than B^. If P2 is higher,the condition under which the delivered price will not differ by
^2^1; or, if ^2 ^1
h
more than the freight is P2 -Pi

e,

It will

i)

{c

^2)

that, among others, the elasticities

demand curve fulfill this condition.

be found

straiofht-line

Application

3.

+h+ ^

{c

resulting from a

{Dumping, Overlapping Areas, Basing Point)

factory price discrimination in favor of

Dumping, or

more

distant

buyers, need not by any means imply invasion of an outside market.

There exists rather a desirable form of dumping in the more remote
part of an undisputed home market, as we have shown.

An

overlapping of areas in the case of homogeneous products,

dumping in the market area of a competitor, on the other
hand, is often a sign of disintegration or panic, or a result of megalomania, and to this extent concerns more the psychiatrist than the
that

is,

economist. At the least

it is

an outcome of a thoughtless disregard

In America especially there have been many complaints about such cross-hauling. The Federal Trade Commission
has calculated that in 1928-29 it caused unnecessary freight in the
cement industry, for example, amounting to some 20 per cent of
the total production and marketing costs. ^^ Exact analysis shows,
of distance.^*

however, that quality differences are often involved; or that where

statistics are broken down according to large areas of localities we
are dealing with only apparent cross-hauling, and in reality with
" small boundary trade." The cross-hauling proper that remains is
often quantitatively negligible.
cross-hauling that

it is

It

has been said in justification of

necessary in industries with high fixed costs

34. Perhaps because a producer is not sure of his costs, is not acquainted with
neighboring buyers or shippers, wishes to continue accidental business relations, enjoys
exceptional freight rates that are much too low, or in transactions within the concern

does not worry over distances.

certain

amount

of cross-hauling could, however, be

Such unavoidable cross-hauling would

occur when the sites of those producers or consumers chiefly concerned cannot handle
a sudden falling off in production, or sudden great demands such as the threat of a
bad harvest or extensive construction. Fundamentally, market areas shift temporarily,
and under certain conditions a market area may even become a supply area. This may
lead, as a precaution, even to normal orders going in part to distant shipper in order
to be sure of them in case of peak demand. All this is confirmed by the findings of
the Baustoffleitstelle and the Dienststelle (formery Biiro) fiir Transportordnung.
35. T. K. Urdahl and L. J. O'Neill, " Operation of the Basing Point Provisions in
the Lime Industry Code," NRA, Division of Review, Work Materials No. 65, 1936,
avoided only

pp. 75

f.

if

production were more mobile.

Part Two.

1^8

Economic Regions

volume of business,^^ and even that

marginal costs it may lead to a drop in domestic prices.^^
But these arguments overlook the fact that, especially within the
same country, reciprocal dumping inevitably develops from uniin order to assure an adequate

with falling

dumping, and that none of the participants therefore receives

additional orders, though all incur additional expenses. That dumping should be answered by dumping is only psychologically, not
economically, necessary. It would be more advantageous to employ
a part of the freight costs that dumping must absorb to prevent
lateral

foreign

dumping

into the

home

market, instead of invading another

market.^^

As unlimited dumping leads only to pressure on prices and allround losses, the basing-point system attempts to replace it with
regulated, or limited, dumping. The simplest of its many forms is
that in which all factory prices are the same and the freight from
the basing point to the buyer is added to all. Producers outside the
basing point therefore charge their customers more or less than the
actual freight, according to circumstances. Only thus in the limiting
case can all producers compete at the same price for every buyer
They will not do so in
(quality rather than price competition)
.

reality, of course,

if,

in the case of unfavorably located customers,

they had to absorb more freight than would correspond to the profits
from near-by customers plus the share in the fixed costs (m)
In
addition, the permissible freight absorption will sometimes be still
.

If the same factory price is to hold

wherever situated, the freight at most from factory
In other agreements, the
to basing point can be absorbed [h)
absorbable freight will be fixed at a percentage of the factory price
(z) .^^
In any case, the maximum degree of permissible dumping
with the basing-point system is automatically established for every

further limited by agreement.

for all customers

place in the area of a competitor; and, except at the geographical

boundaries of any area that can be

36.

G. Seidler, "

Competition,"
37.

1936)

The

NRA,

won

at all

by dumping,*"

it

will

Control of Geographic Price Relations under Codes of Fair

Work Materials No. 86, 1936.

Division of Review,

G. von Haberler, Der Internationale Handel (Berlin, 1933)

p. 229;

(English ed.,

p. 309.

one reason why international dumping does not necessarily presuppose

Moreover, the most advantageous
price discrimination is generally such that it does not pay, in any case, to re-import
cheap exported goods.
39. G. Seidler, " The Control of Geographic Price Relations under Codes of Fair
Competition," NRA, Division of Review, Work Materials No. 86, 1936, p. 33.
40. As to the size of an area supplied at all: If h is the maximum degree of dumping
technically possible under the basing-point system alone (freight from factory to
38.

This

is

the protection of high domestic prices by duties.

Some New

Factors

159

be smaller as a rule than the whole absorbable amount in the

limiting case of profit plus fixed costs. Thus it is true that the
basing-point system restricts but does not prevent unreasonable

On

the other hand, reasonable

be prevented, though in varying
degree according to the construction of the basing-point system."

dumping into a foreign

dumping within the home
Uniform

(dd)

basing point)

and

area.

area

zuill

Uniform

Prices.

prices are less advantageous for

unassociated with price policy A;

the degree economically possible

the degree granted by agreement;

(profit plus

average fixed costs)

then the

be willing to ship anywhere, with uniform f. o. b. prices, if m and z are at

least equal to h (the highest value of h in absorbed freight will be reached only on
the extension of the factory basing-point line beyond the latter) 'if m or z is smaller
than h, not even the basing point itself will be supplied. With a straight mileage
seller will

tariff in a uniform transport area the market area will then be bounded by a hyperbola.
This includes the basing point when m and z lie between h and h/2; it becomes a
straight line that passes halfway between factory and basing point when z is equal to.
and m at least equal to, h/2, or vice versa. Conversely, if m or z is smaller than h/2,
the hyperbola includes the factory site. In the latter case, however, not only will no

be taken in than when freight is charged as of factory

for example, Moller, Weltwirtschaftliches Archiv,
With a sliding-scale tarifl [involving lower mileage rates for longer
1943, p. 91, Fig. 1)
hauls. W. H.W.] the hyperbolas close to ellipsoid curves (G. Mecklenburg, Der Giiterfreight be absorbed;
(so-called

freight

more

will

advantage:

see,

transportaufwand der Deutsclien Eisenindustrie, Hannoversche Dissertation [1941],

p.

27).

On

the size of an area supplied to special advantage: Besides the area that a factory
is willing to supply at all, that part of an area that

not situated at the basing point

it

more profit, and that other part that it

more accurately, that part that it will supply

will supply with

of interest; or,

will supply

with

less

are

at higher or lower prices

than when freight is charged from the factory. The dividing line passes halfway
between factory and basing point if the price policy in both places is the same; that is,
if they either charge the same uniform f. o. b. price or if both discriminated starting

from the same level. Prices

fatcory, and vice versa.

On

the other hand,

criminatory

f.

if

o. b. prices at

result in higher

f.

o. b.

will

be higher via the basing point at the

site

of the

equal prices are charged from the basing point and disthe factory, the area in which charges via the basing point

prices

is

area in which the basing point

widened (provided
itself lies

z,

excentrically

m ^ h)
is

an

f.

Only

o. b.

in

an ellipsoid

more

price policy

becomes larger when the starting price with discrimination

In
is higher than the uniform basing-point price, and smaller in the opposite case.
short, with shipments toward the basing point the seller, with shipments away from
the basing point the buyer, pays more freight than with rational dumping. Hence in
the one case revenue, in the other, demand, decreases more rapidly with distance.

advantageous.

41.

With

The

ellipse

uniform basing-point

price,

producers at the basing point cannot

entiate their factory prices at all according to the distance of buyers.

are not situated at the basing point do not discriminate directly

differ-

Producers

who

away from the basing

point, but toward the basing point they discriminate too strongly against neighboring

(The c. i. f. price falls with distance from the factory instead

more slowly than would correspond to the actual freight.)

buyers.

of rising, though

Economic Regions

Part Two.

j5o

the seller unless they considerably facilitate sales promotion and

business calculations. Uniform factory prices (F) and uniform
delivered prices (C) must be distinguished. The buyer pays the
freight in the former case, the seller in the latter.

Nevertheless,

it

(in the average case of linear

makes no difference to the seller

demand) which of the two uniform prices he selects, so long as his
sales area is determined by competition and not, say, by governmental authority. The size of his sales area and thus the number
of independent enterprises as well, no less than the size of their
profits, will be the same in either case.*^ Sales and the average factory
price will also be equal. All this is true whether, from the standpoint of the individual firm, the tendency toward maximum profits
predominates; or whether, from the standpoint of the economy as a
whole, the tendency toward maximization of the number of independent business units predominates; *^ in other words, whether
sales areas are

chosen as advantageously

as possible, or as small as

possible.**

Geographic Price Policy and Competition.

(ee)

and

tion of old

of

new

enterprises, that

is,

efforts to

The competiexpand, or to

begin an independent existence, must be sharply distinguished. The

former finds its geographic limits; the latter is virtually as unlimited
as the reservoir of those who would like to make themselves
independent.

We

Competition by New Enterprises.

have developed the
1.
various possibilities of geographic price policy for the case where
an arbitrary market area is at the disposal of an entrepreneur. The
tendency to keep the area of the individual enterprise
42.

Thus C

is

possible not only with goods for

elimination of too distant buyers

is

as small as

which freight plays no role. The

C by the refusal

caused with F by the price, with

of the entrepreneur to deliver.

43. See section ee.

demand

curve and the aggregate marginal revenue

both the uniform and the average f o. b. price.
My " Geographie der Preise " advances the difficult proof. The intersection of the
marginal revenue and marginal cost curves determines the most favorable uniform
price. In Figure 45, an amplification of Figure 40, if Pq is the uniform f. o. b. price,
44.

This

is

because the aggregate

curve are identical with

F and C

for

and Pa the uniform c. i. f. price, DPq will determine the sales and TP^ the f. o. b. price
and the marginal revenues in the individual localities (points of intersection with
EP^ gives the discriminatory factory
do, di, and do, and Uq', Ui', and u^' respectively)
prices for the case where aggregate sales are as they are with C and F. The marginal
revenues from all buyers are the same (Q, 7?,5) only with A; with T {M,R,W) and
C (A^, R, T) on the contrary, they are partly too high and partly too low to permit
an equally advantageous exploitation of the demand, and thus an equally large profit.
.

Some New

161

Factors

It was assumed in
possible prevails only in an open market.
Chapters 9-12 that the limit had been reached when the area was
so diminished that the demand curve at a uniform factory price was
tangent to the cost curve. With any further decrease the enterprise
would no longer cover its cost, unless it adopted the expedient of

spatial price discrimination;

Fig. 45.

form

f.

that

is,

unless

it

demanded

different

Comparison of price discrimination (0), uniprice (V), and (X) uniform c. i. f. price

o. b.

factory prices of its customers according to their distance. This

brings in additional revenues. These do not always permit a further

reduction in the market area. Such a reduction becomes more and

more possible, however, the greater the necessary market area and
the greater, therefore, the possibilities for freight absorption.*^
45.

To

Thus

determine the smallest market area and the most favorable price therein,
is no longer made to intersect the current highest marginal

the marginal cost curve

revenue but the lowest possible one, and thus the one that is valid for the smallest
possible number of places. It need not be the lowest absolutely, if in such a small

This is less common with A,

low marginal revenue curve here would be intercurve are rather better because the former, though mathe-

area total revenues are below total costs throughout.

and

in addition the chances that a

sected by the marginal cost

matically identical with the curves for

C and

F,

is

significant for a larger area.

With

Part Tivo.

,(j2

in full operation

it

independent enterprises

to multiplication of

where the tendency

Economic Regions
is

compels geographic price discrimination.^^

Competition by Existing Enterprises. How does the approach

of competition affect price policy: (a) at the boundaries of the
geographic area supplied, and {b) in general?
Will the compactness of areas be destroyed by dumping;
(tti)
or (fls) will the price be lowered by competition to variable costs,
at least on the boundary? Or (^3) will competitors leave to each
other the contributions of marginal buyers to profit, or at least
to fixed costs? Or {b) will they nevertheless pursue a policy in
respect to the general level of their prices that can never lead to a
2.

stable equilibrium of their prices

and

their markets?

can only set down my answernot give reasons for it.

The tendency toward maximization of the number of inde{a)
pendent enterprises forces the entrepreneur with sufficient insight
at the boundary also toward price discrimination in the manner
indicated, {b) Furthermore, it generally leaves but little room for a
strategic price policy as developed by W. Launhardt,*^ H. Hotelling,^^
T. Palander,*^ E. Schneider,^" and others with respect to freight costs,
at least for duopolists.^^ With adequate insight there usually exists
a definite equilibrium. If many act irrationally, equilibrium will be

Here

smaller areas are therefore possible than with

identical marginal revenue curves

C and

F,

one lying higher than with

where among a host of

will often be decisive.

once more to my
forthcoming " Geographie der Preise." Only this need be said here: That marginal
revenue curves should be identical is entirely consistent with the fact that the total

There would be

so

much

to say in explanation here that I refer

revenue curves with A lie uniformly higher.

46. If the tendency to a multiplication of independent enterprises compels price
discrimination, this in its turn encourages an increase of competition either local or
distant.

will be

In the former case,

still

more

firms share the

same

area; in the latter, the area

further reduced until in both cases profits have disappeared despite price

discrimination.

Local competition need not prevent price discrimination

enough that by cutting into

sales it raises

itself.

It is

production costs so high that profits are

consumed. Price discrimination occurs even though its purpose is thus thwarted. The
example of monopolies almost without teeth, that

areal diminution provides a typical

may

practice price discrimination in their areas

and

yet be unable to

make

excess profits,

because the areas that they control absolutely are too much restricted from without.
47. W. Launhardt, Mathematische Begrilndung der Volkswirtschaftslehre (Leipzig,
1885)

48.

pp. 161

ff.

H. Hotelling,

" Stability in

Competition," Economic Journal, 1929.

T. Palander, Beitrdge zur Standortstheorie (Uppsala, 1935), pp. 231-253, 370-394.

50. E. Schneider, " Bemerkungen zu einer Theorie der Raumwirtschaft," Econo49.

metrica, 1935, pp. 90

51.

ff.

With geographical

dispersion each has perhaps half a dozen competitors,

thus has a moderate influence on each individually.

and

Some Nevj

163

Factors

deferred, whereas knowledge

and

encouragement of the right

legal

behavior will lead more quickly to a stable and rational outcome."

This will be discussed under y?.
52.

Concerning

a^:

Dumping

his

own

profitability

dump, then

would be countered or, still

would rather diminish and destroy

in a neighboring area

better, averted, so that the aggressor in particular

once the endeavor to establish new plants is wholly effective. If all

minimum size of market is increased, but so also is

of course the necessary

the chance of still invading them by an abandonment of dumping. Only in competition

with different goods, therefore, not with homogeneous ones, is it rational to absorb
freight.

Concerning 03: The following holds true for price discrimination. As the aggregate
marginal revenue curve is shifted to the left with the diminution of an area, its intersection with the marginal cost curve also moves toward the left. According to whether
the new point of intersection is higher or lower than the old, the new factory price at
the geographical boundary will be higher or lower than before. In the

new equilibrium

the average costs, which generally rise with decreased sales, exceed the factory price at

the geographical boundary.

Marginal

Here the price

lies

between average and marginal

costs.

equal to the marginal revenue. But this says only

not necessarily all the fixed costs involved as well, are covered by

costs are, of course, still

that variable costs,

the revenue in the boundary zone. Indeed, this certainly will not be the case,

and the

will be just made up by the surpluses in the vicinity of the factory.

" exploitation " of districts near the factory and dumping in those at a distance
deficit

The

compensate one another. Together they make it possible to decrease the necessary market
area far more than without price discrimination. The diminution proceeds until the
average costs are so high above the factory prices prevailing in the boundary zone that
the deficit in fixed costs is only just covered by the surpluses in the interior.
Concerning b: How are a stable price and market to be found? The matter is not
so simple that one need only advise that half the freight be added to the costs. For
the costs depend upon the size of the area also, and this is still unknown. Following
the example of Walras with his " prix crie par hasard " in a one-point market, would
it not be possible to start from a boundary accidentally held between areal markets?
Each would then determine the most favorable starting price on the basis of his costs
and his share of the demand (A' in Figure 41) Whoever was cheaper than his competitors because of this starting from an arbitrary boundary would as a rule have to
move the boundary back until prices were equal there. It is improbable either that
the cheaper seller should retreat of his own accord, or that the boundary (like price
in the Walrasian market) should be jointly changed. Each, rather, would eagerly hope
for a market area of the most advantageous extent, no matter whether or not his
competitors were located in it; whether he would therefore have to drive them from
the market or share it with them. According to this boundary, as he imagines it, he
sets his starting price, only to find that he has begun with too large an area, since his
competitors will underbid him before he reaches that boundary. Each one, therefore,
has higher costs and smaller revenues than he calculated, so each generally lowers his
sights as to the desirable market area and usually raises the price. Each gropes his way
toward the equilibrium point where boundary and boundary price coincide. Is there
only one such boundary and boundary price? The curve of delivered prices at the
"
boundary for all boundary points on the line connecting " I " and " II " at which " I
can aim, cuts the corresponding curve for " II " only once if the boundary price changes
monotonically with shifting of the boundary which upon closer examination appears
to be the rule. When each stops struggling and cannot expect more than mere existence
where there is a strong tendency to independence stable equilibrium reigns.
.

Part Two.

i6^

EFFECTS OF GEOGRAPHIC PRICE POLICY

2.

(aa)

Economic Regions

Effect

on Density and Agglomeration of Locations. With

the most profitable market area is larger, that necessary to existence equal to or smaller than with F or C. Hence, in industries
to which there is free entry, locations will often lie closer together

with price discrimination than with uniform prices.

The effects of price policy on the agglomeration of locations in
favored regions are harder to assay. First, as to the locations of the
originators of the policy: With A, and still more with C, the profits
from neighboring buyers are higher than those from more distant
ones. Consequently the former weigh more heavily in the choice
of a location than would correspond to their demand, to say nothing
of their number one more reason for the concentration of industries
in large cities. Most important are the effects of the basing-point
system: Plants situated at a basing point enjoy an unlimited market
area.

Nowhere can they be undersold, nowhere can they

their goal

is

the highest profit.

When

the point of lowest

c.

lose;
i. f.

but
costs

does not coincide with the basing point they move, like all plants,
toward it.^^ The more evenly all competitors in a market area share
the demand, the more nearly do the points of least c. i. f. costs for
all coincide. They agglomerate until some costs of production rise
so much because of the concentration that some plants migrate to
another point of agglomeration. Only when industries voluntarily
concentrate in a smaller market area (which will generally be more
advantageous) does there arise a tendency to disperse from the
basing point, and to settle more densely the farther they scatter.
Whether dispersion or new agglomeration is the final result, migration from the basing point is probable.^*
For the buyers in the industry whose price policy is under con53.

by

its

who

Here

is

a striking example of Weber's theory that until

adherents.

An

can nowhere be

enterprise with a given output

lost to

(quota)

now has
,

passed unnoticed

a given body of buyers

cheaper competitors, and a particularized demand (since

can actually choose a location by means of the isoda-

delivered prices are stationary)

pane diagram, especially when the prices of many production factors are geographically
leveled by rate schedules and stabilized. The minimum transport need not be at the
site of

consumption.

move from

It is

not true, therefore, that a tendency necessarily develops to

the basing point to the point of consumption in order to save freight,

which the customer pays anyway.

materials
54.

is

According

petition

to A.

depends upon whether or not the freight on raw

R. Burns the capacity of the iron and steel industry from 1916

more rapidly outside

[New York, 1936], p. 341)

to 1931 rose

It

increased thereby.

the basing point, Pittsburgh

(The Decline of Com-

Some New

165

Factors

sideration, the advantages are reversed.

They may be

or toward the cheap basing point or (with policy

F)

the production

site,

but

this

likely to

is

attracted to

and

especially

be overshadowed by a

host of other factors. Policy C, like the basing-point system, eliminates not only the influence of the producer's location on prices,
but also the influence of prices on the location of the consumer.

chosen the good concerned becomes ubiquiagglomerate

less at the production site; but whether
tous. Buyers
they will then disperse or concentrate more thickly somewhere else
remains undecided. To set uniform delivered prices is to eliminate
the most important regulator of a rational spatial arrangement.

Within the

(bb)

sales area

Effects

A comparison with
almost always results in higher

on Producers and Consumers.

price discrimination shows that

with free entry, a greater number of independent enterit is more advantageous for the entrepreneur, whereas
in lower c. i. f. prices, and so on the average favors
always
results
F
the consumer.^^ Only distant consumers fare better with A, and
better still with C, because here freight is absorbed; those living
near the factory, on the other hand, pay higher prices (see Fig. 45)
With the basing-point system and with policy C much waste through
profits and,

Thus

prises.^^

cross-haulings
/?.

is

likely,^^

which

Price Differentials

raises prices.

among

Market Areas

Different

and freight rates with policy A or F are the same

production centers, as we have assumed so far, their sales
areas are equilateral hexagons and their boundaries straight lines.
If the freight rates (straight mileage tariffs) are different, the sales
areas are irregular polygons and their boundaries are arcs. If factory
prices are different, the sales areas are irregular polygons and their
boundaries are hyperbolic arcs.^^ Practically, this is perhaps the most
If factory prices

for all

55. A. Losch,
56.

Geographie der Preise

One may be undecided whether

(in

preparation)

of a certain area in respect to the average

with C.

to interpret this to
c. i. f.

price

Consumers are more heavily overcharged with

mean

is

that the

lowest with

and C, but

demand curve
F and highest
also they are

prepared to pay more.

57. Especially, also,

located
58.

and
This

in
is

which

within the district around a basing point in which producers are

in the transport system

easily seen,

must be a matter

is

already subjected to heavy strains.

To points on the boundary it

from which of the neighboring production centers

even without algebraic proof.

of indifference

The constant differences in factory price must therefore be compensated

by an equally constant and opposite difference in freight. But the geometric locus of
all points whose distances from two given points differ by a constant amount is a

they order.

hyperbola.

In so far as prices are lowest in the metropolis, the hyperbolas

lie

with

Part Two.

i56

important

case.

Finally,

if

Economic Regions

both factory prices and freight rates are

and their boundaries

different, the sales areas are irregular polygons,

are curves of the fourth degree.'^ The boundary lines become still
more complicated if the straight mileage tariff is replaced by a

graduated

The

tariff.

situation

is

entirely similar for regions of agricultural supply

except that they are, so to speak, the mirror image of industrial sales
areas. If the boundaries of the latter are projections of sections of
price funnels, agricultural boundaries originate in the intersection
of price cones. Again the case of equal freight rates, but different
prices at the centers, is the most important one. Figure 46 shows the
price cone for three places, A, B, and C, and above S the industrial
mirror image. In exactly the same way that B, as an industrial place,
would be excluded from sales if the price there were equal to the
price at A plus the freight costs from A to B, it would be prevented
from supplying agricultural products if the price at B were equal

only to the price at A less the freight from B to yl.^ Just as the
is
line DG" forms the upper limit of industrial production, so
the lower limit for agricultural production at the price in B. The
larger a town, the higher the market price of agricultural products
in it. Assuming that the population of A doubled, the price of milk,
in order that the milkshed could
say, would have to rise above
increase at the expense of town B. B, too, would experience a price
increase, but by a smaller absolute amount because its population
has remained the same. Consequently the branches of its bounding
hyperbola will be more compressed: it carves out for its own needs ^

DG

AD

toward the center of the areal system.

their vertices

Moreover, they intersect in such

that their foci lie about in the middle of the areas that they enclose.

way

demand is greatest.
59. W. Launhardt has

For then

then

already

shown

wirtschaftslehre [Leipzig, 1885], pp. 157

this

f.)

(Mathematische Begriindung der Folks-

T. Palander has given a detailed derivation

(Beitrdge zur Standorttheorie [Uppsala, 1935], pp. 223-230. See also his Fig. 193, p. 363).

Moreover, A. Schilling

("

Die wirtschaftsgeographischen Grundgesetze des Wettbewerbs

mathematischer Form," Technik und Wirtschaft, XVII [1924], p. 146) introduces

in addition market boundaries (" isostants ") between a point and an economic front,
which likewise are conic sections ellipses, parabolas, or hyperbolas. They do not arise
geometrically as with competition, between two points by the intersection of price
funnels, but by the intersection of a price funnel with a plane representing the c. i. f.
in

from the economic front outward by the amount of the freight costs.
were on a traffic route that connected A with its hinterland.
A. Predohl (" Die ortliche Verteilung der amerikanischen Eisen- und Stahl-

which

price,

rises

60. Unless
61.

industrie," Weltwirtschaftliches Archiv,

the corresponding industrial case.

local

demand

for steel,

XXVII, 239-292, and 314*-329*) has described

As long

(Pittsburgh)

as

(Chicago)

does not fully meet the

will supply the rest and, being the marginal

producer determine the price until Chicago produces enough, and more than enough.

Some New

Factors

167

a smaller area of the milkshed supplying A. The milkshed of C,

a still smaller town, lies within that of B. As there are other towns
lying beside B and C, their supply areas actually will not extend
up to the circular arcs, but will be already bounded by further
branches of the hyperbolas.

woyyw

Fig. 46.

Price cones for agricultural products

A, B, and C, and, above the

It is different

5-axis, their industrial

with price policy C.

sized product asks a

uniform

c. i. f.

If

every producer of a standard-

price, different,

that of his competitor, the cheapest producers

up

around towns
mirror image

however, from

would extend

their

most advantageous sales radius.

Farther out they will refuse deliveries, even though they are cheaper

sales areas in all directions

to the

than their competitors.^^

for local

and

it

demand

will

have

No

at the Pittsburgh-plus-price.

its

own

Then

the price will drop in Chicago

sales area.

diminution of areas occurs in this case. The competition of those already

on the competition of new entrants in such a way that it affects the
particular individual rather than the number of competitors until the new entrants
change to policy A or F, which are more profitable for them.
62.

established reacts

Part Two.

j58

2.

Although

Economic Regions

Local Product Differentiation

market areas

spatial price discrimination enables

to

become very small, spatial product differentiation counteracts this

effect. Only a few goods are homogeneous when produced in different places.^2 As a rule they satisfy jointly a number of requirements that do not exactly coincide. Not even the main requirement
need be the same: thus, independent of price, a car is a necessity
in one place and a pure luxury elsewhere; to say nothing of the
way in which it meets needs with various models, for example, or
satisfies minor needs, as with seats that can be thrown back for
sleeping. The character of an article, among other things, is a
function of its production site, and conversely. It is designed in
accordance with the cost and demand relationships prevailing there.
The demand that it is intended to meet generally comes from the
immediate neighborhood of its production site, though not exclusively as with homogeneous goods. The boundaries of its sales area
no longer coincide with those of the neighboring production sites.
The market areas overlap. For even though the majority of buyers
lived near the factory and its product conformed to the requirements of the neighborhood,"* there would still be individual purchasers farther off

who

for various reasons preferred just this type

one manufactured in their own vicinity. Migration is

not the least important contributor to this. Often enough migrants
are pioneers of exportation.''^ So common taste creates about every
of article to

factory a circle of buyers that overlaps in space the sales areas of

The individual nature of a product thus works

similar products.*'
63.

The

themselves.

difference

may

lie in

the type of retail business rather than in the goods

and with therp the price for the same product, vary
In the more expensive shops one pays for the
of making a number of other purchases at the same time, for their better
Retail trade margins,

according to the type of business.

possibility

equipment with

all

that this implies, or for the certainty of receiving high-quality,

and so on.
most immediate neighborhood, if the factory is in a small
For in an unrestricted area most of the demand would then come from a

tasteful, or fashionable goods,

64.

place.

Not

medium

necessarily the

distance, according to Fig. 43c.

is counteracted by the extremely high tariff

on the one hand, and by the extremely low price of domestic mass-produced goods and
transportation on the other. Without them this " melting pot of the nations " would
hardly have been able to bring about uniform production so quickly. It is interesting
to observe the effect of similar factors in Germany: strangulation of foreign trade,
" Volks " radios, the Volkswagen, directed consumption, cheaper travel through

65.

In the United States this tendency

" Strength
66.

through Joy," and so on.

Something similar occurs also

in the cultural field,

and

is

perhaps at the root

Some New

Factors

169

both for and against a manufacturer: for him because he can invade
the field of his competitors in spite of freight costs; against

more favorable

him

he cannot
keep the competition of similar goods entirely out of his home
area.^ The more unique an article is and the fewer substitutes it
has, the less does it have its market entirely to itself.*^^ But for the
same reason its market area is very much larger than if all its buyers
lived in the same place. How many sales areas overlap may be
realized from the great variety of goods carried by retail dealers.
Entrepreneurial activity also can be understood spatially. Small
improvements extend the home sales area at the expense of competitors and make it more concentrated. New or greatly improved
goods capture their market at the expense of all old goods together.
Thus the development of the automobile took place at the expense
because, in spite of his

freight position

phenomenon. The more local, national, or even racial cultures surthe more wide differences give way to harmless

of the described

render their peculiar character;

nuances that practically exhaust themselves in different

in

customs and costume, and the fading

memory

regions of influence of different cultural centers overlap.

as the differences

entirely;
67. It

but in

were

this

hard to

is

competition, as

is

real,

it is

few idiosyncrasies

and would be separate again

They were
if

the

more do

separated as long

these differences vanished

intermediate stage they overlap.

say, threfore,

whether product differentiation takes the edge

so often asserted.

the efficient and protects

differences,

dialects, a

of a different past;

senseless

It

seems to

the inefficient.

if

not harmful

me

that

it

Sensible though

when

inefficient

intensifies
it

off

competition for

may be

have real

to

producers are able to maintain

themselves through insignificant variation in product or even through adulterations

that the customer can hardly detect.
68.

Hence the markets

for

raw materials and semifinished products overlap less than

still relatively amorphous and so can

those for finished products, because they are

often be standardized.

In addition, freight costs are more important for the former

in relation to the producer's price, so that for this reason alone overlapping

is

restricted

narrower border region. With high-quality goods everything often depends upon
specific properties of the raw material, which then is ordered from a great distance
even though ordinary grades may be plentiful enough. Thus hundreds of German
to a

places can supply clay, but only one can furnish the clay needed for the

making

of

highly fire-resistant products.

In the case of finished products, and especially of consumer's goods, the small
standard goods in daily use that are distributed from small centers with fairly compact
sales areas must be distinguished from more expensive goods in which the possibility
of choice
in

and subtle

larger places

Zimmerman,

"

differences are valued,

with

less

and which therefore can be stocked only

sharply circumscribed sales areas.

Farm Trade Centers

See,

for

example, C.

in Minnesota, 1905-1929," University of Minnesota,

Agricultural Experiment Station Bulletin 269, 1930, p. 16.

69. An extension of the sales area at the expense of competitors or of other goods
can thus occur in many and very different ways: {a) by displacement outward of its
farthest boundaries; (b) by extension of the actual sales area within these boundaries;
(c)

by larger

sales in the original area, partly to old

and partly

to

new

customers.

Part Two.

Economic Regions

not only of the railroads but also of the manufacture of pianos,

beverages, and so on. Later, when a new product has become an

market

success, imitators will share its

economic

area.

on the

If,

contrary, this was too small even for the first entrepreneur (i. e.,
intersect)
if he could not make the demand and the cost curves

one of the pioneers who failed. Between the one market

of the entrepreneurial genius and the rigidly circumscribed areas of
enterprises that produce standard goods,'" development moves back
and forth.
he counts

as

The Freight Rate

3.

enterprises, monopoly freight rates often aim only

at the greatest profit; " with others, at covering
services
certain
for
"
third group is deliberately subsidized. The prewhile
a
the costs;
graduated
tariff offers examples of each.
railway
German
vailing

With public

any of the three principles. Only the extent

tariff is not
which is in question." As far as location
shows
of the graduation
case of a subsidy in Germany is
important
most
is concerned the
essential to

certainly long-distance transport of coal. It breaks up agglomerations

around coal fields, which the increasing use of machinery and exhaus-

had encouraged during the past century.'* Something similar is true for important raw materials.'^
But only competitive tariffs follow general rules. Next to a drop
in the level of freight rates to about 1/10,'^ differential railway rates
tion of the forests

70.

For example,

steel,

cement, bricks, coal,

salt,

sugar,

and

so on.

Even here,

to

be

Certain furnaces, for instance, utilize the caloric content

sure, there are exceptions.

of certain kinds of coal better than others. To this extent there is still some overlapping. But the cores of the sales areas of the various coal fields are distinct.
71. Especially

sive

goods

(see

The

72.

with busy stretches, moderate distances, small shipments, and expenIn these cases the competition of the motor truck enters.

note 77)

significance of fixed costs for a railroad

is

generally

much

overestimated,

and the height of the marginal costs therefore underestimated. With fully employed
equipment every traffic increase must raise costs almost proportionately. It is generally
impossible to justify cheap special rate schedules of wide applicability with low marginal costs. I shall discuss this subject in more detail in another book.
73. When, in 1924, the cheapest railway kilometer for the cheapest commodity was
about 1 per cent of the most expensive kilometer for the most expensive commodity,
the one was obviously subsidized

and the other

profitable.

Sombart, Die moderne Kapitalismus, II (1919) 1143 ff.; Ill (1927) 98 f., 122.
75. Other things being equal, the use of machinery must nevertheless decrease with
the distance from coal, and so must the production of low-quality mass-produced goods
74.

W.

with distance from raw material; on the contrary, the importance of poorly paid labor
of high quality
'76.

W.

in ihrer

1940)

must

increase.

Sombart, op.

cit.,

Wirkung auf den

p. 25.

II, 345.

P. Schulz-Kiesow,

industriellen Standort

und

Die Eisenhahngutertarifpolitik

die

Raumordnung

(Heidelberg,

New

Sotne

171

Factors

according to product

and distance constituted the most

^^

significant

change for the location pattern since the exit of the horse and
wagon, which, like the autotruck, charged freight essentially in
proportion to weight and distance.
Local Differences in Tariffs

a.

1.

GRADUATION ACCORDING TO DESTINATION

Suppose that goods are to be shipped from one place, B, to

others at various distances.

The

volume

elasticity of the

of

traffic

with this rate, and

with respect to the freight rate will rise,
second with length of haul.^^ For the second reason a monopolistic
enterprise lowers the freight rate for long hauls. The spatial freight
discrimination of a graduated tariff corresponds to the spatial price
first

discrimination for the goods.

Figure 47, together with Figure 20, will serve as a proof.

For

the sake of simplicity assume that only a single customer lives at

each place.

If

OP

(in Fig. 20)

traffic

if

the seller paid the freight or

volume
rate

is

of traffic

is

zero

the price at the factory, the

is

to each outlying point

of

when

would be
if

PQ

(in Figs.

equal to or greater than PF (in Fig. 20)

is, the lower is the freight rate that

Thus

If Cq, Ci, 62

The

the freight rate were zero.

the product of distance times freight

away a place
all traffic.

volume

20 and 47)

(Fig. 47)

and

so on, are

the farther

suffices to

demand

shipment to increasingly distant points, they become

prevent

curves for
flatter

and

order and so more and more elastic for the same

freight rate. That graduated tariff (i. e., the particular set of freight
rates for transports over different distances) which maximizes the
surplus of receipts over variable costs (PR) (Fig. 47) ^^ is easily
flatter in this

77.

From

the standpoint of maximizing profits what matters

goods, not their value.

it is
is

much cheaper by

important: whether

Salt can stand higher freight charges

The
new production

the pound.

is

transportability of

than furniture, although

reaction of consumers as well as of the producer

sites will

be established and distances shortened

thereby because of an increase in freight rates.

depends, in sales areas, upon the willingness of buyers to pay the

demanded; in supply areas, upon the chances of profit to the seller. According
to Lenschow the types of goods produced by the Negroes in British East Africa pay
more freight than those produced by the white inhabitants, because the same profit
means more to the Negroes and it is harder for them to susbtitute other possibilities.
79. This is the exact meaning of the saying that railways exact as freight " what
78. Elasticity

price

the
rate

traffic
is

will bear."

The

lower limits of the freight rate are the variable

not arbitrarily fixed above this

level,

the individual case shall be as large as possible.

equal to the fixed

costs,

costs.

The

but in such a way that the surplus for

The

total surplus

must be

otherwise the whole industry will be unprofitable.

at least

Part Two.

172

Economic Regions

obtained by the customary procedure: In Figure 47 draw RS parallel

to PQ and halve the segment of the demand curve lying between
RS and the ))-axis. The graduated tariff will lie on the line RA
connecting these points.
The effect of the graduated tariff upon the size of the necessary
market areas differs. For short distances the graduated tariff lies
above, for long distances below, a tariff proportional to distance. If,

Volume

Fig.

47.

tiation

for

of traffic

Similarity of price differen-

goods

and

spatial

freight

differentiation through zonal tariffs

under

free competition, the latter just covers the costs, the tariffs

if, with a monopoly, a tariff

proportional to distance gave the same total profit. The effect of a
graduated tariff on the size of the necessary market area depends
upon whether, for shipment to the boundaries of the necessary sales
area with a tariff proportional to distance, the graduated tariff lies
above or below the tariff proportional to distance. If it lies above,
and all local prices are therefore higher and the regional demand
is accordingly less than with a tariff proportional to distance, the

intersect at a greater distance than

necessary sales area will be larger with a sliding-scale

the sliding-scale tariff

lies at

tariff.

the tariff proportional to distance, a smaller sales area

Hence

it

But

if

the critical point, considerably below

may

cannot be said a priori whether a graduated

suffice.

tariff

en-

or discourages industrial concentration. The influence

of a sliding-scale tariff on the possible shipping distance (which it

courages

naturally extends)

80.

M. Keir

insists that it does.

("

Economic Factors

turing Industries," Annals of the American

1921, p. 90.)

influence

on the

in the Location of

Manufac-

must not be confused with

Academy

its

of Political

and

Social Sciences,

Sofne

New

i73

Factors

necessary shipping distance, an influence which is usually ^^ decisive

in itself. As freight costs increase but slowly over long distances
with a sliding-scale tariff, large areas arise in which the superiority
of one particular producer depends merely
in the

c.

upon small

differences

This is enough when products are homogeneous.

product differentiation leads to an unstable equi-

price.

i. f.

But even slight

librium and extensive regional

overlap.^-

In a few cases the freight rate increases with distance. This is

true, for example, of firms that make deliveries by their own motor
trucks. If their customers are more than a day's trip away, the cost
of delivery is increased by overtime and lodgings. ^^ The effects are
the reverse of a sliding-scale

2.

tariff.

GRADUATION ACCORDING TO POINT OF ORIGIN

A tariff graduated according to the point of origin can be

thought

means of transportation radiate out

from different points, or that the same carrier grants special rate
schedules to certain places, or that the difference is due to the nature
of the goods transported. For instance, with the same rate per ton,
of by imagining that various

a rich ore pays less freight per unit of yield (unit of useful content)

than a poor ore.

What

is

the relation between the sales areas of two places that

ship the same product under different freight rates? In generAl two
things may be said. First, the product with the lower tariff cannot
be entirely excluded from sale, whatever its factory price may be.
Even though it is displaced at its own production site by anothei
article that can be made much more cheaply, with a sufficiently
large possible sales area a point is nevertheless reached at some distance where the delivered price of the product paying the lower
rate falls below that of the other.** Second, the sales area of the
place with the higher tariff will be surrounded by that of the other.
It is

and the higher the

shrink to a mere point and, in contrast to the

naturally smaller the higher the freight rate

factory price.

It

may

other area, disappear entirely.

81.

With mining outputs

coincide.

The

and the possible shipping distances may perhaps

Rhenish pumice stone, for example, is limited only by

the actual

sales area for

the freight, not by direct competition.

82. See

T. Palander, Beitrdge zur Slandortsthcorie (Uppsala, 1935)

p. 365.

As the result of a fairly good investigation J. Schmitz calculated that this point is
reached for the brewing industry at a sales radius of about 47 miles. {Das Standortprohlem in der deutschen Brauereiindustrie, University of Cologne dissertation, 1930, p. 61).
83.

84. See the figures in Palander, op.

cit.,

p. 228.

Economic Reg-ions

Part Two.

174

Level of the Freight Tariff Schedule

/3.

We

come now

to the case

not for single points but for

sible size of sales areas

where the

all.^^

tariff is raised

the freight level

If

minimum

increased, but the

is

or lowered,

falls,

the pos-

necessary

For the lowered freight lowers the c. i. f. prices,

consequence there now comes from the original sales areas
a demand that is greater than necessary. Lowered freight rates
permit smaller sales areas.
There are several reasons for the prevalent belief that reduced
freights extend markets. First, an erroneous one: The possible
shipping distance is regarded as equal to the reasonable one. For the
possible shipping distance the following propositions hold true: ^^
The shipping distance in kilometers is inversely proportional to the

size is decreased.^^

and

as a

and the sales are inversely proportional

to its square.^ But that this enormous effect of lowered freights
can never be actually exerted is easily seen from the fact that it
benefits competitors also, and the cheaper competitor more. His
sales area expands, chiefly at the cost of his more expensive rivals,^^-^"
a few of whom may be driven completely from the market. But
this is not the end result, for now profits appear that induce the
establishment of new factories, and these finally cut down sales areas.
freight rate; the sales area

85.

in

On

many
86.

goods with a large necessary shipping distance the sliding scale

tariff

operates

respects as a general lowering of the rate schedule.

For example, the automobile has increased the possible

sales radius of retail

business almost tenfold, but certainly not the economic sales radius.
87. See D. Lardner's century-old Railway Economy
(London, 1850)
W.
p. 14.
Launhardt's paradoxical conclusion, that lower freight rates increase sales areas greatly
{Mathematische Begriindung der Volkswirtschaftslehre [Leipzig, 1885], p. 152) but
,

supply areas hardly

number

at all

of consumers

industrial sales

it

(ibid., p. 177)

(i. e.,

schaft
88.

so

(Berlin, 1934)

much

Of course

as the individual

more expensive

is
is

constant, whereas with

not considered, and

An example

is

maps

is

in

the extension of

in Weltwirtschaft,

Die Grundlagen der Verkehrswirt-

p. 73.

to infinity.

89. Similarly,

the fact that in Thiinen's case the

See Heberle's beautiful

for the opposite opinion, C. Pirath,

In contrast to price policy

and with C

upon

monopolistic industries.

rural mail delivery with motorization.

and

rest

can be increased as long as competition

fact increased in the case of

1934, p. 15,

the population of a town)

the possible sales with

are thus increased fourfold,

a general lowering of freight does not increase sales

demand curve might

lead one to expect.

the sales area expands for goods that are cheaper to produce but

to ship (Fig. 3)
Agricultural materials, for example, are more
quently processed at some central location.
.

fre-

Launhardt {op. cit., p. 160) wrote that with improvements in communication

more expensive product loses " the most effective of all protective tariffs, the protection of bad roads." Hence protectionism rises with the lowering of freight rates.
Conversely, an increase in freight rates benefits the more expensive producers because
90.

the

Some New

^75

Factors

within "

"
competition, however, may now have to arise
immobile
because
at the location of the cheap factories

The new
that

is,

conditions of production are now more important than freight.^^

In such a case the sales area would retain its increased size, but
more factories would share the same market. To this extent the
lowering of freight rates really does further the concentration of
production,2 especially where the supply of labor is favorable.^^
The cheapening of transportation has likewise extended the
market areas for similar goods, because here the actual approaches

(A sociological parallel would be

the possible shipping distance.
which marriages occur.) This
between
circles
the
of
a widening
markets for similar
overlapping
as
just
competion,
intensifies true
goods intensify senseless competition.
One more exception to our thesis is possible. Suppose there are
two methods of manufacturing a certain product, of which one is
cheaper only with very large sales. The planning curve would then
divide into two branches, tti and ira in Figure 48; it is broken.
Suppose further that at the old freight rate even the entire possible
freight becomes more important in relation to production costs. The guiding maxim
of medival road policy, " The worse the roads the higher the profits," thus benefited

Their business prospered under the protection of inconspicu-

inferior producers only.

ousness and seclusion.

Launhardt has formulated this double effect of cheaper freights with classic brevity.
Reduction of freight rates decreases the importance of distance. " Mastery over space
has been extended, and all activities that were hampered in their development by
spatial restrictions have been broadened and advanced in consequence; on the other
"
hand, all that required the protection of isolation have been curtailed and enfeebled
(ibid., p.

91.

206)

Local characteristics are

now more

Thus

sharply developed.

the effects of a

lowering of transport costs are by no means only leveling.

afifected in the same way by lower freight rates, resources
cheap labor gaining in significance as compared with site.
The intensity of agriculture decreases on land near cities. In the nineteenth century
many scattered and rather unproductive mines closed down and mining was concen-

Agricultural production

is

like soil quality, climate, or

trated at the cheapest deposits;

industry, which once

rail

and ocean

materials,

made

freights,
it

this

had flourished

contributed to the agglomeration of the iron

in

many

places.

If

important the lower the freight

a smaller role the richer

for

the natural productivity of a

long hauls and raw

many raw
soil

materials from
becomes thus more

rates, then, conversely, the location of a

by nature.
on consumption, lower freight

country plays

it is

92. As for the effect

and with them also differences in supply, as,
in wartime again increases spatial differences

On

great general lowering of

the general practice at that time to obtain

the most favorable sources.

93.

The

together with special reductions

rates diminish price differences

conversely, a reduction of shipping space

in supply.

the other hand, the artificial leveling of wages nowadays raises the impor-

tance of even low freight rates.

Economic

Part Two.

176

Regio7is

been too small to make cheap mass production possible.

But with a lowering of the freight rate,
intersected
tts.
Ai has not
well
as the possible area itself, are greatly
as
area,
sales in the old

sales area has

Now

increased.

A2 intersects

tt^,

and cheap mass production becomes

can be decreased again until A2' is

tangent to the curve tto. It is now possible, though not necessary,
that the new area is larger than the old.

profitable.

Now,

too, the area

v\^/^
^
\
\

Y'
Fig.

48.

Effect

economies on

jij

^;s.

<^\^2
Amount

of

size of

new

large-scale

market area

The extraordinary reduction in transportation costs during the

nineteenth century has most probably had this effect in general,^*
but it must not be forgotten that two phenomena were then working
improvements in large-scale production (ttz supplants
volume of production) and second, improvements
in transportation and communication (A2 replaces Ai) .^^ Had not

together:
TTi

first,

at a certain

An

accurately, in buying power, acts in this

This explains in particular the fact that
businesses are larger in cities than in rural areas, not smaller, as one might at first be
led to expect since the urban demand curve is generally steeper and therefore touches
the old cost curve at a point characterized by higher price and smaller sales. For this
reason, on the other hand, the reduced demand in wartime often favors the small
94.

increase in population or,

more

respect like a lowering of freight rates.

producer.

further reason

number

why many

prices are lower in cities

of the most skillful entrepreneurs,

who

find

it

may be

possible to

that cities attract a

employ

their capabil-

(when they are especially skillful in

production) because they lower the cost curve, or (when they are especially skillful
in advertising) because they shift the demand curve to the right both of which lead
to

ities

to a

the full only in large

cities;

either

lowering of prices.

95.

They belong

to the six great events that

the nineteenth century:

tions;

(3)

(1)

the change from

have revolutionized locations during

(2) monopolies based on inven-

increase in population;

wood and water power

to

coal;

(4)

the exhaustion of

smaller sources of raw materials through a sharp increase in production;

mechanization;
locations,

(6)

lowering of freight

rates.

These

factors

(5)

further

favored the following

though they partly counteracted one another: coal deposits

(3, 5)

large

and

Some New

^77

Factors

the two coincided (which certainly was not mere chance) the fate
of those worlds in miniature whose unquestioned center was a
princely residence, a small rural town, or often only a manor house,
,

was, most of their

too quickly, to the
potential centers of larger areas.^^ This generally brought down the
price of centrally produced goods, but at what cost! The world in
fulfilled so soon.

would not have been

At

central functions were transferred, perhaps

it

all

miniature, which had been so clear to the understanding, so easy to

" became part of a greater
survey, fell in ruins. The " province

whole that in
grasp,

wide expanse was

its

much more

abstract.

The

at first

much more

difficult to

attitude toward life did not broaden

This was true not only in

in step with this technical expansion."

quiet corners remote from the metropolis but, much more important, in the metropolis itself. The unmanageable specialization in
central functions impeded not only their close touch with the rural

but their mutual fructification as well. Individual functions

more cheaply and more and more practically which
of course was the reason for this rearrangement but society as a
whole suffered at first an increasingly thorough uprooting. The
great drop in freight rates tore the towns away from their regions.
In America especially, every-day goods are frequently ordered from

areas,

were

fulfilled

fantastic distances, because of small differences in quality, or in

order to circumvent the seasons: potatoes from Idaho, lettuce from

California, cabbage from Texas, flowers from Florida.^ Here it may
cheap sources of raw materials (4,6);
(1,2). See, for example,

selected sites

(1,5,6); supply of labor (6); arbitrarily

Sombart, Der moderne Kapitalismus, I 5. A
O. Schlier, Der deutsche Industriekorper seit

cities

W.

IIIl.A (1927).
H. Ritschl, " Reine und historische Dynamik der Erzeugungszweige," Schmollers Jahrbuch, 1927. P. Schulz-Kiesow, Die Eisenbahngutertarifpolitik
in ihrer Wirkung nnf den industriellen Standort und die Raumordnung (Heidelberg,
(1922); 113.

1860.

(1919);

Tiibingen, 1922.

1940)

The expansion

many markets

of

in the nineteenth century was itself part of a

Beginning with
on socage farms and in villages) continued by urbanization
(guilds against rural crafts) and accelerated by mechanization (factory against crafts)
(large against small enterit ended with the double-edged victory of mass production
prises) that results here and there in a reduction in the size of markets (controlled
markets and autarky)
96. The subordination of a once independent center to a larger one, or of a dependent center to a different main center, affects the central upper stratum most severely,
greater chain of developments that was, however, not free of reverses.

specialization

(handicrafts

for with
97.

it

the changes in either location or function are greatest.

Or accepted

it

only in externals.

Ropke has much

that

is

just to say against

this rising " cult of the gigantic."

98. See,

Chicago: "

for example,

The

E.

A. Buddy's investigation of this subject in respect

to

and Vegetables," University

of

Physical Distribution o? Fresh Fruits

Chicago, Studies in Business Administration, Vol. VII, No.

2.

Economic Regions

Part Two.

i>j8

be asked whether food grown in the very soil on which we live may
not agree with us better, and the most recent investigations tend
to favor this view.

To

summarize the purely economic

Though

effect of

certain conditions they increase their

lower freight

economic

in general they reduce the size of

size.^^

rates affects only the size of individual towns,

areas,

rates:

under

reduction in freight
however, not their

For the variety of possible market areas

remains unchanged by lowered freight rates as long as the distribution of farms is unchanged. Only the individual products are now
associated with areas of another size. Only the distance between
their production sites is altered,^"" whereas the possible sites for
factories remain as before. Hence the economic function of towns
changes with changes in the cost of transportation in so far as
entirely different goods are now sold in the market areas whose
centers they are; but the possible market areas themselves and the

geographical distribution.

situation of their centers

b.

1.

remain

as

NATURAL DIFFERENCES

Local Differences

We now dismiss

they were.

in

Producti vit y

i<>^

the assumption of a uniformly fertile plain,

take into account the

fact

that nature

and

human endeavor

favors

unequally from place to place. Production, cultivation, or acquisition is possible, according to the manner in which she co-operates:
manufacture or building when nature supplies only resources (industry)

cultivation

when man, on

fertility (agriculture)

and

the other

collection

when

hand

increases natural

the desired products are

already present (mining, fishing, and the like)

The kind and

degree of nature's co-operation

may

vary from one

place to another in the most irregular way, or in conformity with

some rule, or may be entirely uniform over wide areas. The frequency of the first situation causes many to despair of any spatial
99. If it is desired to

encourage industry in an outlying

production are not especially favorable,

it

follows that

district

where conditions of
raw materials)

(except for

incoming freight rates should not be lowered; but (where freight decrease reduces the
one area) the rates within it, or (where freight decrease increases the size of
the area) from it to the rest of the country, should be lowered.
100. Large losses or gains may occasionally be caused by the shift: losses, if necessary

size of

sales areas increase in size, for

crowded; gains,

then the concentrated industries suddenly appear over-

grow smaller, because it always requires some

time for the influx to fill vacancies in thes branches.
101. Their economic significance has been worked out with the greatest care by
E.

if

necessary market areas

W. Zimmermann, among

others, in

World Resources and Industries (New York,

1933).

Some New

i79

Factors

economic pattern. The irregularities of nature do indeed interrupt

the uniform development of landscapes. But they need not destroy
entirely,

it

since all

the organizing forces

separate chaotic ones.

For instance, even

if

combine against the

soil quality differed

would not show the same mosaic

confusion; the differences would be modified here and there by the
effects of equal distance from a market, by the establishment of
belts, and so forth. But even if these were of no great moment
cmd farming and the rural population were irregularly distributed,
a superstructure of rural towns and larger settlements would nevertheless spring up and remain separate despite everything, which, in
spite of all distortion, would still form a pattern, and which would
orient themselves toward the metropolis and the great lines of
radically

from

field to field its

use

communication.
Regular changes in natural conditions are obviously much less
disturbing,^"^ and by good fortune they are both common and
important. One need only recall the climatic changes associated
with latitude, or the fairly uniform variations in the lines of equal
precipitation over wide stretches of the earth's surface. Precipitation
is of definite importance in the United States, for example, where
it decreases from east to west; or in southwest Australia, where it
decreases toward the interior. Natural gradients such as these can
be found even in zones that appear economically uniform. Thus
harvest time in the American cotton belt varies (or shifts) with fair
regularity from early July in the south to the end of October in the
north.103
If

interruptions of the sort

first

described cause a certain irregu-

and those of the second group cause inequalities of the spatial

economic pattern, the interference to be discussed now does not
appear at all as such over wide areas. Thus there are extensive
larity

regions of

more or

less

equal

fertility close to others

suddenly from a plain.

If

when

with a wholly

mountain chain rises

plain and mountains are extensive enough,

different level of productivity, as

two regions may arise that exhibit great regularity within themselves but which are characteristically different.^"*
102. In

Weber's words, they influence the choice of a location continuously,

like

freight costs, not alternatively, like local advantages that occur without transition.
103.

As possible supply areas for

cities

are extensive today, they often

include

same crop. For instance. New York

oranges and grapefruit from Florida, from Texas, and from California at different

regions with entirely different harvest dates for the

gets

times.
104.

Such regions developed in the lowland indentations about Paris, Cologne,

and Breslau. The centers for the corresponding interlocking high-

Miinster, Leipzig,

Economic Regions

Part Two.

i8o

Here we are

interested,

first,

in these differences and, second,

in the conditions at the border.

First,

are market areas in the

region smaller or larger, and are the towns more numerous

or larger than in the poor region? The answer and the reason for
it are the same as those for the consequences of a general reduction
in freight rates: It depends upon whether there are fundamentally
fertile

^"^

between which no transition is

on the fertile soil may posmarket
areas
possible. If they exist, the
If they do not exist,
larger.
towns
sibly be more extensive and the
the market areas
soil,
then
or if they are profitable even on the poor
^"^
and the towns more numerous on the rich soil.^^
will be smaller

different kinds of mass production,

See Blum, " Deutschland und Siidosteuropa nach

Ostmark und der Sudetenlander, verkehrspolitisch betrachtet,

lands are Trier, Kassel, Prague.

Riickgliederung der

Zeitschrift fur Verkehrsivirtschajt,

105.

The

XVI

difference between small

(1939), 1-31.

and

large holdings of land, between proximity

and distance from the center of a landscape, between peace and war economy, and
often between greater and lesser population density, is equivalent to that between
more and less fertile soils. On a more fertile soil the agricultural population is always
denser and (which is not the same) the villages larger (since a small acreage is enough
to

for the agriculturist the distance to the fields nevertheless

villages

make

possible

than do smaller
106.

They

more or cheap production

villages.

are smaller the

more

closely the necessary shipping distance

the possible one. For sales areas on poor soil contain relatively

demand.

Large
bought from nearby

remains tolerable)

of goods that are

sales area in a thickly settled region

have the same demand

as that of the

more

smaller sales area, other things being equal,

a firm in a populous region can always cover

its

approaches

land but a small

need not even be large enough

thinly settled one.

is less

much

elastic

(as

Since the

demand

to

in a

has already been shown)

costs despite further

curtailment of the

area by raising prices. Conversely, however, the sales areas in the thinly settled region

enough to result in the same demand at the same factory price as sales
same goods in the other region. They, too, may be curtailed, and an
adequate demand nevertheless be achieved by a lowering of prices.
Figure 49 resolves this apparent contradiction, r^ and r^ are demand curves in a
thickly settled region {R) a^ and a^ in a thinly settled one {A). The necessary demand
in A is DE. The demand curve r^ would result in R in the same demand, DE, at the
price as in A. But the corresponding area would be larger than with the curve r^,
which lies to the left of it and which results in BC, the minimum demand necessary
in R. The same thing holds true when sales areas in A are compared with those in R.
are not large

areas for the

the prices of industrial goods in the towns of a thinly settled region

be somewhat lower. Conversely, the prices of agricultural products in the towns,
and perhaps even average rural ground rents, will be somewhat higher than in a
thickly settled region; first, because freight rates are higher on account of the less
intensive use of the means of communication; second, because the agricultural supply
area for the towns is larger since they are more populous; and, third, because that
It follows that

will

supply area

itself is less fertile.

may appear here for which there would not be an adequate

market in a thinly settled region, even with full exploitation of their possible shipping
107.

Moreover, goods

distances.

Some

iSJew

Factors

This does not mean a difference in size, but only in distribution

of inhabiof the population. Other things being equal, the number
tants will obviously be greater on fertile soil.
a factory lies on the border, the size of that part of its
respectively
sales area extending into the rich or the poor region
will depend on the relative size of markets in the region concerned.
rich region
If the markets are large in the poor and small in the
will
extent,
areal
by
measured
factory,
the
of
hinterland
the real
are
regions
both
value
economic
their
in
But
former.
lie in the

Second,

if

about the same. Because of their irrational shape, such border areas
are on the whole somewhat larger than interior areas. If sales areas
in the rich region are larger, it is uncertain whether a factory on
the border will attract sufficient demand from the poor region to
fertile region.

produce on the larger scale of the

Comparison of marand

Fig. 49.

ket area in thickly settled

thinly

settled

with

regions,

equal cost curves

another case of natural differences of an areal kind is imporImagine a large region, A, and a small one, B, wholly similar
in natural features but separated by a wide uninhabited region like
a mountain range, a desert, or a body of water, or by high customs
duties in A. The essential assumptions are the differences in size
and distance. Two further assumptions are economic in character.
First, the planning curve must have a break, as in Figure 48. Thus
there must be two different production methods: large-scale and
small-scale production. Second, only B must be too small for mass
Still

tant.

production.

Under

these conditions

is

the indicated location for a

large plant.

B may

but enterprises can never

According to the assumptions,
a large-scale enterprise in B cannot depend upon B alone for its
support. In A, however, it is too expensive by the amount of the
constitute part of

be situated in

its sales

and supply A

as well.

area,

Economic Regions

Fart Two.

xgo

compared with a local large-scale business, even if there are

no customs duties. But a large enterprise would be able to maintain
itself in A, either if A were an adequate sales area or if its costs
were less than those of the small firm in B by more than the amount
freight

of the freight.

The

situation

would

suffice to

make

the United States the classic

land of large-scale enterprises, even without

Of

duties."^

approaches

it

all

the

today as

its

fantastic

customs

European countries, Germany most nearly

a large economic area.^*'^ The decisive factor

the size of a population than the national income. The other

European countries would lie xvithin the market areas of many
is less

large

American businesses

if

they did not " protect

"

themselves by

customs duties.^"
Uniformly operative natural factors will be more important in
general for agriculture, irregular factors for industry and mining.
But the influence of nature plays a significant role in all branches
"^
of the economy in the formation of " districts " and " belts."
in
far
disadvantages
so
This has both advantages and disadvantages:
as it encourages urbanization and causes an irrational distortion
in the shapes of market areas; advantages in so far as the external
economics that result when similar production is concentrated in
one place need not be purchased by carrying out part of this production under unfavorable natural conditions. ^^-

2.

Local Differences

in

Accessibility

Among

the purely economically conditioned deviations from our

initial scheme it should have been mentioned that a transport surface
(i. e., an area within which transportation between any two arbitrary

always possible over a direct route) does not exist. The

limited number of roads and railways lines, of railroad stations and

points

is

108. Essentially similar conditions

businesses.

European
109.
110.

dem

The

make

large cities the favored sites for large-scale

metropolis corresponds to the United States, provincial towns to the

countries,

and the open country

to the ocean.

Written before the autumn of 1939, but retained in the 1944 edition.W. H. W.
See A. Losch: Selbstkosten- und Standortverschiebungen von Genussgiltern nach

Krieg ah Ursachen von Zolltendenzen

(Berlin,

1934)

(Zwischenstaatliche Wirt-

by H. v. Beckerath, Heft 4)
111. 5. W. Wilcox, Chief Statistician of the Bureau of Labor Statistics in Washington, D. C, told me that an attempt to divide Illinois into areas of similar production
showed a surprising agreement with geological structure, which went so far that regions
where corn was grown for the market, for example, were associated with a formation
different from those where it was used as fodder.
112. It would be so, for instance, if all kinds of soil were evenly mixed everywhere.

schaft, edited

Some New

i3

Factors

harbor facilities, can be ascribed to their high fixed cost if to nothing

else. Thus, in reality, transportation is not possible between any
two given points over any desired route, but only between a few
so-called transport points and over a few so-called transport lines.
Still, the number of these points and lines varies with the means
of transportation."^

It is

large in the case of

wagons and motor

trucks,"* smaller in the case of railways."^ and smallest in the case

and ships. Their position results "^ essentially from

of airplanes

For the laws according to which transport

113.

and the

carriers,

is

distributed

among

the various

relative size of their loads, see A. Losch, " Die Leistung der See-

schiffahrt," Nauticus, 1941, pp. 326-336.

The narrow-meshed network

114.

lines.

stopping places wherever

than the wide-meshed railway
especially important in its com-

with

highways,

of

more

desired, approaches a true transport surface

closely

This feature of motor-truck transportation is

and in the development of locations.

petition with the railways

scale or according to value)

is

in addition, the

taken into consideration, the most important results of

motorization can easily be deduced. In so far as

with low production

If,

(according to straight distance and weight, not sUding-

characteristic tariff schedule

as

costs,

it

lowers freight costs

does any decrease in freight rates.

it

favors places

In so far as

it

works to the disadvantage of " favored points," as already

shown. Thus no simple answer can be given to the disputed question of whether the
equalizes freight rates

it

motor truck has a centralizing or a decentralizing effect. It facilitates access to and

from newly developed and unfavorably situated places, for example. On the one hand,
metropolitan competition can now break into remote corners and destroy local industries.
According to both German and American experience this seems to be true of retail
trade especially. (See A. Erlenmaier, " Die Bedeutung des Kraftwagens fiir den Standort
in Produktion und Handel," Zeitschrift fiir Verkehrswissenschaft, XII [1934]; and C. E.
Lively, " Growth and Decline of Farm Trade Centers in Minnesota, 1905-1930," UniOn the other
versity of Minnesota, Agricultural Experiment Station, Bulletin 287.)
hand, favorable production conditions
places once they have been

may

attract industries to formerly inaccessible

opened up by the motor

truck.

(For examples see Erlen-

pp. 352-360.) In a similar manner the

construction of railways once benefited outlying sources of labor. (See O. Schlier, Der
maier, op.

cit.,

p. 94;

and Palander,

deutsche Industriekorper

seit

bahngiitertarifpolitik in ihrer

ordnung [Heidelberg,

op.

cit.,

1860 [Tubingen, 1922]; and P. Schulz-Kiesow, Die EisenWirkung auf den industriellen Standort und die Raum-

1940].)

As for superhighways, the Autobahnen of Germany, they resemble raihoads in that

the number of their junction points is limited. Hence in comparison with ordinary
highways they save more time the greater the distance between starting point and
destination and, obviously, the nearer both

lie

to

the Autobahnen.

time-saving run like arrowheads toward the destination.

more acute
railways;

i.

in the case of the

e.,

Autobahnen,

the latter signified a

the highly interesting

maps

much

to

The

Lines of equal

angles are considerably

be sure, than they once were with the

-greater revolution of

of C. Pirath, "Auflockerung

communication.

See

und Ballung im Lichte der

Reichsautobahnen," in Volk und Lebensraum, edited by K. Meyer (Heidelberg, 1938)

pp. 262, 269.

Three out

of four German communities are without railway station!

As a reaction, of course, there is a tendency to concentration along a few welldeveloped traffic routes, especially with expensive railway installations.
115.
116.

Part Two.

i84

Economic Regions

our ideal system of market areas; that is to say, from transport

requirements proper as long as disturbances brought about by
nature are absent.
a.

Transport Lines

Natural obstacles divert transport lines according to the law of

refraction, which is valid far beyond the sphere of economics/^^ Man
subjects himself to it by choice (after all, it is merely the economic
principle applied to a special situation) nature (light and sound)
by necessity. Here is a significant identity between a law of nature
;

Fig. 50.

The law

of refraction

and a law based on reason, which shows clearly enough that the
economic principle is not merely a human invention and does
not simply correspond with the attitude of a particular epoch.^^^
It runs through the history of natural science as lex parsimoniae:
the principle of simplest

means or

least resistance; as the hypothesis

that natural events reach their goals

by the shortest route. "^

Suppose that a product is to be shipped as cheaply as possible

from A to B (Fig. 50) North of the coastline CD, which is equally
.

117. I

have already referred

to

this

in

Standortstheorie," Schmollers Jahrbuch, 1938)

my
.

review of Palander

("

Beitrage zur

In the meantime appeared the detailed

and admirable accoimt of H. von Stackelberg, " Das Brechungsgesetz des Verkehrs,"
fiir Nationalokonomie und Statistik, CXLVIII, 680-696.
118. On the contrary, it embraces the behavior of some men in almost all situations,
and the behavior of almost all men in some situations: when desire and aversion are
strong (one wants to attain a definite end or avoid it as far as possible pursues every
advantage or high aim; husbands his powers; avoids the unpleasant)
It is otherwise
when we live everything instead of separating means and ends; when we rejoice in
the game; surrender ourselves completely only those can do so who are free of desire
and filled with love. There are two worlds, and we are wanderers between them.
119. Others of our results, too, have their counterparts in nature. What, after all,
are the often sharply separated feeding grounds of various animal families and species,

Jahrbiicher

Some New

185

Factors

favorable everywhere for landing, the cheap ocean freight, fa, is in

The t ransport costs
effect; south of it, the high rail freight, /&.

= fa\/a^ {c x)^;
=
F
F^
a minimum when
+
+
+ -^^= = Hence U sin ^ - sin a = 0,

per unit for the dist ance

and for EB, F^
/&V&'

F{x)

or ^^"

'^

smj3

-===

yj a^

-\-

= ft

{c

x)-

AE

will then be Fa

x-.

F (x)

-\-

is

y/h^-\-x-

This determines the

site

of the harbor

jE.

the

If

fa

distance per unit of time

is

substituted for the distance per unit of

freight in this formula, the formula for the refraction of light

and

sound will be obtained.

Suppose, thirdly, that an officer has to lead his troops from A to
B with the smallest possible losses, and the severity of the enemy's
fire in the two zones is related as the freights in the example above.
He will choose route AEB. In short, the formula for refraction is
universally valid when two unequally favorable zones have to be
crossed with the smallest expenditure, whether of time, money,
blood, or the like. The most important application of the law of
refraction is probably the case where a cheap transport line such as
a railway or a navigable river cuts a more expensive transport surface like a dense network of roads. ^^ The angle /?, within which
transportation to and from the railway takes place, is easily calculated. Since in this case AE in Figure 50 coincides with CE, and a
is therefore 90, sin j3
fa^^ fb- Another application of the formula
The
is the construction of railway bridges over broad streams.
higher the construction costs the more will a bridge deviate from

the

main direction

made

of the tracks in order that the crossing

may be

as short as possible.

The law of refraction naturally covers more difficult cases as well.

Refraction by lenses, too, has its counterpart in economics. For the
solution, it is completely irrelevant whether the hatched area in
Fig. 51 is a biconcave lens and the problem is to project a beam of
light from
in such a way that it will arrive at N; or whether
is Hawaii, the hatched area the isthmus of Central America, and

is

if

New

H
N

Orleans, and instead of a

not the market areas of man?

beam

of light being projected a

Plant species also have their necessary and typical

and
from

distance, as a consequence of the struggle betjveen an individual impulse to spread

the tendency to maximize the

number

of independent existences familiar to us

economic analysis. I doubt that the fundamental principles of zoological, botanical,

and economic location theory differ very greatly.
120. Palander (op. cit., pp. 337 ff.) gives an admirable presentation of the combination of means of transport. ( (The minimum condition on the left side of the
equation on p. 337, however, should read x -^ Va^ -j- jc^, not x -j- a)

Part Two.

i86

load of pineapples
possible.

The

is

to be shipped to

New

Economic Regions

Orleans as cheaply as

greater the refractive index of the lens that

is,

the

more it resists the passage of a beam of light the more will the
beam be deflected (path I instead of path II) Exactly so, were
there no Panama Canal today, would a connecting railway be chosen
between Pacific and Atlantic ports that would be more southerly
the higher the rail tariff in comparison with the ocean freight. At
,

Fig.

51.

Schematic representa-

tion of efficient route

(H) to

New Orleans

from Hawaii

(N) via

Panama

Canal and possible Nicaragua cut

present the problem

is

stated thus:

Whether the

cost of a canal

through Nicaragua would be repaid by the shortening of the sea

voyage. Other things being equal, the higher the cost the shorter
would a cut have to be; in other words, the greater would be
the superiority of the Panama Canal over one running through
Nicaragua. In this case a decision can be reached without appeal
to the law of refraction, because there are only two practical alternatives. Where there are more, which cannot all be thoroughly
explored, the right choice can be made only with the help of this
law.

But an important limitation of the law of refraction must be

added here. Its nature is essentially similar to Launhardt's and
Weber's geometrical figures: it assumes that the points between
which transportation is carried on are definitely fixed and few in

number in

the present case only two.

Hence the

objections to the

law in question.
However, the objections are less important here because transport
lines, with which we are now dealing, are considerably less numerous
than transport points. In the case of ocean traffic between the east
and west coasts of America, for example, it can be said, despite the
numerous harbors and innumerable points of departure and arrival,
that in the neighborhood of the Central American isthmus at least
there are only one or two transport lines. But if the traffic of the

earlier figures are substantially valid against the

Some New

^7

Factors

west coast of South America with Europe and with the east coast
of North America is added, there will be several lines, and for each
one a somewhat different situation of the Panama Canal would be
more advantageous. Since it would not pay to have a special canal
for each transport line (quite apart from the fact that the choice
severely limited for technical reasons) the location
of the present cut is a compromise. The higher the fixed costs of
overcoming an obstacle to traffic and the greater the number of
of locations

is

transport lines that have to surmount it, the more does the law of
refraction lose in significance. It cannot be applied to a group of

importing areas. In such cases, gateways

any other industrial undertaking; their
location will be so chosen as to reach an adequate market.
transport lines, that

must be regarded

is,

to

as like

^.

Transport Points

Among
tance.

transport points the nodal points are of special imporThey are more favorably situated in respect to freight than

mere stopping places. We have already seen that the mechanical

model for determining the optimum transport point comes to rest
only in them. This

is

why

they are preferred locations for industry

Among

nodal points those primarily determined by

nature (bottleneck cities) are of outstanding importance. Unlike
other nodal points, they cannot be by-passed by technical means,
though others will not be by-passed for economic reasons. They are
The particular
literally gateways that must be passed through.
barrier a mountain range, a river, an unbroken coastline may be

and

trade.

provided by nature or may depend partly on economic factors. The

expensive means of transferring goods, say from a ship to a railway,
or of surmounting obstacles (bridges, tunnels) presuppose a relatively large supply area, and thus are to be found at a few points only.
The classic example of a " pass city " is Vienna (and at the other
end of a long curve in the Danube, Bratislava,'^^^ as a threefold gate-

way leading into the Bohemian and Hungarian basins, and into
south Germany. The narrower the pass and the more important
the market lying behind this natural gateway, the nearer to it will
industries with large necessary sales areas establish themselves, other
things being equal; but they will pass through

a larger market

on the other

it

only

when

there

is

side.

is a gateway not for river traiBc on the Danube,

Danube. (See Blum, *' Deutschland und Siidosteuropa nach
Riickgliederung der Ostmark und der Sudetenlander, verkehrspolitisch betrachtet,"
Zeitschrift fiir Verkehrswirtschajt, XVI [1939], 1-31; and Schneefuss, in Lebensraum-

121.

but for

Budapest, on the contrary,

traffic

crossing the

fragen europdischer Volker, edited by K. Dietzel

et al. [Leipzig, 1941], p. 659.)

Part Two.

jgg

Economic Regions

arises when the barrier separates not only

but different means of transportation as well.
In such a case the pass city is at the same time a transshipment point,
and if the pass is fairly long it will be situated as near as possible

problem

special

different markets

to the

Hence

^^^

end where the more expensive means of transportation begins.

if a seaport is on a navigable river it will lie as far upstream

as possible.^^^

Palander
river port

has shown how much larger the hinterland for a

compared with that for a seaport. It must not be

^-*

is

assumed, therefore, that the choice of the natural harbor to be

developed and the question of how far upstream it shall be situated
are two separate problems. It will not do to select a hypothetical
location (in the wider sense) by means of the law of refraction, say
on a conventionalized coastline where the possible seaports have
been indicated, and then choose the actual location (in the narrower
sense) as far inland as possible. There is only one single location

The position of the

it cannot be solved in stages.
hinterland, the destination of the shipments, the contour of the

problem, and

harbor installations, all must be considered

simultaneously in a general calculation that covers a few selected
coastline, the cost of

sites.

Transport points play an important part in the formation of

market areas. If, for instance, wheat growers supplied wheat consumers directly, there would be a chaotic plethora of market areas,
the shape and situation of which are the harder to imagine because
the deficit and surplus regions of wheat are widely separated geographically. Transport points simplify this situation so greatly that
only through them can it be grasped. Every railway station in a
wheat belt is a collecting point in miniature. Each is surrounded
by its small supply area, and the receipts of each farmer are equal
to the uniform unit price at the collecting station less the cost of
transporting the wheat there. The nodal traffic points are the collecting places of the railway stations. A larger supply area surrounds
them, and the price at each stopping place is equal to that at the
122.

This holds true for smaller market areas, whereas a gateway merely constricts
In general, therefore, countries separated by mountain chains are eco-

larger ones.

nomically

less closely

integrated. This in itself

is

a sufficient reason

why Wiirttemberg

do not constitute a single economic area. Mountains make

Chile an independent economic region; her share in the foreign trade of Argentina
amounts to but a small percentage.
and Baden,

123.

This

for instance,

is

especially important

when

the possible supply radius

is

not

much

longer than the necessary one. Furthermore, port installations are cheaper on a river.
124.

Op.

cit.,

p. 349.

Some New

i9

Factors

The collecting stations for

less the freight.
few great ports that export
finally,
the
are
collecting
stations,
these
superior nodal point

wheat. In each the product of an enormous hinterland is assembled.

Only these great gateways can give rise to great delivery regions in
place of the small supply areas. Furthermore, they simplify the
All prices at the subordinate collecting stations
are determined by a single price at the port and the freight to it.^^^
If this uniform price falls, the hinterland of the port becomes
spatial price system.

more fragmentary. Smaller, because in the region of

the farthest nodal points or " whistle stops " the cultivation of wheat
would be no longer profitable; more fragmentary, because even in

smaller and

the nearer part of the hinterland individual farmers, who are espefrom the railway, or own poor soil, or lack ability, will

cially far

now

The important

function of price in the ordering of

unmistakable.
The sales area for wheat is simplified in like manner. To be
sure, simplification does not go so far that only one exporting port
for wheat in the whole world supplies one single importing port.
In such a case everything would be perfectly clear: one single area
would be confronted with one single supply area and there would
be a single world price for wheat, which could be chosen at either
the export or the import harbor, since it would differ only by the
give up.

spatial relations

is

freight.

But

it

is

not quite so simple in

to

reality.^^

Even

if

we

neglect

consumed, several supply areas are related

several consuming areas. Almost every exporting port ships to

the product that

125.

When

wheat

is

is

locally

traded between places, local prices differ exactly by the cost

may differ by less. In such cases considerable local price

without any movement of goods. If A and B supply C, the price

of shipment; otherwise they

variations

may

exist

or below that in B by as much as the freight, and yet no trade

between them. This does not mean that the difference can fluctuate
within these limits as long as A and B have a surplus. Since price fluctuations always
originate at the central collecting station, they must be exactly the same for all subordinate places. Gateway points fix spatial price differences rigidly, for permanent
surplus as well as for permanent deficit places. Prices in A and B always differ,
therefore, by the difference in freight from y4 to C or from B to C. Otherwise one of
the two places would be excluded as a source of supply. Only when A and B supply
two different and unconnected places can the price in A be higher or lower than that
in B by almost the amount of the freight to B, and vary arbitrarily within these limits,
without one of the places being driven entirely from the market. The actual frequency
of fluctuations in the price differences between two places is due not only to frictional
in

A may be above

will take place

difficulties,

many

but also partly to slight product differences and partly to the fact that
and sometimes a deficit.

places sometimes have a surplus

126. See the section

on the

"

World Market

" in

Chapter

23, b, 4.

Part Two.

igo

Economic Regions

and almost every importing one receives from

This is an unusual situation. We should
expect several consumers to order from one producer, or several
producers to supply one large consumer. Does this strange overlapping of areas, as it is found, for example, in the wheat market,
depend solely upon differences in the product, or can it be explained
in some other way?
several importing ones,

several exporting ports.

Suppose the prices in

all

ports of exportation to be given.

Then

wheat of the same

quality from only one exporting port, for only to the few importing
ports on the borders of the sales areas of two exporting ports is it a
matter of indifference whether they supply the one or the other, or
both. But suppose that the import needs of one of these border
ports are very great, and cannot be met at all by a single exporting
port, or only when the import price rises. Such an importing port
in principle a small importing port can obtain

Fig. 52. Effect of gate cities on market and supply areas. A, B, C,

and D are export ports with separate sales areas. is a large importing
port, whose supply area is endorsed by a broken line.

not only a border point for the sales

same time the center of a supply
region on whose borders lie those exporting ports that, among others,
supply the great importing port. The same exporting ports can
supply in common only such importing ports as lie on their common
boundary. But it seldom happens that more than two sellers share
(Liverpool, for example)

is

areas of several ports, but at the

more than a corner of their sales areas.

With these considerations we have shown an important and
remarkable effect of the gateway points: They can of themselves
between millions of indeindependent
millions
consumers. This is
and
of
pendent producers
buyers
on
large
a
border it is not a
expressed by the fact that to
small
buyers) how much they buy
matter of indifference (as it is to
from each sales center on the border of whose areas they lie. As an
example, England and Peru buy wheat from Canada, the United
create a state of imperfect competition

Some New

Factors

191

would make little

from Argentina, the
whole spatial price structure would be radically altered if England
were to try the same thing. For England buys over- a third, Peru
only an insignificant fraction, of the combined amounts exported
by the countries mentioned. The share of the various surplus regions
in English imports is uniquely determined in equilibrium.
Thus the characteristic effect of gateway points is twofold. First,
they create a few great supply and sales areas. Second, when one or
another of these turns out to be especially large they cause a strange
But whereas

Argentina, and Australia.

States,

difference

if

overlapping.

Peru were

With

to get

its

it

entire supply

a standardized product, however, the sales areas

will only touch, but supply and sales areas will in this case overlap!

(Fig. 52.)
c.

1.

HUMAN DIFFERENCES

Differences among Individual Entrepreneurs

As the planning curve of a less capable entrepreneur lies above

an abler one, the necessary extent of his sales area and his
producer's price are generally greater, which can easily be deduced
from a graph. The unskillful one could not maintain himself if
there were enough capable ones. This is probably true in old
established trades, because in order to succeed the head of an enterprise need only good average abilities such as approach those most
often found, since human characteristics seem to be distributed
along the Gaussian frequency curve. Very good and very bad entrepreneurs should be relatively uncommon in these branches, and the
that of

regional size should be about equal.

In pioneer industries, however, where a rather infrequent combination of characteristics is required, less able entrepreneurs may
also find a place, though they are still above average. Will the abler
producers be content with small sales areas and leave large markets
to the less skillful, who could not otherwise exist? The outcome is
as though all entrepreneurs were competing in the same market:
The well qualified extend their sales areas until at the boundaries,
which now extend farther outward than need be, the price is equal

boundaries of the necessary sales areas of their less

Consequently the actual, though not the necesareas of the ablest will be larger than those of the others.^"

to that at the

skillful neighbors.
sary, sales

127.

As the

general, so

capabilities of a

the special

abilities

greatly in a certain direction.

leading entrepreneur can extend his sales area in

of

his

regional sales representative

can expand

it

Economic Resions

Part Two.

192

In a literal sense they are the ones with the larger sphere of influence.
Since they prefer great cities as locations wherever possible, their
sales areas will be often, and perhaps usually, above the average in
size for this

2.

The

reason alone.

Differences

in

National Character

character of a people expresses

itself also

in the

way in

which they organize their economic life. But such national differences interest us here only in so far as they operate spatially which
presupposes that the various races and nationalities are not thoroughly intermixed. Where consumption is still rigidly determined
by a common way of life (that is, where it represents a meaningful
group of needs similar for all), tribal, national, and racial differences,
like all differences between regionally confined groups, are of great
economic importance from a spatial standpoint. Then the boundaries
of a tribe or nation are at the same time the boundaries of regional
networks for whole classes of goods. Not much is altered when in
cosmopolitan periods customs and usages relax and become more
similar. But even when they do, and advertising and fashions of the
day instead of established custom attempt to determine consumption,
not all boundaries are obliterated. Many customs are determined by
the character of a landscape, by its history, and perhaps biologically
too,^^^ and can be changed only slowly or not at all.^^^ Thus a native
born entrepreneur can judge more accurately what compromise
with the prevailing fashion will be possible. His solution and his
advertising will correspond more closely with the national or tribal
character, and up to a certain point national boundaries will still
remain economic boundaries.
128. Heredity and landscape affect national character in part directly, in part
through tradition, which also is largely determined by historical chance. For the
influence of landscape see W. Hellpach, Geopsyche (5th ed., 1939)

129. Conversely,

United States

is

one of the most striking phenomena

how

differences in character

little

its

to a

European

visiting the

great regional differences have been transmuted into

and custom, and hence

variations are greater than appears at

first

in consumption, even

sight.

One

though the subtle

gets the impression that the

American is nature's master and shapes it, rather than allowing it to shape him. This
imposing uniformity (as Ratzel has put it) is one of the sources of America's wealth.
If there were as many cultural differences there within the same space as in Europe,
cheap mass production would be finished. Earnings at least would fall, though psychic
income need not. Incidentally, it is just this economic and cultural uniformity that
makes the strong political position of the individual states so little dangerous to the
Federal Government. Nevertheless, even in the United States the heyday of the
regional

is

only beginning.

So7ne

New

Factors

193

But production,

too,

is

largely influenced

by the individuality of

producers, even when they do not work exclusively for their own
needs. What is produced will naturally depend in great measure
upon the special skill of a people, though it cannot be said simply

which relatively they know best.^^

must not be invariably regarded as given

that they will produce that

Characteristic skills

a priori, since, for example, they often require a suitable task for

Thus

their development.

some
by no means objective

the parsimony of nature will spur

peoples on, but discourge others.

It

is

alone that decide what a location

criteria

different peoples will develop

differently.

it

is

suitable for, since

They

react differently

environment. The
to their human,
diversity of production of a people is determined by how far they
can resist a general leveling. The more they can do so, the less
will they specialize one-sidedly in goods for a larger market.^^^
They will neither simply accommodate themselves to an unfamiliar
demand nor be satisfied with goods that are fashionable elsewhere.^^^
Such loyalty to the native and indigenous has enormous advantages,

do

as they

For further details see pp. 226

130.

of different places, especially

often

to their natural,

work

real

ff.

and 236

ff.

those of larger

Ability varies

among

the citizens

and smaller towns. The former

the latter better.

faster,

The

131.

among

meaning of European

colonial policy was chiefly to enforce speciali-

zation.
132. It

hardly possible to overestimate the degree to which a too sudden or too

may uproot an established way of life, or how trade

is

great concentration of production

may

alienate a people

from their

soil.

wood

Foreign in place of domestic

in the con-

struction of furniture, fruit that has never been seen to ripen, clothing that
for a different climate,

travel

among

cultural

might do

surroundings for which one

not

is

prepared, a thousand things that are possible against the background of a cosmopolitan

attitude when

all

this

suddenly breaks into the

judge calmly which of the new economic

life

of a people,

possibilities will suit

it.

it

is

difficult

For there

is

to

little

sense in ordering a multitude of goods from afar simply because they are cheaper or

more attractive, as long as one has not found in some way or other a place in one's
world pattern for their individuality, their origin, and their producer. One's horizon
must widen with the expansion of markets. But it would be far from right to hold
that this expansion of markets intrudes upon a people like fate from without. They
themselves decide whether it shall take place at all; it depends on them whether they
are ready for

Of course
to hasten

it.

it.

it

would be

as fallacious to prevent the concentration of

The enormous

increase in our wealth since the

dawn

production as

of capitalism

was

only possible because we were willing, on the whole, to accept standardized products

America went further in this respect, and that is one

Europe there lies dormant a great and dangerous
of quickly becoming rich again after the war, even though only on the

instead of individual ones.

reason

why

possibility

surface.

she has

more

goods. For

Part Two.

,Q^

Economic Regions

far transcending the diminution in economic risk,"^ for it is conducive to a more harmonius development of human nature. The
individual will have to specialize everywhere, but it makes a great
difference whether in his sphere "* there are only associates who
specialize in the same field, or whether he is surrounded by men
who live for him the other possibilities that he has had to forego^^^
that is, whether his horizon constitutes a complete whole.

Tribal and national characteristics show also in the conduct of

business. There is not nearly enough attention paid to how much
not only individuals, but tribes and nations ^^ as well, vary in such
characteristics as timidity or daring, discretion or rashness, a liking
for tradition or for innovation, a conservative or a flexible mind,

thorough or superficial training, stability or frivolity, and to how

strongly these differences dominate the character of their economies:
the objects produced, the size of their undertakings, the relation

between an entrepreneur and his workers, the mobility of labor

and capital, the strategy of monopolists, location, resistance to crises,
and so on. All these depend not only upon the individual entrepreneur, but also upon the environment in which he works as well
as upon his environment in a spatial sense, since the intimacy of
economic relations generally decreases with distance.
When an explanation was sought for the fact that the economy
of Wiirttemberg withstood the great depression of the 'thirties
especially well, the discussion occasionally touched upon these
matters. But many explanations did not get near enough to the
root of the matter. The poverty of the region in natural raw
materials was certainly a piece of good fortune in this instance.
But the balance of the economic structure, as shown in the diversity
of production and particularly in the happy combination of industry
and agriculture, and again in the dispersion of industry and landed
133.

The expansion

diminish

risks

(see E.

of markets gained at the price of specialization also tends to

Willeke,

Von der raumgebundenen menschlichen

[Jena, 1937], p. 113), but this rarely suffices to

nected with specialization

134.

Arbeitskraft

compensate for the increased

risk con-

itself.

This broadens with improvements in transportation, though not necessarily at

the same rate.

For the development of a cultural individuality a landscape must therefore be

enough to constitute a world in miniature, yet at the same time small enough
to be more or less understood by its intellectual leaders.
136. For national types of entrepreneurs see W. Sombart, Der Bourgeois (Munich,
1913), pp. 170-193, 266-281); K. Wiedenfeld, Das Personliche im modernen Unternehmertum (Leipzig, 1920) and R. Michels, Wirtschaft und Rasse. Grundriss der
135.

large

Sozialokonomik (2d

ed., 1923)

Vol.

II, Pt.

1.

Some New

Factors

195

property ^" resulting from free divisibility and deliberate policy ^^*
these were not due to chance. Whoever considers thoroughly the
particular nature of the products and production; the highly valuable specialties that can be made only by unusually well-trained
and adaptable workers who like to tinker and experiment; whoever
considers the energetic yet sound business policy that clings to easily
understood and controlled conditions and to enterprises seldom

exceeding the capital and labor resources of one family ^^^ (just as
Wiirttemberg itself in many respects resembles a large family which
has contributed greatly to the easing of social tension and encouraged
the use of native products)

whoever considers

all

these factors will

see clearly that national character has influenced this

137.

Well described by G. Stockmann,

"

Grundlagen

wiirttembergischen Industrie," Deutsche Zeitschrift

fiir

und

economy

Krisenfestigkeit

Wirtschaftskunde,

to
der

(1936)

See also the great atlas of P. Hesse et al., Landvolk und Landwirtschaft in
den Gemeinden von Wurttemberg-Hohenzollern [Kartenwerk) (Stuttgart, 1939); and
several contributions in Weltwirtschaft, 1934, No. 11/2.
138. Ever since 1848 the Zentralstelle fiir Gewerbe und Handel (the present Landesgewerbeamt) fulfilled certain functions of a regional planning office in an exemplary
manner, more recently under the farsighted leadership of Ferdinand von Steinbei'
139. According to 233 official American studies, the largest enterprises are seldom
the cheapest; it is generally the medium-sized and often the small ones (G. J. Stigler,
American Economic Review, June, 1942, Pt. 2)
As for agriculture in Wiirttemberg,
281-298.

the

number

note 53)

of farms that are too small

The

net market return

is

apt to be overestimated (see above,

(money

receipts less expenses)

in

p. 65,

1934 amounted

Wiirttemberg to 145, in Hanover to 124,

Pomerania to 73. Large farms were more common
and most natural yields larger in the same order, but this was achieved by a greater
outlay for machinery and artificial fertilizers. " The economic efficiency of an area
under cultivation increases as its size decreases." (H. Priebe, " Zur Frage der Gestaltung
in

Baden

to 155 reichsmarks per hectare, in

in Schleswig-Holstein to 88,

und Grosse

and

in

des zukiinftigen bauerlichen Familienbetriebes in Deutschland," Berichte

Neue Folge, XXVII [1942], 585.) Though higher money return

per hectare does not entirely compensate for the thicker settlement of regions containing
small farms (the net return per person principally engaged in agriculture was 300
iiber Landwirtschaft,

reichsmarks in Wiirttemberg and 400 in Pomerania)

when

the difference almost vanishes

taken into account that on a peasant farm an especially large number of

workers are employed, such as children or old people, who are not fully efiBcient.
it

is

(G. Isenberg, "

Die Tragfahigkeit des deutschen Ostens an landwirtschaftlicher und

und Gestaltung der zentralen Orte des deutschen

gewerblicher Bevolkerung," in Struktur

Ostens [Leipzig, 1941], p.

13.)

In any case, depopulation of the Swabian villages would affect the vitality of industry

younger generation (Bosch

boy from the Swabian Alps) and
would altogether sap the energy of the whole region, which springs psychically and
economically from the fertile proximity of man and nature. Even without such a
itself

through the

loss

himself, typical in so

depopulation

much

is

of the qualitatively irreplaceable

many

ways,

came

as a peasant

taking place in Wurttemberg that some day

able into unfavorable conditions.

may change

favor-

Part Two.

!<)()

Economic Regions

an extraordinarily high degree. ^* The Swabian economy cannot be

entirely grasped without an understanding of Swabian philosophy,
which has probably formulated this national character in the most
apt way.^*^

POLITICAL DIFFERENCES

d.

Countries and economic regions do not necessarily coincide. It

lies with the state as an independently governed society, and hence
in the final analysis with the people themselves, whether or not it
shall be entirely self-sufficient economically; that is, whether its
outer economic boundaries shall coincide with its political boundaries, or whether deliberate state interference shall remain limited
to arranging the economy in such a way that, once set going, it shall
continue on the whole by itself.^*^ In the latter case many economic
boundaries will extend beyond its frontiers. Between these two
clear-cut extremes there is naturally an infinite variety of less well
defined economic policies,^*^ but we shall limit the following paragraphs chiefly to the second limiting case, because it allows recognition of the minimum extent of political influences on the

formation of economic areas. The discussion will be preceded by a

comparison between purely political and purely economic regions.

States and Economic Landscapes: A Comparison

1,

a.

States

1.

which

Both kinds of capital are located

its

(Die Wiirttembergischer

Preiser

140. E.

by

and economic landscapes each have a

and main traffic routes are

their subdivisions

2.

p. 79)

Similarities

capital

as centrally as

Wirtschaft

toward

oriented.^**

ah Vorbild

possible,

[Stuttgart,

1937],

having disarmed the most damagaing criticism of capitalism

relative invulnerability to crises, its spatial arrangement, and its social harmony.
justly praises

it

for

H. O. Burger, Schwabentum in der Geistesgeschichte (Stuttgart, 1933)

not quite accurate to speak of rules of the economic game set up by a
state. For in the economy the individual (though not all individuals together) can do
about as he pleases without disturbing its functioning, which is not true of a game.
A free economy is rather constructed precisely in such a manner that it functions as a
whole, no matter what the individual may do. The most important exception to this
141. See
142. It

is

statement concern monopolistic tendencies, which must therefore be supervised or

checked.
143.

and

Thus

it is

only a question of convenience whether to regard free trade

state interference as a disturbance, or to

workings of economic forces within this given framework.

mediate condition
144.

may be

This explains the odd

is

an example.

normal

Similarly, the actual inter-

derived from either free competition or monopoly.

fact that frontiers of the

boundaries without being tribal boundaries.

temberg

as

begin with state planning and show the

The Swabians

The

German

states are often

language

border between Bavaria and Wiirt-

just over the line speak a dialect tinctured with

Some New

Factors

197

taking into consideration the location of competitors and the fact

demanded in a uniform manner through-

that tlieir functions are not

out the whole area and that local locational advantages are not
everywhere the same.
3.

The tendency toward

equal

common

size is

to both states

and economic landscapes. This we have already shown for economic

areas. For states the reader is referred to Ratzel, who, in his great
Politische Geographie, ascribes to the notion of equilibrium the

neighboring states in competition with one another struggle

toward equal size.^*^ In this mutual pressure and thrust the peculiarities of the central position are the same in both cases; it is as
powerful in strength as it is threatened in weakness. ^*^
fact that

The

and economic landscapes, of administrative

depends in great measure on the development of transportation and production techniques. In every case
the size must be at least such as to assure existence; that of economic
landscapes and market areas through markets, that of states and
4.

districts

size of states

and market

areas,

administrative districts through

po'^ver.

If

they exceed this size

there arise the rich entrepreneur and the mighty state.

The former

can afford to be generous, the latter magnanimous.

The boundaries of states and economic landscapes cut through

5.
regular market networks, which results in economic losses.
6.
Boundaries have the function of separating the various orders.
Enclaves and exclaves are politically and economically unprofitable.

The influence of centers always grows less toward the periThe capitals and their immediate surroundings differ more
sharply from each other than do the border regions. Just as we
7.

phery.

have seen market areas on the borders of economic landscapes that

did not belong exclusively to either of the adjoining orders, and
just as the border zones of individual market areas are most easily
lost to competitors, so a political boundary region is most endangered. Furthermore, administrations on either side of a frontier
co-operate in many ways (joint river commissions, for example)
there are sundry overlaps, such as customs exemptions; and diverse
privileges granted to the neighbor state, as when the border-control
formalities are performed in the neighboring country's frontier
;

station

(see Ratzel, op. cit., p. 487)

Bavarian because they are oriented toward Munich both politically and culturally; this
especially true of teachers and clergymen, who are so important in the evolution of

is

a language.
145. F. Ratzel, Politische
146. Ibid., p. 282.

Geographie (Munich, 1897),

p. 221.

Economic Regions

Part Two.

jqg

Thus

political

and economic

areas have their most important

principles of organization as well as many properties in common.

Because of this structural similarity it is no wonder that states and
economic regions frequently overlap; at least in the sense that their

and economic capitals coincide, that political boundaries

are at the same time boundaries of many market areas, and that
many market areas and administrative districts, or at least their
political

capitals, are identical.

Dissimilarities

/3.

They

more

Political frontiers are

1.

are not

2.

so easily

rigid than

economic boundaries.

changed.

Political frontiers are wider, so to speak, than

States,

daries.

like

economic boun-

are separated as in a great desert by

oases,

customs duties, laws, language, a sense of community, insecurity,^*'^

and destiny. Economic boundaries separate only through minute
price differences.
3.

Political frontiers are

more sharply defined than economic

boundaries. To be sure political boundaries, too, may be belts

rather than lines,"^ particularly when they depend upon natural
features. But the influence of the center grows less toward the
border in both cases. Nevertheless, the overlaps and transitions are
disproportionately more common in economic landscape boundaries.

There are profound reasons

for this.

live individuals, small units that

On

make

economic boundaries there

a gradual transition possible

same time concrete units that " collide in space " and
to whom distance therefore means something. On political frontiers
two organizations meet, and often two nations large and in certain

and are

at the

respects abstract units, for

whom

distance changes

little

or nothing.

It has been truly said that patriotism draws no distinctions within,

but sharp limits without. "^^^' Economic boundaries change as profit

With

changes.

political boundaries, ideas or the people change, or

147. Especially since the two political principles that are so important to world
trade balance of power and differentiation between war and peace were abandoned
(See W. Euken, " Staatliche Strukturwandlungen und die Krisis
after World War I.

des Kapitalismus,"

WeltzvirtschaftUches Archiv,

XXXVI

[1932.],

297-321, particularly

p. 309.)

148. See

Grenzen "
149.

W.

Ratzel, op.

cit.,

p.

451;

in der wissenschaftlichen

Sulzbach,

Rationales

and J. Solch, Die Auffassung der " natiirlichen

Geographic (Innsbruck, 1924) p. 26.
,

Gemeinschaftsgefiihl

und

wirtschaftliches

Interesse

(Leipzig, 1929)
150.

and

Thus

tariffs at

List's

program was an eminently

patriotic one: railroads in the interior,

the border to protect infant industries.

Some New

Factors

199

which the individual sacrifices

something. Hence economic ties are very much looser and weaker
than political ties. Between economic landscapes transitional areas
are possible which derive no advantages from definite orientation
toward one or another order. Between states, on the contrary, the
at least the organization for the sake of

individual must choose.

The

4.

goals of

economic landscapes and

states are different.

If

those for states are arranged in a descending order as follows: continuance, power, Kultur, prosperity, this order must be exactly

reversed for economic areas. Entirely different sides of

nature are expressed in the political and economic orders.
y.

Political

human

and Economic Boundaries

In certain respects the boundaries of economic landscapes have

same effect as political frontiers, even though the two
are of opposite nature. The former resemble a seam, the latter a
cut, through the elaborate maze of market networks. Both have the
same effect, however. Both break up the regular meshes, which are
then replaced by relatively uneconomic types of areas. In order to
minimize this disadvantage there is a tendency to reduce the length
of boundaries, first by making political and economic boundaries
coincide wherever possible, and second by making states and ecoexactly the

nomic landscapes

may be
than

if

as large as possible. Fewer economic landscapes

able to maintain themselves within a given area, therefore,
there were no frictions at the boundary.

On

both types of boundary the regular areal network shows gaps,

filled in by irregular areal forms. In other respects, however, the two situations are as different as those of two men with
entirely different starting points and destinations who meet along
the way. On economic landscape boundaries the tendency prevails
to close unavoidable gaps wherever possible; on state frontiers, to
open avoidable gaps wherever possible. It is characteristic of economic landscape boundaries that they offer a particularly favorable
location for the centers of market areas that fill in these gaps and
thus extend across the boundary. It is characteristic of state frontiers,
on the contrary, to hamper the crossing of boundaries by market
areas (that is, the filling in of gaps) to create new gaps in a market
network where none exist ^" (for a boundary can pass directly

which are

151. In the

extreme case a whole

belongs because of
artificial

its

situation.

gap, whose existence

is

state

The

is

cut out of the market area to which

entire state

becomes a market by

assured by protective

a national industry that prospers in their shadow.

tariffs

it

an
and made profitable by
itself,

Part Two.

200

Economic Regions

through an economic landscape) and with certain exceptions to

discourage industries from settling near a boundary, where in fact
they often have a market in one direction only.
This explains, too, why after a shifting of political frontiers the
new border regions so often become depressed areas. Not only must
they transpose their economic activities; they must curtail them as
well. This devastating effect of boundaries would be still more
apparent if they did not so often pass through regions that would
be thinly settled in any case (such as mountainous frontiers) or
through regions (such as those along river boundaries) that by
nature are especially thickly settled, so that the population density
in the latter case appears normal anyway and in the former is
attributed to the parsimony of nature alone. But when a boundary
opens up gaps and keeps them open that is to say, prevents their
closure by industrial enterprises on the boundary the result, so far
as no multiplication of the interior market can be achieved by
regrouping (which is also relatively uneconomic) is greater excess
profits but almost always a poorer supply for the consumer.
Why do political boundaries exert this effect? The secondary
phenomena that are usually associated with them are to blame.
First, they are almost always customs boundaries as well. But tariffs
are like rivers, which separate their banks economically more than
would correspond to their actual width. ^^^ Second, they are often
;

national frontiers also.

Differences in language, in requirements,

and in national character have the same

effect as customs duties.

Third, they are administrative boundaries, which means on the one
hand that public contracts are only reluctantly awarded beyond the

border, and on the other that business

is

associated with official

traffic,

as

is

traffic,

to the extent that it

especially

common among

does not cross the border. Fourth, border regions are

regions of danger, for special consideration must be given to military
requirements even in time of peace, and in war they are the most

country

folk,

seriously threatened areas.

2.

Economic Areas

as Basis

for the State

We shall begin our investigation by sketching at least the influence of an economic area on the state, and conclude with a more
minute analysis of the inverse relationship. It need hardly be men152.

Thus

tariffs

are equivalent to a lengthening of transport routes.

The

length-

ening depends partly upon the tariff level and partly upon the way in which duties
The effect
are collected (a frontier can be crossed only at certain designated points)
.

of a railway line that cuts through a

town

is

similar.

Some New

Factors

201

tioned that the often divergent interests of individual businesses

within a state determine its policy and size to a rather large degree.
The safeguarding of profits in the long run postulates the participation of business leaders in politics,^^^ The safeguarding of the
power of the state in the long run demands that a state make the
economic interests of the citizens its own. Exports and, when necessary, imports are protected if possible by conquest, by command,
or by treaties in regard to tariffs, special trade privileges, and so on.
History shows how closely the destiny of states is connected with that
of their domestic economy. Italy lost her commanding economic
position in the Roman Empire, which depended upon wine and
olive oil privileges, and her political pre-eminence as a result, when
she gradually permitted the legions to supply themselves and when
she gradually emancipated the provinces with respect to these and
to important industrial goods. ^^* And the sway of the Italian commercial cities came to an end when the old trade routes to the Orient
were deserted upon the discovery of a sea route to the East Indies.
The nature of the British economic landscape has favored the creation of the British

Empire in

a particularly clear-cut manner.

Size

make

the most of their limited areas,

time their position offers them the compelling

limitations force islands to

while at the same

advantage of far-flung contacts."^ This explains the difference between British and German imperial development. As ocean freights
are so low, and no place in England lies much more than about
60 miles from the sea, she is as closely connected with other maritime
countries throughout the entire world as Germany is with the
adjoining countries of Middle Europe. The great difference between
land and ocean freights sets much narrower limits for the Continental emipres than for those oriented toward the sea.^^^
The simpler and more uniform are economic interests within a
state,^" the clearer and more productive is the adjustment of politics
153.

interest

The

degree of participation naturally varies.

If in the course of time all lose

an individual entrepreneur or an individual people have less
political power in the service of economic interests, but the temptation

(free trade)

reason to enlist
to

do

so increases.

154. See

M.

(Leipzig, 1930)

Rostovtzeff,
,

155. See Ratzel, op.

Next

GeseUschaft

und

Wirtschaft

im romischen Kaiserreich

2 vols.
cit.,

pp. 356

ideological

and

ff.

homogeneity, the fact that its economic disis undoubtedly the most important cause
of the tenacious cohesion of the British Empire.
(See A. Losch, " Die Leistung der
156.

tances are

to

much

its

shorter than

its

racial

geographic

Seeschiffahrt," Nauticus, 1941, pp. 326-336.)

157. For examples see A. Predohl, " Staatsraum

schaftliches Archiv,

XXXIX

(1934)

1/12, p.

3.

und Wirtschaftsraum," Weltwirt-

Part Two.

o,,^

Ecoiioinic Regions

would have been of great economic advantage to

America if they had succeeded in creating
a union of their own. Their free-trade policy would have been
approved by all their citizens, and would therefore have been able
to pursue a definite course. But since the protectionist industries
of the North and the free-trade cotton growers of the South live in
the same country, American policy vacillates between moderate and
exorbitant protective tariffs according to the outcome of elections.
to economics.

It

the Confederate States of

3.

Coincidence of Political and Economic

Boundaries

A political
it is

hard to

frontier

cross.

is

This

an economic boundary

is

regularly true

when

it

also

when by nature

exists for significant

reasons such as natural or national (racial) barriers especially. Seas,

lakes, and broad rivers keep many smaller market areas from further

expansion, exactly as do mountain chains, deserts, or language

barriers.^^^

Though

often said that streams connect rather than separate

it is

their banks, this

is

so only for trade over long distances,

which

is

cheaper, though not quicker, than if the stream were solid land.
But there is no doubt that on the opposite bank the sale of many

goods with short or even

ordinarily difficult,

medium

and the more

shipping distances is made extraso the wider the river and the

fewer therefore its bridges. Since states aspired to natural obstacles

boundaries until the awakening of national consciousness in the
nineteenth century, and since these often separate peoples as well,
many, if not most, of today's political frontiers are also natural
boundaries for the smaller market areas. This is particularly true
for retail trade and artisans, but much less true for factories.
The coincidence of political and economic boundaries in " great
spaces " (Grossraiim) is desired and mutually conditioned. The
leading state delimits regions of influence geographically in such a
way as to include wherever possible those economic conditions that
it believes important for its existence, and to this extent accommoas

158.

This

refers

to natural boundaries.

Such a border need not make

all

trade

impossible, nor does every natural obstacle have to be turned into a political frontier.

Thus

a natural boundary need not by any

It is sufficient
its size

means include only what is homogeneous.

enough to maintain itself by reason of

that the state enclosed be strong

and economic structure and the

suitability of

its

border for military purposes.

opinion Solch asks too much of natural boundaries in his otherwise admirable
work (J. Solch, Die Auffassung der " naturlichen Grenzen " in der wissenschaftlichen
In

my

Geographie [Innsbruck, 1924])

Some New

203

Factors

dates itself to the economy. On the other hand, it shifts the necessary
foreign trade as much as possible to easily safeguarded markets, and
here the economy has to adjust itself to the policy of the state. Only

when that which is important for existence coincides more or less

with that which can be defended has the development of a great
^^^
space {Grossraum) succeeded.

Transformation of Economic Areas

4.

BY State Boundaries'^"
Larger market areas are always transformed along political frontiers, and all areas are changed where the borders represent merely
man-made obstacles to trade. We can classify these changes into:
first, destruction of locations or their removal away from a boundary,

which in the absence of disturbing influences together create the

border wasteland; and second, removal of locations across the border.
a.

The Border Wasteland

What has already been sketched in comparing political and economic boundaries may now be supplemented. '^'' Figure 53 shows
at the left a few typical situations at the border of economic landscapes; at the right, at the border of two countries. The relative
position of the regions on either side of the landscape varies,
depending on their size and other factors. Since they are oriented
toward different centers, they do not necessarily dovetail with each
other. The political boundary, on the other hand, necessarily cuts
through the regular networks of market areas unless
coincide with an economic boundary.
159.

When

Nutzen
vision

it

is

economically

profitable.

zuirtschaftlicher Grossriiume

of

(in

See

p.

339,

it

happens

and Losch,

preparation but never published)

to

Wesen und
.

The

pro-

important means of defense obviously will never be wholly guaranteed.

Some raw material obtainable only beyond the frontier may suddenly acquire significance, or an invention may be made there that may be more threatening than any
lack of raw material, which often can be made synthetically or for which a substitute
There will never be absolute safety in any region smaller
must also be considered that as the space grows in size more
defensive measures are needed and more means of defense provided, for larger empires
have to reckon with more powerful adversaries. The development of one great space
starts that of another. All depends upon which increases more rapidly the need for
the means of security, or their supply.
160. For transformation within states especially through the enormously important
can frequently be found.

than the earth

itself.

It

transport policies, see below, pp. 345

The

ff.

paragraph and the next four paragraphs are from the first
German edition of Die rdumliche Ordnung der Wirtschaft, which were omitted from
the second edition to save space. Ed.
160a.

rest of this

Part Two.

204

Economic Regions

We shall discuss first the individual possibilities. Area 1 remains

unchanged, because the economic boundary by itself has no effect
whatsoever. Area 12, on the other hand, will be divided, because
the political border reduces the demand from the other side of the
border and because the total demand therefore ceases to be sufficient.
The size of the neighboring areas will thus increase. Areas 4, 5, 16,
and 17 remain unaffected. Between areas 2 and 3 parts of market
areas are situated whose sources of supply would lie on the other

eti
Fig. 53.

Economic and

political borders

side of the border if the market networks could expand farther

"
without interference. Depending on the size of these " splinter
areas a " corner " area will arise, which, because of its uneconomical
shape, will extend far in the upward and downward directions in
order to lead to a sufficiently large sales area, provided that the
other areas and the possible sales radius permit this extension. If
the splinters are small, areas 2 and 3 will expand. The same is true
also of areas 6

and

7.

with areas 10 and 14, whose corners are also cut

by the boundary. Area 10, to the right of the border, and area 14,
It is different

off

now

an insufficient demand. They will therefore

be divided among the neighboring areas which
expand correspondingly. Areas 8 and 9, which overlap, are also too
small when taken by themselves. But they can be consolidated into
to

its

left,

face

(at least at first)

Soi7ie

New

Factors

>

new market area whose center will lie on the boundary

landscape. The situation is similar to that of areas
economic
of the
clear-cut. So much for the temporary solution
more
though
2 and 3
a fairly large

of the typical situations.

areal extensions do not last in all cases, however.

of the areas and by a movement of the
shapes
By changing the
may be created here and there, particuareas
additional
locations,
boundary, and most probably at
landscape
economic
larly along the
meet,^" because splinters of
landscapes
corners where three such
a much larger extent than
used
to
be
neighboring landscapes can

These derived

would be the case where three countries meet.^^

Wherever the odd pieces are not sufficient for a new market
the old area remains enlarged. The
border and within it are equalized only

area,

sizes of the areas along the

large for all sales areas of the

next higher

number

if

the surplus

good in question

to

is

sufficiently

move

into the

but too small to permit an increase in the

This is especially probable for goods with a large

size class,

of areas.

necessary sales radius.

In other respects state and economic boundaries have the same

The market areas in their vicinity are larger,^*'^ and therefore

numerous."* The seam at the boundary gives more or less the
impression of a wasteland, in so far as it is less thickly populated
and many products can be obtained only from a distance or not at
result:
less

more freight on the average

and partly because there is less competition. Boundaries cause economic losses, and double boundaries,
economic and political, mean doubled losses.

^}j 165
is

Prices are higher, partly because

added

to the factory price

surrounded by a region of especially numerous overmay be consolidated, more enterprises can exist here than at any other point along the border.
162. The enterprise locating at the border will select that side of the border where
the empty space is larger; or, if it is not much smaller, where higher tariffs com161.

Such

triple corners are

lapping and atrophied market areas. But, as the pieces of three regions

pensate for the smaller

size.

H. Chamberlin shows the same thing for a boundary beyond which there
are no more markets (The Theory of Monopolistic Competition [Cambridge, Mass.,
163. E.

1936 edition], pp. 195-196.)

164.

Adjustment

in the size of the region

of an economic landscape takes place only

sales areas of the

product concerned to

small to permit further increase in the

between a boundary seam and the interior

when

rise to

number

the surplus

is

large

enough

the next higher order of

of areas; that

is,

size,

for all

but too

especially in the case

of goods with a large necessary shipping distance.

165.

not

This

much

reaching

less

it.

is

true also of economic landscapes where the necessary sales distance

is

than half the radius of the landscape, without the possible sales distance

Ptirt

2o5

Two.

Economic Regions

All these consequences, distortion of areas, expansion of areas,

and dead corners, are disproportionately more prominent on political
frontiers. Since these, unlike economic boundaries, lower the demand
from remnants of areas beyond them, and since they often entirely

prevent market areas from extending beyond them, industries occupying gaps are still less common and market areas still larger. The
number of unobtainable products is greater, too. For example, the

most in the boundary seam and less toward

the interior. The boundary itself, which in economic landscapes is
the location of many enterprises that occupy gaps, is most deserted
in the case of states; for, when half the demand comes from an

effects of tariffs are felt

adjoining country despite the political frontier,"^ it is definitely

more advantageous as a rule to move production there. Exceptions
referable to unusual circumstances will be discussed in the statistical
section.

The

depends entirely on the

under

effect of political frontiers naturally

kind and

size of the barrier that they set

up

against trade; but

otherwise similar conditions, products with small necessary shipping

distances are hardest hit. First, any given tariff rate has a more
adverse percentage effect

when low

freight charges are

added

to the

purchase price than when these charges are high. Second, there must
be added to the customs duties all the annoying formalities at the
border, which cause many small enterpreneurs to give up all foreign
trade.

third,

and

especially important, factor

necessary limitation of the

increase in distance
greatest

when

number

between a

is

the technically

of border crossings.

seller

and

his

The resulting

customers

is

relatively

the latter are near the border.^^^

Shift of Location to

13.

Suppose that country

is

large

certain sort, but that in country

an Adjoining State

enough
there

for several plants of a

is

a place, O, with con-

ditions so advantageous for production that the entire branch of

industry
B.

If

166.

is

concentrated there and some of

B were

to introduce a high

This demand originates

its

firms supply country

tariff that nullified

the special

from an area considerably larger than half the

necessary sales area.

The

which typically have a short sales distance, is calcuon wholesale goods from the much lower middleman's price. This makes no difference to the ultimate consumer if the retail margin
on either side of the border is the same percentage of the purchase price inclusive of
167.

tariff

on

retail goods,

lated from the high retail price; that

tariff.

Some Xru'

207

Factors

advantages of O in so far as sales to B were concerned, the firms in

question would migrate from A to B.^^^
Suppose, again, that in one branch of industry very small and
very large enterprises were technically possible, and that one or the
other was more profitable according to the density of population.
Suppose that a few of the large enterprises in thickly settled country
A had formerly helped to supply adjacent parts of thinly settled
country B also. But suddenly B sets up a high tariff. Suppose that
the internal demand in B is not great enough for very large enterprises though adequate for very small ones, and that since they are

no longer exposed to competition from large enterprises across the

border, small enterprises spring up like mushrooms. Whereas, in
the first example, a long-established enterprise would migrate, in the
second, only a newly established one would move across the border.
Canada "^ provides classic examples of each, as does also the shifting
of industries after the partition of Austria-Hungary.

country poor in capital

may be

well adapted to the working

up of raw materials found in it, but foreign capital may be frightened

away by uncertain political conditions and unpredictable expropriations.

The

country

is

doubly harmed:

it

loses

openings for

its

labor because foreign entrepreneurs finish the material abroad,^^**

and it is further exploited through high risk premiums.

y.

Economic Width

Boundary

of a

Let S be the radius of a rounded-off state and L the radius of

an economic landscape. The lengths of the two are decisive. If S
is shorter than L, consumers throughout the entire state may under
certain circumstances be able to order goods with relatively large
(p > S) from abroad. If 5 is equal to L,
an economic landscape, all consumers who are
more than S/2 away from the capital will order from abroad. If S
is greater than L, imports may, under certain circumstances, be
limited to a narrow border seam. Similarly for the producer. If S

necessary shipping distance

then, as in the case of

is

shorter than L, all producers

168. See Palander, op.

cit.,

p. 331, Fig.

may be
83

and

able to export.

If

S equals

text.

H. Marshall et al., Canadian-American Industry. A Study in International

Investment (New Haven, 1936)
170. For example, almost all Venezuelan petroleum is refined on the neighboring
islands of Curacao and Aruba, in the Netherlands West Indies. Once built, such
enormous installations can be moved only with the greatest difficulty, though in the
meantime Venezuela has developed into one of the best-governed countries in the
world. Of course, ocean steamers could not penetrate to the oil wells in any case.
169. See

P''*

2o8

Ecnnomic Regions

Two.

L, only those at a minimum distance of 2S/3 will do so. If S is

greater than L, only a few producers in a very narrow border seam
may, under certain circumstances, export.^^^
From this reasoning a number of conclusions may be drawn. But
first it is well to remember that we have excluded all natural differences that would tend to increase the extent of foreign trade. For
this reason our conclusions are minimum expectations, since some
differences will always exist in fact. Second, we have excluded any
state intervention. For this reason, our conclusions would be the
Since the effects of our two
our conclusions show a sort
directions,
opposite
assumptions go in
expected.
is
be
what
to
of average picture of

maximum

(1)

that could be expected.

The width

but
boundary is

scapes,

of a

boundary

different for states.

is

the same for

The

(2)

all

effect

economic land-

of an economic

halfway to the center; that of the political frontier

of a large state only in the boundary seam, and of a small state
possibly as far in as the capital itself.^'^ (3) In both cases the economic influence of a boundary declines toward the interior, but
is

felt

greater the greater are the necessary sales areas.

5.

^''^^

Political Economic Areas

These are economic areas that exist only because there are states,
and hence, as a rule, coincide with these states. Most important is
the area over which an economic order based on politics extends.
quite conceivable that every state may have its own special
In the face of such fundamentally different political beliefs the world-wide acceptance of
It is

principles of economic organization.

capitalism during the nineteenth century was by

no means

a fore-

gone conclusion. ^^*

171.

When

state frontiers

are farther a%vay than economic landscape boundaries,

agricultural products also are artificially diverted from their natural markets.

This

is

hardest for the farmers concerned, but affects those economic landscapes as well that

have been deprived of their natural boundary zones. Even a large state benefits only
to a limited degree from this diversion. Because of increased agricultural supplies
the per capita income of the inhabitants of its central economic landscape is higher
than if state frontiers and economic boundaries coincided; but the per capita income
in the

The

boundary seam, and that of all citizens of the state taken together,
boundary thus appear in agriculture exactly as in industry.

is

lower.

costs of a

172. Foreign trade

173.
174.

is

therefore

more important

for small countries than for large.

Consequently more large industries than small are interested in

H. von Beckerath,

" Politische

und

" Politik

und

tariff policies.

Wirtschaft," Schmollers Jahrbuch,

Wirtschaftsverfassung," ibid.,

LVI

(1933)

258-276.

LVI

(1932);

Some New

The
is

209

Factors

second profound

effect that

may

originate from a

the creation of a single economic landscape embracing

country
its

entire

advantageous for such a landscape to rise to statehood, so the damage is at least reduced when a state develops into
an economic landscape. This assumes three things above all: first,
that political boundaries represent a great artificial barrier to trade;
area. Just as

it is

second, that the administrative structure of a state

nomic importance;
economic landscape

is

of great eco-

third, that the greatest possible extent of

an

not very much smaller than that of the state.

Furthermore, individual households and firms in the same state

share a

common

is

We

political fortune.

may

a deep influence this

exert

stay of capital imports. ^^^

have learned perfectly what

upon the

and the

level, the source,

to direct the export of

It is wise, also,

capital in accordance with political alliances; and this has been

widely practiced even during the liberal era, if only because invest-

ment

enemy

in the territory of a possible

is

risky.^^^

But even market areas

for goods proper are not unaffected by

only necessary to recall the political boycott,
or it converse, a preference for domestic goods for patriotic reasons.
The lessons of 1871, 1918, and 1933 show how greatly national
victory or defeat can exhilarate or depress entrepreneurs in the state
concerned and lead to an upswing or a decline in the national
economy. Wars also have an aftereffect on subsequent business
cycles. They raise birth waves, and when these have been transformed into waves of marriages and in the labor supply they cause
cyclical variations in the economy. At least it was so in Germany.^^^
Population waves, and thus business cycles, vary characteristically
in amplitude from one country to another, since the immediate
effects of wars cease abruptly at frontiers. ^^^
In the fourth place, a state may represent a politically created
political situations. It

is

goods that would not be in demand at all, or not in

or not only in this state, or not everywhere in this state,

sales area for

this state,

175.

Of course the destiny

associated,
It

is

in

many

determines the risk

176.

form of

of the state, with

which the national economy

respects nothing but a higher or lower import duty

premium

risk against

that

is

to

be added to the interest

which there

is

is

so closely

on

capital.

rate.

no insurance.

177. A. Losch, "

Bevolkerungswellen und Wechsellagen," Beitrdge zur Erforschung

der wirstschaftlichen Wechsellagen Aufschwung, Krise, Stockung, edited by A. Spiethoff,
Vol. 13

(Jena, 1936).

178. Similarly

make
had

the domestically conditioned reluctance of American

investments in 1937, or an armament

effects that

reached at

first

boom with

almost to the borders.

industry

to

a throttling of foreign trade,

Economic Regions

Part Two.

210

without pressure from above such as tariffs, taxes/^^ regulations, or

freight rates. It must be clearly understood, however, that only a
few customs duties, etc., have such effects. In the case of public
works state boundaries are generally the boundaries of the possible
supply area

also.

There still remain to be mentioned those exceptional cases in

which economic areas created by a state, not merely controlled by it,
do not coincide with the state itself. Currency, tariff, and political
unions need not coincide. There are customs, currency, and legislative frontiers that include only parts of states, and others that
embrace several states. Consider, on the one hand, customs and
mint unions or the identity of many German and Austrian laws
after World War I; and on the other hand, internal customs duties,
significant today principally in trade between a motherland and
her colonies, or as an anachronism

still

be seen in the vicinity

to

of Paris,^^ the regional validity or significance of

many

laws,

and

so on.^^^

Finally, in

porarily a

many

respects the state

homogeneous economic

monetary system
seen in Part

to create regions

The

III.

area.
is

only apparently or tem-

is

The power

normally but

of a

common

slight, as will

be

opposite experience during the inflation

period and since the last crisis was exceptional. Most tariffs, too,
do not even approach the creation of a national market, or even a
network of purely domestic market areas. As a rule they curtail
only the tips of areas that extend over a boundary. Moreover, there
will be pointed out below some further limitation of the old thesis
that production factors are less mobile internationally. If it was
wrong formerly to underestimate the importance of political factors
in developing economic areas, we should not forget today, on the
other hand, that this is, after all, but one influence among several.

179.

The method

of

computing taxes

affects,

example,

for

the

construction

of

automobiles.
180.

181.

These were reduced in 1941 in order to improve the food supply.

W. Sulzbach gives a good presentation in " Der wirtschaftliche Begriff des

Auslands," Weltwirtschaftliches Archiv,

XXXII

(1930)

For the

many

trade barriers

between individual states in the United States see Works Progress Administration, The
Marketing Laws Survey, Comparative Charts of State Statutes Illustrating Barriers to

Trade Between

States

(Washington, D. C, 1939)

Chapter

Further Restriction of Market Areas

14.

In the preceding chapter the various

effects of

individual factors

were examined. This chapter will discuss all the different factors
that work together toward the same end: to limit the extent of
narket areas.

It is a

question of the greatest importance, for

many

doubt whether today's low

quence to restrict markets effectively.

freight costs are of sufficient conse-

will

In addition to freight there

is

another restraining influence:

But where freight costs are of little importance, competition by itself would hardly influence the limitation of market
areas and the distribution of production sites. Locations would not
have to maintain a certain distance from one another, and all
market areas would overlap everywhere. Even competition can
exert its limiting effect only by way of freight, or other factors that
operate similarly. Here it is immaterial whether these factors work
by raising prices to the consumer or by lowering the profits of the
competition.

producer.^

For the sake of simplicity we

shall limit the discussion

to the former.
(a)

distance,

Transport

costs.

and naturally

The

sometimes increases with

soon reached where the demand

freight rate

a point

is

In such cases the argument that freight costs are insignifithe ground. One thinks here of retail stores, laundries,
breweries, and the like that deliver by motor truck or messenger boy.
With increasing distance from a producer the density of habitations
and the demand of individual customers drop, partly because outside of large cities the density and buying power of the population
decrease and partly because, even with a constant freight rate and
for all the reasons still to be given, both this particular producer's
proportionate share of customers and the inclination of individual
customers to buy become smaller. As a consequence the time of
the motor truck or of the messenger boy is less and less efficiently
employed with increasing distance, and there remains only a choice
is

zero.

cant

1.

falls to

In the latter case, revenue cones appear in place of price funnels.

equal gross receipts were probably

der Volks-

und

first

used by V. Furlan,

"

Curves for
Die Standortprobleme in

Weltwirtschaftslehre," Weltwirtschaftliches Archiv, II

(1913).

Economic Regions

Part Two.

212

between charging distant customers for delivery or abandoning

delivery beyond a certain point. Costs resembling freight have the
effect of

Among

these are, in particular, insurtransit not during loading

in
the deterioration of goods

higher freight

rates.

ance and
and unloading, since these are fixed

costs.

These are disadvantages that arise not so much

from the overcoming of distance as from the time that this requires.
In this category belongs the time lost by the housewife in making
her purchases, no less than the time that elapses between the ordering
of goods and their delivery. The monetary cost of time appears in
various guises: as interest on the sum invested in goods in transit;
as an additional charge for quick delivery; as the cost of larger

Time

(b)

costs.

inventories to the retailer, for

whom

a distant factory

is

not a reserve

warehouse in the same measure as one that is near by; or

business if goods cannot be delivered in good time.^

as loss of

The cost of sales promotion increases with

time of a commercial traveler cannot be so profitably employed, for example, when buyers are thinly distributed, and
similarly a newspaper advertisement draws a smaller response.
Furthermore, one must understand one's market, and keep well
informed on current trends. This often happens automatically when
(c)

Selling costs.

The

distance.

is near, but involves costs in the case of more distant ones.

Branches and representatives cause additional expenditures, and the

a market

outlay for postage, telephone, and travel

(d)

too

Business

little

is

also greater.

Risks generally increase with distance. Far

paid to this fact, but it will receive concrete

risks.

attention

is

proof in the statistical section. Long distances make it difficult to

get reliable information on the credit and needs of buyers, as well
as on the legal methods to be taken in respect to payment should
these become necessary.^ This fact in its turn is used to their advantage by a less desirable class of buyers.
(e)
istics

Idiosyncrasies.

of their

so on.

Thus

own
the

Most products are adapted

to the character-

and
neighborhood are not

limited markets to climate, habits, income,

demands

of a

more

distant

so easily met.

2.

Quick delivery plays a role especially in the case of fashionable

articles.

It

may

even determine location, as E. M. Hoover has shown in his admirable study of the
shoe industry. Location Theory and the Shoe and Leather Industries
Mass., 1937)
3.

(Cambridge,

p, 176.

According to German law, payment has to be made at the domicile of the buyer

unless another place has been stipulated in the contract.

213

Further Restriction of Market Areas

(f)

Even though the spatial expansion of

no particular costs, nevertheless such costs arise

Extent of business.

a business entails
after a certain point,

when the physical p]:;nt of the business has

This factor does not become
consequence.
a
to be enlarged as
work to the left of the point
that
plants
with
operative immediately
of

minimum

costs, iDut

with continued expansion

it

makes

eventually.

itself felt

(g)

average

Hindrances

to trade.

Sooner or

later the sale of

most goods

encounters governmental barriers. In the Middle Ages especially

there were countless road taxes, excise taxes, and customs duties to
be surmounted, and since the 1870's the weight of such restrictions
has been increasing again.
(h)

Disinclination and incompetence.

The

difficulties

of the

entrepreneur increase with the growth of his sales, and particularly

with the distance of his customers. How many, for example, give
up foreign trade because of the formalities associated with it! Moreover, a lack of ideas and imagination in most entrepreneurs precludes

more

distant connections.
its immediate costs, distance plays a role
individual and that presupposes thorough

Thus, over and above

in everything that

is

knowledge and confidencea role that

cost.

Even when more

men

distant buyers are

often neglect to their

no longer served

directly,

but through distributors or branches, these can only mitigate the

effect of distance, not remove it. This effect is evident, indeed, far

more

hold large or
can be done only at the
expense of native individuality. Even the proportion of Catholics
in Europe decreases, by and large, with their distance from Rome.^-^

beyond the sphere of economics.

misshapen empires together, and

It is

difficult to

as a rule it

There is a strong inclination to disregard the laws of distance,

and for a long time this tendency was esteemed as progress. Trade
was no longer regarded as determined by such immediately experienced realities as local and regional relationships, but by abstract
ideas, universal principles, guiding maxims, or general laws, that
4.

Not

their proportion in a single place, but their proportion

of each individual but not too

geographical center of the

narrow

ring.

Mohammedan

Similarly,

among

Mecca and Medina

the people
lie at

the

world.

5. In the field of sociology compare: the sphere of marriage, migrating supply areas
(examples in Bevolkerungshiologie der Grosstadt, edited by E. von Eikstedt [Stuttgart,

and the distribution of students. The percentage of persons subject to

1941], p. 242)
punishment often decreases with distance from the center of a city, and so on. (See
R. D. McKenzie, The Metropolitan Community [1933], p. 185.
,

Part Tivo.

214

Economic Regions

one place only very roughly. They did away

time
with a great deal of narrow-minded whimsey, but at the same
shown
will
be
It
value.
solid
of
be
with much that had grown to
caused great
in the statistical section that this contempt for distance
Thomas
Saint
of
saying
the
losses, economic and otherwise, for
" still holds true.
fines
proprios
Aquinas on indinatio rerum in

met the needs

6.

The

of any

tendency of things to stay within

tlieir

own

limits.

Chapter

preceding chapters considered separately the various

causes or the various effects of the

necessary to

in Reality

SPATIAL ARRANGEMENT

a.

The two

Economic Regions

15.

combine the resuks

same phenomenon. It is now

methods of study and draw

of both

a complete picture.

1.

Market Areas

When we drop the assumption of a uniform plain, the simple

market and supply areas assume irregular shapes and sizes because
of the natural, personal, and political differences already mentioned.
Furthermore, market areas for the same product overlap, since it is
seldom finished in exactly the same way, and each area is fringed
out in consequence. Nevertheless, our original simplifying assumptions often seem to be more or less fulfilled, and in such cases our
theoretical findings will hold without much change. A few examples
will be offered in the statistical section,
Regional Networks

2.

Since market areas for the same product overlap, as has just
said, strictly speaking they can no longer be compared with a

been

They

more

an irregular layer of pieces of slate,

network are
usually retained, however, and hardly a single chart of market areas
represents them otherwise. But there is another modification of the
network that is of great importance. We assume that networks would
cover the whole plain, though in reality their extent is more or less
restricted and we speak then of districts and belts, according to
whether only production sites or their market areas as well are
circumscribed as to space. Such a concentration may be based on
external economies or depend upon the limited scope of natural
or political factors. This is especially clear when these factors themnetwork.

carelessly flung

1.

Based

in

are

part on

Economic Journal,

my

(1938)

like

The

down.

lecture,
,

71.

essential properties of a

"The Nature

of

Economic Regions," Southern

Economic Regions

Two.

Pai^t

2i6

market networks. Yet it is not necessarily true

that these extra-economic factors and their economic result coincide.
Cotton is not grown wherever it will thrive, nor is it always spun
where it is cultivated.^
selves create certain

3.

Regional Systems

Economic landscapes, the highest and most complicated form of

economic area, differ most of all from the simplified theoretical
simply impossible to arrange all the irregular and
bound networks in such a way that they will have
at least one common center. Actually there is no longer an economically self-sufficient economic landscape, nor is there a metropolis
in which all industries are fully represented. And this is not all.
In fact, one might imagine, and perhaps even discover, a few cases
picture.

It

is

often spatially

where economic landscapes exchanged their specialties exclusively

by way of their capitals.^ Under these circumstances every economic
landscape would still be as compactly organized as in our ideal
system. However, it would be better then to speak of economic
districts, or economic provinces, because these words express more
clearly the fact that we are no longer dealing with independent,
economically self-sufficient units. In reality, not only do entire districts depend on other capitals for certain specialties; ^ for many
goods, small places that otherwise depend completely upon neighboring larger towns are centers of extensive market areas that reach
far beyond the home district, and may even include the whole world.
Again, whereas every regional system has a large town for its center,
every large town is not the center of such a system. Many large
mining towns, for example, can hardly be said to fulfill an economic
function for their environs.^ From such specialized large towns the
2.

Spinning mills in the United States are concentrated in the eastern part of the

cotton belt.
3.

One

of the two

most important functions of the central town

connections with the remaining economic landscapes.

The

other

is

is

then to establish

trade with

its

own

economic landscape.
4. O. Schiller ("Die Landschaften Deutschlands," Allgemeines Statistisches Archiv,
XX [1930], 24-41) even goes so far as to maintain that in Germany only the following
cities are morfe or less autocrats in their economic landscapes: Berlin, Stettin, Konigsberg, Breslau, Munich, Vienna, and Stuttgart.
5. Hence they often show extraordinary fluctuations in population. The gold-mining
town of Cripple Creek, in Colorado, for instance, had 45,000 inhabitants in its heyday,

and only

But after the depreciation of the dollar the old mines became
and the population rose quickly to 7,000. (C. Goodrich et al.,
Migration and Economic Opportunity [Philadelphia, 1936], p. 271.)
4,000 in 1930.

profitable once more,

Economic Regions

217

in Reality

distinguished by the diversification of

their production, or at least of their trade, which provides abundant
connection with their environs.
Amid all the chaos of reality a basic pattern of economic districts

major

cities of districts are

nevertheless unmistakable. These differ from the ideal economic

landscape in one important point: they are not self-sufficient. They
coincide with it in so far as they are established on the same principlesthe advantages of a large local demand and traffic density.
These principles suffice to call economic landscapes into being,
have already seen in the theoretical derivation. But, second,
we
as
is

the hierachy of markets

may depend

also

upon

the hierarchy of

Third, it may originate in natural or national

factors of an areal nature as does a region of agricultural monoculture (cultivation of a homogeneous product) or a racial manner
of life (homogeneous consumption) .^ Thus cotton growing determined for a long time the spatial organization of the economy in
the American southern states. The supply regions of 15,000 cotton
gins, which cleaned the cotton and removed the seeds, were super-

administrative areas.

imposed upon the producing areas of the individual plantations;

above these came the wider-meshed network of presses; above these,
again, the 500 oil mills; then the transport points; the collecting
depots, where the cotton is sorted and stored; and, at the top, the
two principal export ports with their enormous supply regions.^ The
arrangement of the networks of the distributing trades was largely
"^

patterned after those of the all-controlling cotton production. {Ibid.,

p.

190.)
In the

6.

last case

the networks of market areas for a whole series of goods are of

similar extent; not accidentally, but because these goods represent a meaningful com-

This is enough to delimit an entire group of economic landscapes, if not

from one another then at least from without.
7. As a heavy press costs about $50,000, it would not pay the individual cotton gin,
with an average yearly output of only 1,000 bales, to buy one. A profitable press will
take care of the output of some 30 gins and has a supply region of perhaps 50 miles'
radius, as compared with less than 10 miles for gins. These provide an interesting
example of the stickiness of a once firmly established location pattern. Formerly the

bination.

supply region for cotton gins had a radius of roughly 5 miles, but with their improvement and with better roads the most advantageous size of the supply area increased.

But

this

more advantageous

size of

the supply area

is

realized only in the

area west of the Mississippi River, where individual gins work

up on

new

cotton

the average one

more cotton than those in the old cotton area. (E. S. Moulton, " Cotton Producand Distribution in the Gulf Southwest," U. S. Department of Commerce, Domestic
Commerce Series No. 49 [Washington, D. C, 1931], p. 46)
8. Only the cotton of the Southeast is spun near by, as a rule, which gives rise to

third
tion

many

small supply regions.

2i8

P^''^!'

Two.

Economic Regions

Regional substrata like this are to be found almost everywhere,

but they are not always of equal importance. Their importance is
inversely proportional to that of market areas that do not fit into
the economic landscape pattern. In south Germany, for example,
these substrata are of the highest importance, as Christaller has so
convincingly shown.^-^" In the Ruhr, on the contrary, it is difficult
to find any at all." According to the regularity of spatial organization, a regional substratum will be regarded as the essence in one

whereas in another

case,

it

entirely out of consideration.

may be thought irrelevant and left

However suitable a regional point of

view may be for many areas, it would be difficult and profitless to

attempt the complete subdivision of a large country into economic
landscapes.^^

economic and

or cultural landscapes share

essential features in their structures. All have a central point, for
example. In fortunate cases their central points coincide, and then
Finally,

political

there arises one of the world's great centers of power.

4.

We
market

10.

MMARY

have found three main types of economic regions: simple

areas, regional networks,

the matter
9.

SU

more

clearly

and regional

we may speak

systems.

Or

of markets, belts,

to impress

and

districts.

W. Christaller, Die zentralen Orte in Suddeutschland (Jena, 1933), pp. 165-251.

The economic capitals Frankfort, Nuremberg, Munich, Zurich, Strasbourg, and,

at the center, Stuttgart, are very evenly distributed.

11.

Unless, like Schlier

(op.

cit.,

p. 37),

one combines the regions of influence of

the rival Rhenish-Westphalian centers, thus obtaining a larger economic lanscape that
is split through the center.
On the other hand, see Isenberg, " Zur Stadtplanung in
den neuen deutschen Ostgebieten," Raumforschung und Raumordnung, 1941, pp. 141 f.
How clearly the supply regions for individual partial centers can be separated is
seen in the simple example of the twin cities St. Paul and Minneapolis. Even when
their economic functions in general are at all similar, the regions they control are
clearly distinguished. The hinterland of Minneapolis stretches toward the west, whereas
the more easterly St. Paul commands the east. (See M. L. Hartsough, The Twin Cities
as a Metropolitan Market [Minneapolis, 1925], p. 13. The case of Leeds and Bradford
is similar.
(Stamp and Beaver, The British Isles [London, 1937], p. 573.)
12. Yet, according to K.
Haushofer (" Grosstadtprobleme der Monsunlander,"
Archiv fiir Bevolk., 1942, p. 268) Japan is made up entirely of cells having about the
same shape, and the size of a district; small river drainage basins with urban centers
,

" that

fit together like the cells of a honeycomb."

And Isenberg (op. cit., p. 266)
found an astonishingly regular substratum for the most dissimilar parts of Germany.
Even a good many disturbances may not greatly change the regularity of the structure.
" Der Stand der Raumordnungsplanung fiir die eingegliederten Ostgebiete,"
(J. Umlauf,
Neiies Bauerntum, 1942, p. 287, map of the Regierungsbezirk Posen.)

Economic Regions

219

in Reality

The members

of

series

this

complicated, increasingly
ingly

uncommon

become, in that order, increasingly

self-sufficient, but,

unfortunately, increas-

too.

On the one hand we have simple supply or market areas very

simple indeed, manifestly real, and wholly dependent upon trade.
The systems of market areas or districts are the antithesis. Their
"
structure is anything but simple. In the ideal case of a " landscape
they are wholly self-sufficient, but seldom can they be found so
distinct. Many goods remain outside every such system. And whatever systems we find overlap still more than simple markets. A
clearly defined economic landscape is a piece of good fortune
rather than a natural subdivision of a state. Nevertheless a substratum resembling an economic landscape is to be found almost
everywhere below a maze of market areas, though developed to
different degrees.

Between the simple market area and the complete economic

landscape comes the network that is, the totality of all market areas
for the same product. The network itself, or at least its heart, is
often compressed into a narrow space. Such belts, or zones, of homogeneous production or consumption arrest our attention, but they
should not be confused with economic landscapes. The economic
landscape is a system of different markets; an organism, not merely
an organ.

ON

b.

No

doubt the

CHAOTIC INTERPRETATION

spatial

economic pattern about us contains enough

But I refuse to put the whole

illogical, irregular, lawless features.

emphasis on

this lack of order.

interpretation

No

may be confirmed by

matter

the

how widely

facts, it is

but dangerous. Unworthy because there is

upon which incomparably more depends in

a chaotic

not only unworthy

also a reality of reason,

the long

run than upon

the reality of the factual. Dangerous because our idea of reality is one
of the factors that shape the future. Had only obstacles to the operation of logical

the
its

dawn

and natural

forces been emphasized and fostered at

would never have been able to complete
needed no planning; indeed, could despise

of capitalism, this

great achievements.

It

planning as a " disturbance," since it believed in the great principles

of its time and lived in accordance with them. It rose with belief
and declined with unbelief in its own order. In the face of a belief
in an orderly progress or, more accurately stated, in its possible
functioning, chaotic facts automatically lose their significance. This
belief is based on nature and reason when it can no longer depend
on the facts. From them it creates the model for an order that may
originate only as a result of

it.

Part Two.

220

The
and

There is a chaos that arises from doubt

upon order when it reminds us of the tem

roots of anarchy?

despair, a parasite

poral nature of

may

Economic Regions

all

human

ordering, even though occasionally

But there

it

another sort of chaos, which is

really nothing but order in disguise. Thus the bewildering individuality of various places and events in space may arise merely
because each consists of a special combination of different ordersfructify order.

is

on which
one another and cause tensions but do not destroy
each other's roots. The economic sphere is simply added to the
many other spheres of life that overlap, neither dominating nor
merely tolerated.
geographical, geological, political, racial, religious, and so
interfere with

PART THREE. TRADE

A. Description of Equilibrium

Problems of the Division

and Their Interrelations ^

Chapter 16.

Six Cardinal

THEME
OUR
Seen from

is

of

Labor

the combination of man, work,

man

the standpoint of

it

is

and place.
the problem of the

occupational and spatial division of labor. Often enough, however,

we do not start with ourselves, but wish to know what combination
will be best for an enterprise or a country. For this reason, only the
following six questions together will cover the subject completely
(see Fig. 54)

These are already more or

1.

2.

3.

The problem
The problem
The problem

familiar to us in another form:

less

of choice of

an occupation.

of the cooperation of

men

in an enterprise.

of selecting a place to live

(the emigration

problem) and of the distribution of populations.

4.
5.

The problems of urban sociology.

The " chamber of commerce " problem
possibilities of a

G.

The

(the developmental

town)

traditional location problem.

We thus place in a broader context the sixth problem, the main

one considered hitherto.
1.

Here we

discuss only the nature, not the cause, of the division of labor.

In the

would be our old familiar trio: site, supply, and volume; that is,
natural differences in and advantages of mass production or, as Ohlin and Iversen
express it, a lack of mobility and divisibility. A historical treatment would have to take
final analysis the cause

E. W. Zimmermann {Foreign Trade and

Shipping [New York, 1918], pp. 40 f.) has hit upon the distinction, very pretty in itself,
that because of developmental differences world trade today still definitely follows

developmental stages into account as well.

latitude,

whereas in the future, when only climatic differences remain,

follow longitude a concept

nomic

areas.

upon which

is

will

have

to

however, that site and volume also lead to trade. Furthermore,

must be broad enough to include human capabilities also.

It forgets,

the concept of supply

it

based the idea of establishing world eco-

223

Part Three.

224

Trade

preliminary answer to all six questions may seem very

It amounts in each case to a maxifirst, or even naive.
mization (of production, of utility, of financial return, and so on)
that is felt to be self-evident. We endeavor to make the most of
every situation. But it will soon be realized that all more exact

The

general at

Fig. 54.

Schematic representation of the

six basic questions of the division of labor

and detailed solutions, which interest us much more, can be derived

from this general solution only by abandoning full understanding
of the situation.

The mathematical

transport point, for example,

is

determination of the optimum

infinitely

more impressive

as a solu-

tion of the location problem but also incomparably less accurate

than the statement that an entrepreneur,

all

things considered, will

establish his enterprise at a place that he likes best.

We

shall

do

well to recall from time to time the limited validity of our precise

formulas, in order not to overlook the fact that they merely help us
do not provide one.

in arriving at a decision; in themselves they

Even the most carefully considered conclusion is only an experiment after all. It is like shooting when we are neither certain of
the target nor able to test how close we have come to it. In the
last analysis, of course, we say that we have been aiming at the
highest utility, and many believe themselves able to measure it.
But to balk at words would be petty. Utility may signify the general
good as well as personal happiness, and efforts may be directed
toward it either from a sense of duty or by inclination. ^ And yet
we have agreed upon a vague word that any critic will be able to
pick to pieces! The real difficulty in all measurements of utility
2.

But in every

case only such efforts as accord with the

sense developed on p. 184, note 118.

economic principle in the

InLerrelaled Problems

,S/x

lies

in the fact that

225

we have no

idea of what " utility " actually

is.

Often we surmise its meaning, to be sure, but frequently enough

we decide upon one of two mutually exclusive courses, not because
it seems preferable, or because it makes no difference to us, but
because something or other must finally be done. Every choice
naturally gives the impression that the greater utility has been
selected. But why, then, is there so often pain at having to forego
one possibility after another preferable one has been chosen? We
should not feel this distress if the case were merely one of deciding
between two and four units of utility, as between two coins. Here
we meet an obstacle so fundamental that we cannot circumvent it
by the little trick of " indifference curves." In reality these curves
do not avoid the concept of utility, but merely conceal it. The shape
of utility curves can be reconstructed from them. Indeed, they presuppose a better knowledge of utility than do the ordinary decisions
of mankind. For one may prefer one object to another that costs
the same without being able to say how much more utile it seems,
but the value of a combination of foods cannot be equated with
that of another combination without a very exact idea of their utility.
Choice becomes especially difficult in the neighborhood of the equilibrium of marginal utilities.
We must not deceive ourselves (and we do v/ell to remember
this when we are in danger of being too sure of our results) by the
thought that with the introduction of the concept of utility we have
firmly founded our science in the unknowable; and yet no other
course remains if we wish to pursue it. Though we know that in
the end we always must act with our fingers crossed, through a
curious yet wholly reasonable quirk in our nature we seek for the
meaning of the single act, and for the higher order into which all
events fit.^ We act as though we understood the purpose of life, and
hence could classify routes according to the speed with which they
lead to its goal. We interpret economic activities as if they aimed
at the highest utility, reading into them a rational design that may
be lacking in reality.
But why should not such a basic construct as the physical concepts
of force and mass have at least the merit of providing a foundation
for an intellectual edifice of preliminary truths, which, like all that
we think and believe, is not eternal, but with which we can live
for a time? What distinguishes science from idle talk is not the
nature, but the breadth, of its foundation, and the consistency of its
structure.
3.

We

cultivate science for

preting the world as best

we

no other reason than that we cannot

can.

live

without inter-

Chapter

The

17.

Six Cardinal

Problems of the Division of

Labor Discussed Individually

a.

THE OCCUPATION OF

PERSON

What does any given person produce? Official occupational guidance should assign to each one the activity in which he could best
serve the interests of the state. But as long as the state allows free
choice in the matter everyone selects the occupational that he likes
best among those available to him. In so far as his liking depends
upon earnings, there are two ways of deciding on an occupation.
One is the marginal view, as it corresponds to the Walrasian method
of describing equilibrium.
1.

The Marginal View

The marginal approach would be valid if " labor " could be

subdivided into homogeneous subgroups. The members of each
subgroup would be equally good at every occupation. This does not
mean, however, that their physical productivities need be comparable. When such homogeneous groups exist, the following equilibrium conditions hold true: (1) The members of a particular
homogeneous subgroup are distributed among the various industries
in such a way that their wages are everywhere the same. This automatically also gives the answer to the question just put.

members

of the different groups will be

(2)

The

employed in such numbers

in any particular industry that their marginal products are proportional to their wages.

This

also answers the next question.

The assumption that persons can be divided

which they may be regarded as interchangeable

into groups within

units simplifies the

problem greatly. But in reality it is improbable that even two

persons would be equally productive in one and the same activity,
or that their productivity would differ in the same proportion.
This means the impossibility of a marginal approach that would
answer our question summarily for whole groups of persons. But
the marginal principle could be applied to individual persons provided they were units large enough to influence wages in the various
activities. For then a person would divide his working hours among
226

'

The

Six

227

Problems Discussed Individually

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Trade

Part Three.

228

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Tlie Six

Problems Discussed Individually

229

these different employments according to the principle by which

the group, so to speak, directs its members into the individual
branches. But since the individual does not usually exert this

on wages, he devotes his entire time to the trade that yields

the largest return, though not in money alone. Thus, with
few exceptions, the marginal approach fails with individuals as it

influence

him

does with groups.

Table 77. COMPARATIVE EFFICIENCIES
(COMPARATIVE ADVANTAGES) OF THE COUNTRIES"
Country

II

III

IV

II

100
80
90
90

100
125
37
25

100
57
131
43

100
500
100
100

100
167
50
166

100
1000
100
950

125
100
112
112

80
100
30
20

175
100

20
100
20
20

60
100
30
99

10
100
10
95

IV
*

265
333
100
66

70
40
100
30

100
500
100
100

200
333
100
333

100
1000
100
950

Calcula ted

2.

In

frc

column 2 of Tal Die

75

111

400
500

232
133
233
100

100
500
100
100

61

10
105
10
100

89
100
100

150
100

101

30
100

9.

The Principle

my judgment

250

Country IV

III

111
89

100
100

III

II

Country

Country

of Comparative Cost

the choice of an occupation follows the prin-

ciple that the earlier theory of international trade developed for

determining the international division of labor: the principle of

comparative cost. As a matter of fact, for reasons that will be given
in discussing the fifth problem, this principle is applicable in general
only to persons, not to countries. As it is more familiar to us in its
unwarranted application, however, a comparison of the phenomena
that correspond to each other in the two cases may be of interest.'
But first the application of this principle to more complicated cases
must be examined in greater detail than it has been in the literature
heretofore.- Althous;h it is incorrect to do so, we base the discussion
1.

Of course

its

application to the division of labor

among

individual persons

is

(Introduction to Production Economics [New York, 1926], pp.

J. D. Black
and G. von Haberler {Der Internationale Handel [Berlin, 1933], p. 100; English

not new. See

129

ff.)

edition [1936], pp. 130-131)

But

so far

it

has not been carried through accurately or

exhaustively enough.
" Wo gilt das
2. The following is based upon my article on comparative cost,
Theorem der komparativen Kosten? " WeltwirtschaftUches Archiv, July, 1938. (The

Part Three.

ago

on trade between countries because the theory

most readers only in
a.

Trade

will be familiar to

connection.

this

Development

of the Principle

Consider first only two countries. So long as the number of

products also is limited to two, what each country specializes in
can be unequivocally determined in the usual way from differences
in comparative cost. If there are several products we can only give
for each country the order in which they must enter international
trade. Only with the help of the additional principle of fair settlement of the balance of payment (p. 298) is it possible to decide which
goods in the series are imported and which are exported. If the
products are arranged in order of their comparative advantage
beginning with the good in which country I has the greatest comparative advantage over country II, country I will export all goods
above the dividing line and import the remainder.^ With several
products and more than two producers, the sequence of comparative
advantages must be determined separately for each pair of countries.
When II is its partner, the order of comparative advantage of
country I differs from what it is when III is its partner. If there is
trade in both directions between two countries, I and II, for
example, which now is no longer necessary, the interchange need
not extend to all products even when freight costs are disregarded.
On the contrary there are then two dividing lines as a rule; one
below the exported product for which country I has the smallest
comparative advantage over II (line 1) and one above the corresponding product exported from II (line 2) Line 1 must of necessity lie above line 2. Again the lines are determined by the condition
that the balance of payment must be in equilibrium. But if the
lines for only one pair of countries are available, it is certain only
that I imports everything under line 1 but not that it exports
everything above it. Similarly, II imports everything above line 2
but does not export- everything below it. Hence it remains un,

An

erroneous changes introduced by the editor are here corrected.)

edge
3.

is

elementary knowl-

assumed.

The

dividing line can be determined only

as well as relative prices

if

absolute prices,

implied in comparative cost are given.

i.

e.,

the price level,

The change

price level has the function of restoring equilibrium in the balances of payments.

a gold standard the price levels are

magnitude of the absolute price

moved back and

numbers and

differences suffice to bring the international accounts

(comparative)

in order of their

With
and

forth until the direction

into equilibrium without defaults or involuntary credits.

forms the possible

in the

into real

magnitude.

(absolute)

Only
cost

this

mechanism

differences

in

trans-

sufficient

Tlie Six

231

Problems Discussed Individually

decided what goods enter into trade between the two countries.
Only for commodities lying between the two lines is it true without
limitation that both countries will import them from other countries.

incomplete knowledge is impossible. It is

not known what products will be exported, or in what order their
chances of exportation are greatest.
Tables 11 and 12, calculated from Table 9, will serve as an
illustration. There happens to be only one dividing line for trade
between I and every other country, but in all other cases there are

As

even

for exports,

two.

this

Consider the trade between countries

Table

12.

11

and

III

(column

4,

ORDER OF COMPARATIVE
ADVANTAGES^
I

f^.B

ti

II

II

III

F
III

II

IV

III

IV

IV

Products are arranged in descending order of advan-

a.

from Table II, for the upper row of countries as

compared with those in the lower row. The dots and arrows
indicate products and the direction of exchange between two
tages, taken

countries.

Table
line 2

12)

between products D and E,

and A. Of the products above line 1, country II

for example.

between

Line

lies

to country III but not food F, although in II its

comparative advantage as compared with country III would be still
greater. But in comparison with country IV it is smaller, with the
result that not only the two products B and E, lying between the
dividing lines, but also F, above the upper line, will be imported
by both countries from a third.
We summarize what may be concluded from a simple knowledge
of comparative cost in the three cases (two countries two products;
two countries many products; and many countries many products):
In the first, the textbook example of theory, there is a unique line
separating imported and exported goods. In the second, the neces-

exports food

Trade

Part Three.

232

which goods enter international trade can be determined, from which follows the hypothetical proposition that if the
dividing line were given it would sharply separate imported and
sary sequence in

The

the half-knowledge
goods on the farther side
of the line would all be on the list of imports but would not exhaust
From this follows the little that is definitely known about the
it.
trade relationships between any two countries: That they do not
exchange the goods between the dividing lines but import them
from this and other countries. Whereas everything is known in the
second case, once the dividing line is given, in the third case even
the lines separating two countries provide only partial information

exported products.
that

third case provides

there are any dividing lines at

if

all,

what takes place between them. For a full knowledge of the

trade between even two countries we need, in addition, the dividing
lines between the two in question and all others. Thus in the case
of several goods, and even more so in the case of several countries,
it is very hard to determine what a country will export; this cannot
be decided from comparative cost alone, without the additional
principle of the fair settlement of balances of payment; and with
more than two countries we require a knowledge of the trade of

as to

the other countries as well,*

/?.

Application of the Principle of Comparative Cost to the

Choice of an Occupation

Now

compare trade between countries and trade between perwhat concepts of interpersonal trade correspond
to those with which we are already familiar from international trade
For this purpose we must proceed as though
(Tables 9 and 10)

sons, in order to see

the principle actually could be applied to foreign trade.

relative productivity can

country (column
4.
is

2)

The matter may be

be

set

From

up

it

scale of

these proportionality coefficients

expressed in this way also:

valid between two countries, but

for a person exactly as for a

is

The

and

principle of comparative cost

impossible to determine by a comparison of

between these two alone what they will exchange with one another, in which
and with what probability. Other countries and the rate of exchange so
interfere with the system as to make it possible to say in advance only that the order
in which goods are exchanged between two countries, which is fixed by the size of
comparative advantages, can be interrupted but not jumbled.
costs

direction,

5.

The

following

endeavored

margin
firm.

("

also

Wo

derivation

assumes

that

efficiency

remains

constant.

show elsewhere that the principle of comparative cost holds

when, as with factory workers, efficiency varies with employment

to

gilt

das

Theorem der komparativen Kosten?

July, 1938, pp. 50-52).

" Weltioirtschaftliches

have

at

the

in the

Archiv,

The

Six

.,

Problems Discussed Individually

233

the absolute output of one of the producers in a unit of time

(column 3) the national price system before entrance into inter-

national trade can be calculated

(Column 4

of

Table 9 contains in

addition the absolute level of prices in domestic currencies, and

thus involves a further assumption about the quantity of money)
In exactly the same way, the goods that the individual produces
exchange in proportion to the working time spent on them (Table

column

10,

4)

In both cases, finally, we need a rate of exchange to convert the

domestic unit of account (reichmarks, hours) into a foreign unit
in which all domestic prices are then comparable. For countries
this international unit might be, for example, the pound sterling
or gold; for individuals it is the standard currency (say reichsmarks)
This exchange ratio fixes the relative height of the domestic price
level. It is familiar to us in international trade as the rate of exchange, and the hourly wage in interpersonal trade corresponds with
it almost to a hair.*^ Just as a national unit of value like the reichsmark can be converted into an international unit like the pound

by means of the exchange rate (Table 9, column 3), so the

personal unit of value, the hour, can be converted into the general
unit, the reichsmark, by means of the hourly wage (Table 10, column

sterling

The

5).

level of the

and should bring

exchange rate depends upon reciprocal demand,

equilibrium. As with countries, so with

this into

sum

must equal the sum of their

payments must be in equilibrium.
And in the absence of a knowledge of demand relationships the
rates of exchange in both cases can be assumed arbitrarily only
within certain limits.^ They must always be such that no product
is excluded from interchange; otherwise equilibrium would not
prevail. The producer with a rate of exchange that was too high
would lower his rate, or his wage demands, as the case might be,
until even he could produce at least one article more cheaply than
individuals; the

credits; that

is,

of their debits

their balance of

the others.

And now we come

to the sole difference, a difference in degree.

In the international division of labor an article can be produced in

several countries if none of them alone can wholly satisfy world
demand. Conversely, countries may be so large that they are able
to export more than one product. The latter is not generally true
The

sole difference is ttiat tfie excfiange rate does not give tlie international wage
working hour directly, but only after the introduction of an intermediate link
(the hourly wage in national currency)
7. See G. von Haberler; Der internaiionale Handel (Berlin, 1933)
p. 102; English
6.

for a

edition (1936)

p. 133.

Part Three.

20J

Trade

most goods is so great that no one

individual alone can fully meet it, much less engage in several occupations at the same time.^ Thus in setting the hourly wage in
Table 10 we must be sure not only that each worker can engage in
one trade, but also that the efficiency wage corresponds for all equals
in a trade. Thus whereas farm laborer III in Table 10 receives an
hourly wage of but 66 cents and farm laborer I is paid $1.10, they
are rewarded exactly according to their productivity. The wage for
one unit and the price for one unit are the same everywhere, no
matter what person or what country supplies the unit. If we had
assumed for countries also that no individual country could by
itself satisfy world demand, we should have had to take into account,
in determining the exchange rate, the condition that prices of the
same commodity must be equal in different countries. Efficiency
wages and international prices correspond to each other.
To elucidate this perfect correspondence further we shall now
discuss the effect of a few disturbing elements, the main subject of
the theory of international trade, under simple assumptions in
interpersonal trade. Suppose that a man is willing to work for a
very low hourly wage, which correspond to dumping by a country.
Several different jobs are offered him; everyone attempts to employ
him, and the demand exceeds his capacity for work. He finds that
he can ask a higher hourly wage and still be fully employed. As
his demands increase he eliminates more and more possibilities,
until his wage demands at last are so high that his efficiency in but
one single trade corresponds to it. This one he chooses. In the same
of persons.

way

The demand

for

international cut-throat competition, too, finally reaches its

and its legitimate place. However, with a very large country

limits

takes longer to reach the point where the demand for its goods
exceeds productive capacity and drives its exchange rate upward,
until the foreign demand for its still remaining special products can
be satisfied by the domestic supply of hours of work required to
produce them. Sooner or later this point must be reached. Hourly
wage and exchange rate will finally become so high that the balance

it

8. There are exceptions; for example, among sparse populations. There the hourly
wage is so adjusted that the sum of the activities possible at this wage just fill the
working time of a man. Consider the versatility of the rural artisan, or the combination of innkeeping with agriculture; a sharp separation of occupations would be
undesirable in rural districts. Secondly, the wish to be continuously employed forms

the existence of the farmer-workman. Because of its

employ labor constantly throughout the year, and agriculture is carried on, therefore, as a side line. Hence the difference between personal
and international trade is one of degree only.

one of the main reasons

for

fluctuations industry cannot

The

Six

235

Problems Discussed Individually

payments is equalized in both cases; that is, the national or

personal supply of working hours times their price (= export) is
equal to the demand for foreign goods (== import)
Another example of the difference in degree mentioned above:
of

In order to pay debts out of current income, a country must lower

its prices, and this increases its export surplus, partly through
increased exports and partly through decreased imports. An individual (a wage earner) on the other hand, does not generally have
to lower his price in order to increase his " export," since he exports
,

production anyhow and exerts no influence on its price.

He cannot raise his income by undercutting, but only by working
more hours. Of course the normal way of achieving the necessary
export surplus is for him to cut down his expenditures, which again
his entire

typical example of
requires no lowering of " domestic prices."
transfer by a simple shift in buying power without change of price!
It is based upon the relative insignificance of the individual in the

whole economy.
The

table summarizes this one-to-one correspondence

between international and interpersonal trade

INTERPERSONAL TRADE

INTERNATIONAL TRADE
Rates of exchange
International prices
Barter terms (relation of export to

import price)
National price system
National price level
Gold import

The

Relation of time spent per unit

Wage

level

Hoarding (hiding money

in a stocking)

= import

question,

to prices

of goods)

Saving (depositing money in a bank)

purchases
Earnings

Capital export

Export

Hourly wages
Efficiency wages
Real wages (relation of wages

upon what does

a rational choice of an occupation

depend, may therefore be answered to this effect in so far as it

depends on earnings: upon the native aptitude of a person; upon
the price he can get, and upon the length of the workday. These
determine the highest hourly wage that will just ensure his fulltime employment. Thus the choice of an occupation does not
depend simply upon aptitude but upon how much it will bring in
and how much employment it will provide. This formulation is
especially valid for the case of a limited monopoly, which enables
one to engage in several activities and to influence their prices. As
long as full-time employment in one occupation is possible, the
matter may also be put in this way: That occupation will be chosen
which pays the highest hourly wage considering aptitude and efficiency wages. The parallel with international trade is complete.

Part Three.

236

Trade

What

a country will eventually export or a person produce in his

occupation depends, with given comparative advantages, upon the

exchange rate that each achieves in equilibrium. Both will specialize

in what, compared at this exchange rate, they can produce at least
as cheaply as others. Thus exchange rate and hourly wage have

same function.
But the choice of an occupation does not depend entirely on
money income, as we have been assuming up to now, or even upon
the utilities that this income will buy. On the contrary, to these
more or less variable utilities there must be added all those imponderables that are associated with various occupations and usually
For a man aims at the
appear as fixed utilities (or disutilities)

exactly the

highest total utility, not at the highest purchasable utility, but the

making

same for the

engaged in several
trades at once, he will work at them and apportion his time among
them until the utility per time unit is the same at the margin for
all activities and equal to the marginal cost (measured in disutilities
or in other utilities relinquished)
The principle of comparative
cost, too, is probably applicable to the utility calculus, even though
with difficulty.
general principles for

utility calculus as for the

his decisions are the

money

calculus.

When

THE PERSONNEL OF AN INDUSTRY

b.

1.

The Personnel

What have

the

members

of an Occupation

of any given occupation in

First, this: that despite all difficulties

common?

they are equal to the demands

made upon them. This may presuppose a certain minimum of

is more or less rare, depending on the kind and

aptitudes that

quality of work.^

In any case this

common

perform the jobs

characteristic

(at least

concerned) is not
restricted to members of a particular occupation. The particular
ability may be found outside the occupation to a greater or lesser
degree. It can therefore be at most a necessary characteristic, which,
moreover, hardly need be mentioned. It is never a sufficient characteristic. Is not the relevant question for the members of an occupation how quickly the job can be done, rather than whether it can be
as far as native ability to

9.

It

may even presuppose

for example, tends to be

a definite type of

is

man. The dextrous

textile worker,

an extrovert, the steadier mine or foundry worker an introvert

(W. Mitze, Die strukturtypologische Gliederung einer westdeutschen Grosstadt [Leipzig,
A distinction should be drawn, of course, between how much this is a cause
1941])
of the choice of a trade and to what extent it is a result.
.

The

Six Froblctns Discussed Individually

done

at all?

What

is

the exact

237

meaning

ductive " in

it,

who
who

or

of the formula that says there

are " relatively most proare " comparatively superior " ? In no case

are found in an occupation all those

who

objectively produce most in it as compared

can it inean those
with other persons. A bank president will not change places with a
bootblack because he excels him in polishing shoes, as well as in
banking. But neither can the formula mean those who come nearest
to the world record in this special occupation; that is, those who
are subjectively most skillful in it.^ In Table 10, for example, a II
chooses occupation D, where his output is 60 per cent of the world
record, not occupation A, where it is 80 per cent, for the simple
reason that, considering the pay in both, his hourly wage is greater
in D. Or, more obviously, a banker may be a superb messenger
but a second-rate bank president. Yet he earns more as a president
when he multiplies his output by the efficiency wage.
But what else can the phrase " comparatively superior " mean?
As in international trade, it can be applied only to two producers.
If their relative productivity in various occupations is arranged in
series, each will choose an occupation on that end of the series
which is more favorable for him. Exactly what this is can be determined only if the equilibrium wage of all producers is known.
Then it will appear that all who choose a given occupation have in
common only that they earn most in it and that this occupation,
when compared with any given persons in another occupation, is
on that end of the comparative series which is more favorable for
them. The formula for comparatice advantage, so clear in simple
cases, is both obscure and incomplete in complicated ones. In any
case, it is not necessarily the most skillful in any ordinary sense
who gather together in an occupation, but those whose productivity in it is at least so great that it earns them, and them alone,
the highest hourly wage at the prevailing piece wage.^- Or, stated
'^'^

is

10. Except, perhaps, in the case of two

the same as " comparatively superior."
11.

This leads

to

men

only,

doubts whether Schumpeter

where

is

"

correct

aptitudes for definite functions the origin of class differences.

most

skillful subjectively

when he
(J.

sees

"

in special

A. Schumpeter, " Die

im ethnisch homogenen Milieu," Archiv fiir Soziahvissenschaft, 1927,

Only when wages are paid by time rather than by output
is it true that with rational selection no one performing a definite task is sufficiently
qualified for a more highly paid one. See p. 240.

sozialen Klassen

pp. 1-67, particularly p. 58.)

12.

What

follows from this for the choice of an occupation by

are as efficient as

men

feminist movement.

not to

efficiency.

in

But

it

many

women? That women

occupations was once an effective argument in the

was sound only when wages were paid according

Otherwise

it

is

irrelevant

whether the absolute output of women

is

in

to time,

the choice of a suitable occupation

equal to that of their male associates.

The

Part Three.

238

Trade

more generally, when one leaves the money for the utility
As against outsiders, the members of any given occupation

Still

calculus:

have only one thing in common: they find their highest satisfaction
in it."

A few examples will perhaps clarify this point. Among all

workers in occupation D (Table 10) 81 is most and all least skillful.
Hence their hourly wages are $1.00 and 60 cents respectively. If the
wage for piecework should fall from 10 to 8.5 cents per unit both
would leave the occupation because they could earn more elsewhere
Or again: A rise in the piece wage in occupation
(81 in C, csll in A)
B from 78 to 84 cents will attract not only worker ^I, who is
unexcelled in this trade, but the moderately skillful jSlII also. It is
thus impossible to say in advance who will be the marginal worker
when wages rise. It need not even be the one who is least efficient
in this occupation; indeed, the most skillful worker may only now
enter the occupation because he has nevertheless earned more until
then in another; and it is even possible that the most efficient worker
will leave an occupation because in the future he will earn more
elsewhere. The marginal worker in an occupation is therefore one
whose hourly wage in another most nearly approaches his earnings
at the occupation in question. Or, in brief: The marginal producer
is not the worst, but the most unwilling producer.
Although workers in every employment can be arranged in order
of productivity, this does not exclude the fact that there are persons
engaged in other employments who could be included in this one,
not only at the end of the productivity series but anywhere along
the scale, some of whom could be drawn in by higher wages.^*
,

most lucrative occupation

she

is

for a

comparatively superior to

woman is at the same time necessarily one in which

all men who pursue another one, and perhaps even

some of them; the latter, however, is not necessary. On the

which a woman surpasses all men may earn her less than
is absolutely inferior to all men.
Hence " typical women's occupations " can be described only as the ones in which those who earn the most are
generally women. These women are comparatively superior in it to all men; that is
to say, they do this work relatively better than they would do " men's work." But it
would not be to the advantage of all women who might be comparatively superior to
men in this occupation to enter it. The relation between aptitude and the choice of
an occupation is by no means so simple.
13. That is, thevhlghest satisfaction possible for them under existing conditions.
14. Thus the wage in a given employment does not depend upon the productivity
of the least efficient though still necessary worker, but upon how many believe it most
advantageous to specialize in such work at this particular wage within a given wage
structure. From this must be distinguished the case in which the productivity of the
absolutely superior to

an activity
another in which she
contrary,

marginal worker

is

in

reduced, not because of his personal inefficiency but for reasons

The

Six

Problems Discussed IndividuaUx

239

^^
entrepreneur is interested chiefly in the wage per unit
kindness
of output, the worker only in his hourly wage. Mistaken
toward labor has made the latter into the wage; that is, the price
of the worker's output. Payment by time instead of by output has
"
revolutionary results: AVith a piece wage there are no " better paid
occupations, because there is no basis for comparison. The wage
for making a coat cannot be compared with that for making a pair
of shoes. Uniform hourly wages for tailors and cobblers do not

The

when they
The picture

exist

are paid according to output.

changes when wages are paid according to fixed

hourly wage schedules. Many who would have earned more at their
former occupations under free competition are driven into more
lucrative ones, where they are still worth the higher wage despite
their lower productivity. And all who would have earned less under
free competition are driven into less lucrative occupations as long
as they are sufficiently productive there to earn the established wage.

The others join the ranks of the unemployed. Only wage schedules
make marginal workers economically significant; that is, marginal
in the sense of the least productive workers, not in the sense given
above of those that are readiest to leave or to enter an occupation.

Only

in the case of

wage schedules

is it

correct to say that all those

engaged in a more lucrative occupation are objectively more productive in it than all in less lucrative ones. The situation differs
fundamentally from barter, where it need not be true that those
who objectively or subjectively excel in a task will actually perform
When wages are determined in a free market that occuit also.
pation will be chosen that will lead to the highest earnings when
efficiency and piece rates are taken into account. With an hourly
wage schedule that occupation is chosen in which output times the
piece rate is at least equal to the established hourly wage and which
offers the highest hourly wage of all. (This is true only when wages
are determined in a free market.) Of course, it is not necessary that
output times the piece rate should equal any of the existing time
rates. This will then result in the army of unemployed that muddled
philanthropists are never tired of creating.
connected with the organization of the firm;

exceeded

its

optimum

size

or

is

for

example, because the firm has

being run by a marginal entrepreneur whose incom-

petence impairs the work of his employees.

Though

the marginal view has

impossible from the standpoint of the individual person,

standpoint of industry.

It will

it

become

remains valid from the

continue to attract a mixed group of persons of

degrees of efficiency until the value of the marginal product equals the wage paid for

all
it.

Except in so far as production results in costs that depend simply upon the
lapse of time or upon the duration of the production process. Then he also is interested in work tempo and hence in the hourly wage of the individual worker.
15.

Part Three.

240

2.

The Personnel

Trade

of a Firm

Who

works at the production of a given commodity? At bottom

the answer is the same as that to the question discussed in the preceding section, except that here it is even more manifest that highest
utility rather than, say, similar characteristics,

leads persons into

the same firm. This follows from the multiplicity of occupations

represented in a firm; all that has been said previously holds true

members of the same occupation, but we must at least touch

upon an additional point. The preceding analysis implied that in
for

produce independently as master craftsAt the least it implied that the combination

free occupations all persons

men,

dealers, or farmers.

of workers in firms does not affect their productivity. Whenever this

assumption is not valid the choice of an occupation does not depend

upon

different efficiencies in themselves (which in

many

occupations

but upon different possibilities for production, which depend on combinations with other factors of production possible at any moment. These are a function of the degree
of utilization of the capacities of a plant at any given time. Thus
the choice of an occupation by employed workers depends still less
upon mere aptitude than does that by the self-employed. On the
contrary, the common output of persons in different occupations, as
are not even conceivable)

represented in a factory, is also a function of the price of their

products and the technical possibilities at any one time for devel-

oping aptitudes.
c.

THE LOCALITY OF

PERSON

Where does any given man produce? This time we shall invert
our customary procedure and trace our answer step by step from
special to

1.

more general

solutions.

The Locality
a.

of

Employed Workers

Equal Nominal Wages

on one
wage level.

All popular views on a person's choice of location agree

point: the principle of interlocal equalization of the

Only against this background is it possible to understand the

shocking opinion of the American Department of Labor given to
the NRA, which declared local wage differentials economically
unjustifiable. This view could be defended on two assumptions,
of which one is not given in reality and the other is not desirable.

The

Six

Problems Discussed Individually

241

modern tendency toward the

nominal wages. Its supporters are those
who are either unwilling or unable to perceive differences in places
and things, and in this and in other matters follow what others do
without considering reasons for and against. They follow the highest
nominal wage as though it were a magnet. These persons, who
consider only the money wage, tend to equalize it everywhere if
they are sufficiently numerous.
There

1.

is

in fact a dangerous

inter-local equalization of

the " iron law of wages " held, an individual

If

2.

where he found a

livelihood,

and

all

would work

together would be located so

many persons as possible could live on this planet,^'' But

number of people, unlike the number of firms, does not tend
to reach the maximum number possible, labor, like land, receives
a scarcity rent; that is, the workman earns more than his cost of
that as

as the

Like every entrepreneur, he will consequently seek

a location where his profit will be greatest. In both cases profit is
the difference between receipts and variable costs, both of which
are functions of location. ^^ With persons variable costs are not only
reproduction.

the expenses necessary to

mere existence

(as little as

expenses in

a firm go only for the maintenance of capital goods) , but also

such additional expenditures beyond mere existence as keeping fit

work with

for

better food,

work

clothes, carfare,

and

so on.

But

everyone in a limited monopolistic position the individual is

free to choose his location in such a way that his gain accrues not
chiefly in money, but more directly in some such natural form as
a more agreeable climate instead of higher wages. From this it
follows most emphatically that nominal wages can never be equalized
interlocally any more than they can be equalized among occupations.
'Man wishes to maximize his total utility, not only his monetary
like

return.

But

interlocal equalization of total utilities requires inter-

nominal wages; that is, of wages for piecework,

wage varies in any case for different persons, as

local inequality of

since the hourly

we have

seen.
fi.

Equal Real Wages

be objected, however, that only real wages for piecework

But that again is not correct. For
the individual the difficulty of comparing real wages interlocally
It will

are supposed to be equalized.

16.

Mutatis mutandis

this

statement holds also for firms, in so far

as

they are

subject to an " iron law of profits."

17.

Only

in statics

is

profit

the difference between the receipts and total costs,

because here, otherwise than in dynamics, the probability

be recovered.

is

that fixed costs too will

Pai^t

242

Three.

Trade

might be overcome. The type of work is generally different in

and when his place of residence has to be changed
with a change in his place of work a man becomes completely
The price system, and accordingly his consumption
unsettled.
pattern, changes from place to place; in many localities he will be
unable to procure goods to which he has become accustomed because
their possible sales areas do not extend that far.^^ But in so far as
his marginal utilities change with relative price and with his environment he will voluntarily ^^ adapt himself to local custom, which
R. Wilbrandt ^ ingeniously derives from the local marginal utility,
which is largely fixed. Thus the individual, though not necessarily
a statistician, could in principle compare the utilities purchasable
different places,

in various places.

But our total satisfaction does not depend solely upon what we
can buy in various places with the income available at a given time.
For besides purchasable goods unique things that are without price
influence our location; those individual characteristics of places and
people that cannot be interchanged, all those imponderables of
production and consumption that often mean incomparably more
to us than the economic process proper. For this reason potential
real wages for the same worker, unlike the wholesale price for the
same product, may differ from place to place by more than his
travel costs.
y.

Equal

Satisfaction

We wish to maximize neither our money wage nor our real wage,
but our total utility. This, too, differs interlocally for individuals
by far more than traveling expenses, for it makes an enormous
difference whether we were born in a place or have to move there.
Migration means relinquishing much that, like friends, can be
replaced only after a long time; or never, like one's native place.
We cannot take landscape and people with us. And seldom do we
become as attached to new surroundings as if we had grown up
18. In his admirable study L. B. Zapoleon
(" International and Domestic Commodities and the Theory of Prices," Quarterly Journal of Economics XLV [1931], 443)

expresses the opinion, however, that local differences in the style of living nowadays
show more in the relative amounts in which goods and qualities obtainable everywhere are bought, than in the existence of different products that can be obtained

only locally.
19. On the other hand, those local differences in custom to which one adapts oneself
simply in order not to seem queer can no longer be included in the concept of real

wages.
20.

R. Wilbrandt,

Vom Leben

der Wirtschaft,

P. I

(Berlin, 1937)

The

Six Problems Discussed Individually

among them and were wholly

and

243

a part of them.

other identical circumstances provide a

Hence the same wage

newcomer with less

than they give to a native with the same characteristics. In

the marginal case, therefore, utility differs interlocally for individuals by traveling expenses plus the loss of one's home.^^-'*
Are there any other universally valid interlocal differences in
utility? If all persons were alike, and if they chose what they recognized as an improvement over their present activities, total utility
would again differ interlocally at most by traveling expenses and
compensation for the loss of one's home.^^ But as no interpersonal
utility comparison can be drawn, or even a comparison of the utilities of the " same " person at different times ^ because, to put it
plainly, the concept of utility is nothing but a chimera spatial comparison of utilities, to say nothing of equalization, is impossible in
any sense at all.
utility

21. Thus as long as familiar

make removal difficult, freedom

22. If a
localities,

conditions continue to exert their

of

movement

charm and expenses

will not lead to limitless agglomeration.

person could divide his working hours and his free time

equalization of his local marginal utilities

(after

among

several

deduction of traveling

home) would constitute the condition of equilibrium.

that must be offered a worker in order to induce him to
change his place of employment increases, at first slowly, with the distance of the new
then at one jump,
location from his original home (as long as this can be letained)
then suddenly and considerably
a little more (change of dwelling in the same place)
(with removal to another town) and finally again more slowly, until there comes an
expenses and

loss of his

Hence the

23.

utility

abrupt

rise at the

hagen, 1942],
24.

border of a

district or country.

We may

go a step further and assume that individuals are not free to choose

a locality, but are placed by the government

Then

(See K. Philip, Finanspolitik [Copen-

p. 354.)

where they

will be

most useful

to

it.

there are no longer limits to the interlocal differences in personal utility. Instead,

the individual

is

so situated that in

no other

locality

would

by more than the traveling expenses.

25. For this reason labor is less mobile than goods.
price differences are equal to the cost of transportation.

his public utility be greater

Goods begin to move when

Migration, on the contrary,

does not take place until local differences in utility are greater than travelling expenses.

Only a modern gypsy can apply the same rule to goods and to himself. But differences
in the mobility of stable persons, gypsies, and goods are evidently differences in degree
only, even where movement between countries is concerned. Whoever starts with the
assumption that labor is internationally immobile is dealing with a limiting case.
26. Utility for the individual can be compared between localities at a given
moment, when he really is one and the same, provided we interpret his choice of
locality as though he had decided in favor of the greater utility. But interpersonal
utility comparisons are something entirely different. This would be an interpretation
of a formal principle of explanation as an actual force, which does not become any
more real because men believe in it and calculate real wages and set up wage schedules
in conformity with it. Worship does not transform an idol into a god.

Trade

Part Three.

244

8.

From

all that

Conclusion

has been said

it

follows,

first,

that the objective

choice of a location vanish more and more as

our model approaches reality until, in the limiting case of the
individual, no choice remains. In the end not much remained of
the simple conformity to law of the voluntary spatial distribution
criteria for

human

we deduced at the beginning from special assumptions. It is

be suspected that the original precision was achieved by impossible assumptions. This shows the great psychological difference
that

to

that exists

when we

pass

from the general

of from the particular to the general, as

we proceed from

to the particular instead

we have done

here.

When

the general to the particular even the special case

has significance against the background of the general, in that it

more exact solution for certain conditions. When we start

gives a

with the special case it is soon covered over by the more general
solution, and then appears merely as an error on the road to truth.
Secondly, as universally valid spatial differences in utility do not
exist in a free economy, there is also no limit for spatial differences
in nominal or real efficiency wages. All wages remain unique and

incommensurable in

and thus offer no criterion for the spatial

Only where interlocal wage differences are

space,

distribution of persons.

by a sufficiently large number of persons can one-way

migration result, which in turn may, under certain circumstances,
lead to uniform wage differentials. (See below, Fig. 91.)
Only one general principle can be established for the choice of
felt similarly

a location by the individual.

He

will select

it

so that

nowhere

else

does he feel enough better to make up for the cost of moving and,
if necessary, the loss of familiar surroundings.

2.

The Location of an Entrepreneur

An

entrepreneur, too, wishes to maximize not his profit in terms

his utility. For this reason his profits, like the wages
of the worker, vary irregularly from place to place. But as there
is no " iron " law of wages, though there is a tendency toward an
of

money but

" iron "

law of

profits,"^

and

since, therefore, entrepreneurial

are especially sensitive to location;

-^

incomes

and, furthermore, as an entre-

27. In other words, wages may lie arbitrarily above the minimum of existence, but
an entrepreneur's profit cannot exceed the enterpreneurial income by an arbitrary
amount without bringing counteracting forces into play.
28. That is, through the wrong choice of a location it can fall below the minimum

The

Six Probleius Disnisscd I ndh'i dually

245

preneur, unlike a worker, is generally tied more closely to his branch

of industry and, naturally, even more closely to his own factory,
the choice of a location by the individual entrepreneur is more
restricted and that of entrepreneurs as a group more calculable
than is the case with luorkers. Only when conditions in an industry
or the capability of an entrepreneur allow relatively large monetary
gains, or when the location of entrepreneur and enterprise or factory
can be separate without disadvantage, is there wider scope for free

personal choice of a locality.

Finally, as for the connection of a choice of locality by persons
and by enterprises, it is easier for an adequate number of potential

workers than for potential entrepreneurs to make the sacrifice that

would permit the establishment of a factory in the locality of their
choice. (See, for example, the southward migration of the American
On the other hand, migration from country to
textile industry.)
town offers examples enough of men following factories either voluntarily or of necessity, so that generalization in respect to one
practice or the other is impossible. On principle, the location of

men and

factories are interdependent.

THE OCCUPANTS OF

d.

Who

LOCALITY

The answer depends, first,

The word may have a vague

occupies any given locality?

upon what

is

" locality."

meant by

or a precise meaning.

may be understood

It

whose number can be increased,

like

New

group of locations
York, or one single spot
as a

^^
^

like Macy's.
of existence

more

easily tiian

can the income of a worker, especially as an entrepre-

neur's mistake cannot be so easily remedied, since the migration of factories

is

incom-

parably more expensive than that of persons.

29.

In a double sense:

a vertical direction

employed
Of course even

that are not

30.

[a)

an agglomeration of areas through

(multistory buildings)

{b)

artificial increases in

a horizontal agglomeration of areas

for agricultural purposes.

this

is

still

not wholly precise.

The extremely

difficult

problem

of size of the individual lot remains, which recalls the problem of " product differentiation,"

and the

difficulty of

determining precisely what a

"

product

think of using a legal criterion, such as the unit of possession.

the question were in what

way the

"

is.

One might

This would be correct

ground could be
But a discussion of basic principles
must not employ such an institutional pons asinorum. Or one might assume infinitely
small plots of ground together with a prohibition of sabotage; that is, no one would
be allowed to withhold his land as the " key piece," but would have to surrender it to
if

made

possession of a given piece of

to yield the greatest possible total return.

the highest bidder. In this case, however, the question of the production or occupants
of such an infinitely small plot

combination with adjoining

would have no sense, since it would be useful only

But not only can a given area be combined

plots.

in
in

Part Three.

246

Trade

According to circumstances the inhabitants of a locality have

to be compared among themselves, or with strangers; in the former
case the comparison is directed toward similarities, in the latter
toward differences. " People," on the other hand, might be divided
into pure consumers, persons with a fixed income, whose only
problem is to spend it in the most favorable locality; the others,
the producers, on the contrary, have this one thing in common,
that their incomes, too, depend upon their choice of location. For
the pure consumer, therefore, the problem amounts to finding the
best residence; for the producer, to finding the best combination
of business place

1.

and residence.

Localities

For the most usual

coincide, the solution
locality all

when

loss

necessary.^-

those
of a

case, in
is

this:

in

the Wider Sense

which residence and place of business

There are gathered together in one

who achieve their highest utility there, even

home and traveling expenses are subtracted if
^^

This holds not only

for settlements

but also for larger

same purpose; different men and different proddo not always compete for exactly the same combination or areas. This means
that the assumption that the prices of all remaining lots remain constant becomes
impossible, and we can say nothing more about the occupants or the production of
one locality alone, but can only determine the distribution of persons in general. Thus
our subject cannot even be discussed unless all rivals compete for the same combination
of areas, however this combination may be determined. Such a combination we call a
endless ways with other areas for the
ucts

locality in

its

more

restricted sense.

Their number in turn

of rents and wages)

31.

level

affects the utility of the individual

(e. g.,

through the

32.

The

explanation for a certain collection of people in a particular place cannot

common

inhabitants, any more than special

group of people belong to a particular
occupation or a particular firm. Such characteristics might become prominent either
through a process of selection or through mutation. Furthermore, any given characteristics are not found in a particular location only, nor are they the only ones found
there. The really revelant cpiestion is: why are special characteristics used at all, and
why are they used in just that particular place? With these limitations the most recent
inquiries into the metropolitan type of person are really valuable.
(W. Hellpach,
Mensch und Volk der Grosstadt [Stuttgart, 1939]; E. von Eickstedt, ed. Bevolkerrungsbiologie der Grossstadt [Stuttgart, 1941]; W. Mitze, Die strukturtypologische Gliederung
einer westdeutschen Grosstadt [Leipzig, 1941]; K. V. Miiller, " Siebungsvorgange bei der
Bildung von Grosstadtbevolkerungen," Archiv fur Bevolkerungswissenschaft, 1942, pp.

be found in special

characteristics of

characteristics are an explanation of

why

its

a given

1-26.)

All studies agree that an especially large

similarly, those

even

less

who move

number

of gifted persons migrate to cities;

into cities are predominantly gifted.

But on the other hand,

well-rounded personalities succeed better in urban specialization.

The

Six

Piobkins Discussed Individually

247

economic landscapes, countries, and continents. Since

under rational conditions all those assemble who find their highest
utility here it follows that there is good reason for the special attitude toward space that binds these persons together, such as love
for a native place, a feeling for economic landscapes, and national
Only when an unreasonably large fraction of the total
pride.
utility is attributed to one of these geographical divisions may the
exaggeration be condemned as the outcome of local patriotism,

areas such as

particularism, or chauvinism.

Localities

2.

Who
prepared

in

the Narrower Sense

narrower sense, a site?

This has two implications:

gets a location in the

to

pay most for

it.

He who
First,

is

with

prevailing price relations the individual in question finds his highest

Secondly, at the price paid for this site he alone finds

Thus ground rent is a price ^^ whose func-

utility here.

his highest utility here.

is to exclude all but one from this locality.

For entrepreneurs the mechanism may be imagined as follows:
costs, excluding the price of the lot, are given for each; so are the

tion

revenues of

well as the prices of

all locations, as

the one in question.

The

all

locations except

locations can then be arranged for each

entrepreneur in order of the total utility that they will afford him.
If the location to be disposed of is to be at the upper end of the
series, that is, if it is to assure at least the same utility as the next
best, its price must not exceed a definite calculable amount.^* The
price may even have to become a subsidy, especially if the revenues
to be obtained from this location do not even cover the remaining
costs. The various entrepreneurs may now be arranged in order of
the highest price that they are ready to pay for the location in ques-

The one

upper end gets it.

compare the highest bidder with the others, just
as when we attempted to compare the personnel of an occupation
with others, we find no further characteristics that would serve to
distinguish him. For example, he need not be the one who achieves
tion.

When we

at the

try to

the highest gross profit here (proceeds before deduction of the cost

33.
is

Wherever rent appears

as a fixed " differential " ihe willingness to

pay the price

limited merely by certain objective factors such as differences in freight or in natural

yield; thus, the theories of site rent

and

of rent based

on

differential soil fertility

show

differences in the prices of lots only for certain simple cases.

34. That is, the amount that anyone is willing to pay for
upon the price at which another site will afford him a greater

a certain place
total utility.

depends

Trade

Part Three.

2^8

Despite a smaller gross profit fie may obtain a total

high that he outbids all the others.
When we attempt to compare, for the highest bidder, the chosen
location with the competing localities, no criterion at all appears
save highest utility. The locality selected need not offer him the
of the lot)

utility so

this
(before subtracting the cost of the lot)
greater elsewhere, yet provide a smaller net profit because
of a disproportionately greater outlay for space. Yet even the net
profit may be higher somewhere else, for it does not by itself deter-

highest gross profit

may be

mine

total utility.

In our model of economic regions, in which

selves to

was

exclude

sufficient to

the same.

we

restricted our-

monetary calculations and assumed that the competition

The

money

profits,

the

mechanism

is

in principle

but one would

shifts the cost
of
land
rising price

price of a site will

rise until all

produce there at a loss.^^ The

curves upward, which reduces profits just as much as when the
demand curve is shifted toward the left by reduction in the size of
a territory. The one that remains is generally a farmer, since except
for a few central points industry would operate everywhere at a
loss, and so would be able to pay only a negative price for land.
In our theoretical deduction the problem of the price of land did
not appear, because we neglected industry's need of space, arguing
as though industrial production could be concentrated at a point.
But as factories are included among the objects that jostle one
another in space, local variations in the price of land cannot be
overlooked. They are included among the factors that distort our
regular hexagon.
e.

1.

THE INDUSTRY
Localities
a.

The

in

IN A

LOCALITY

the Wider Sense

Correct Solution

The firms in a locality have this one thing in common: their

entrepreneurs find their highest utility there. But as the influence
of an entrepreneur on the choice of a locality for an enterprise is
limited, especially when profits disappear under pure competition,
and as with many corporations locations are determined exclusively
by profitability rather than by any sort of personal utility, a some35.

This does not hold with the utiHty calculus.

But then money

profits

can no

longer be excluded, for the returns to the entrepreneur need no longer he equal.
case then

amounts

to a

normal one.

The

The

Problems Discussed Individually

Six

what narrower formulation

249

will bring out the essential point

everything

more

produced for which

In any given
neighboring competition leaves room.^^ It is the difficult task of
those authorities who must plan and develop cities or countries to
decide which particular industries should locate in a particular place.
The practical procedure may be imagined about as follows: First,
the chief production advantages of the locality in question, and next
the main cost factors for the various enterprises are determined,
from which appear the industries for which the local cost advantages will be most advantageous. So much for supply.
As for demand, it would have to be determined which were the
industries whose nearest competition was unusually far distant, and
whether the intermediate demand would be adequate. If both
favorable production conditions and a satisfactory distance from
competition exist, an undertaking of the type considered would
have a good chance. Cases are much harder to find in which neither
favorable conditions for production nor a particularly favorable
competitive position are manifest, yet where an enterprise might
nevertheless succeed in the end against neighboring competition.^^
The most difficult thing of all is to discover how the industries that
are to be attracted will themselves reciprocally alter the bases of
calculation; particularly at what price level the final equilibrium
will be reached.
Whether neighboring production sites will leave room for a new
factory depends upon more than competition from similar firms.
As a rule the product of one locality differs in quality as well as
packaging and the like from similar products of other localities.
locality

clearly:

On

the whole

it

is

somewhat

different

is

and

characteristic article

obtainable only there, and the real question is whether it can hold
its own against all other possible similar or entirely different goods
that consumers would otherwise purchase. Whether the individuality of a locality can be maintained, whether the products peculiar
to it will find an adequate market, whether it can obtain the consumer's goods peculiar to it at such prices that a sufficient number
of people will remain attached to it these are the questions that
must be answered.

36.

That

touch.

The

is,

everything for which the planning curves and

cost of the particular site in the locality

demand

must be included

curves at least

in the

planning

curve.
37.

Hence the question

localities

but of

sales

is

not necessarily one of lower costs than in neighboring

adequate to cover them.

Part Three.

250

p.

The Traditional Solution {The

Principle of Comparative Cost)

THE INDUSTRY OF

1,

Trade

COUNTRY

This classical location theory is not wrong, but it is always

employed in the wrong way. The theory tried to explain the sort
of production that localities, economic landscapes,^^ or countries will
specialize in.^^ It could explain what is produced by persons.*" The

main reason why the theory

of comparative cost can hardly ever be

applied to countries is their spatial extent. The theory of comparative cost treats countries as points, and believes it has done all
that is necessary when it has taken " the " freight costs between
countries into consideration. But in many cases these are equal to
zero, whereas up to the frontier they almost never are. This degra-

dation of countries to points facilitated the erroneous theory of

their economic uniformity.
Such uniformity does not exist in two respects that are fundamental here: (1) Under the assumptions of the classical theory,

which was supposed to be independent of

political

differences,

countries have no comparative advantages apart from those of their

inhabitants
econortiic

and

localities

(and of the larger units, enterprises and

nor have their inhabitants and

landscapes at most)

localities

any advantages in

from the

rest of the world.

gifts of

on the

On

common

that

would distinguish them

For on the one hand people and the

nature vary from place to place. These are the differences

side of supply.

demand varies in different places and not

demand from abroad.*^ Distance plays an important role
One need only recall the different situations relative to a
the other hand,

least the

here.

38. Depressed areas whose workers do not wish to migrate (see p. 326, note 13)
should change over to something wherein their greatest comparative advantage lies.
See A. Robinson's review of S. R. Dennison's The Location of Industry and the
Depressed Areas (Oxford, 1939) in Economic Journal, L (1940) 26.
,

39.
it

The

solution of the problem

is this:

Every country specializes in the goods that

can produce comparatively more cheaply.

40.

Only

in

extreme cases can the theory be applied more or

less to

countries also;

perhaps when these are small, widely separated, and very dissimilar islands, and differences in the size and utilization of enterprises do not play too important a role.

was probably not by chance that the theory originated in England.

41. The classical demonstration proceeds as though the problem for every country
in respect to every product were only to choose between no market area at all and the
largest possible market area: the world. This oversimplification of possible market
areas is on a par with the oversimplification of possible locations: choice is restricted
It

to a
is

few countries.

The

avoided by dividing

it

difficulty of

into a finite

deciding on a location in an infinite continuum

number

of discontinua.

The

251

Problems Discussed Individually

Six

foreign country of a site located at the frontier and of one in the

interior of a country. This location relative to one frontier influences decisively the chances of export, even when trade between
two countries has to pass through practically but one gateway in
each:

Antwerp

to

New

York,

say.

Even then the

freight costs to

the domestic harbor, which are added to the ocean freight, are often
higher, and always as different as can be for individual points of
origin and destination. Because of these local variations in supply

and demand absolute

and comparative advantages

prices

differ

everywhere.

was explained in the preceding section why absolute

same goods, and price ratios for different goods within
the same country, vary from place to place. It must now be added
(2)

It

prices for the

movement

as well as the level of prices varies in different

words, there are no uniform national price
In
other
localities.
at the frontier. On the contrary, interabruptly
change
levels that
trade connect domestic and
international
migration
and
national
frontier.
A fundamental though
a
especially
near
foreign prices,
of
the
theory of comparative
tacit assumption of the application
cost to countries is not given in reality.*^ The transitory possibility
of an independent central bank policy cannot alter this in the

that the

long run.*^

But this means that countries simply do not show the economic
uniformity postulated by the principle of comparative cost; hence
The problem of
it is illogical to apply the theorem to them.^*-*''
determining the production of a country must be solved in some
other way.

Wo

gilt das Theorem

42. This subject is treated at greater length in my article, "
der komparativen Kosten? " Weltwirtschaftliches Archiv, July, 1938, pp. 48 f.
43. The long-run processes are unjustly neglected today. Only they obey laws that

together constitute a functioning and meaningful whole. Studies of short-run processes

are useful within their limits, but are so overvalued at present that the situation

borders on decadence and dissolution. Keynes, of course, brilliant as always, has

broken a lance in their defense: In the long run we shall all be dead. But that is just
brilliant bluff.
it

In the

first

place,

it

is

not true of peoples as a whole; and secondly,

often does not hold for individuals either, since in general a long period

more than a few years.

44. There are still other

objections.

For example,

impossible to estimate the cost of an article that

yet the principle assumes that

it

is

known.

is

it is

practically

and

means not

theoretically

not produced in a country at

See Losch, "

Wo

gilt

das

all,

Theorem der

komparativen Kosten?" Weltwirtschaftliches Archiv, July, 1938, p. 51.

45. Except for certain practical purposes, such as disproving the popular prejudice
that countries poorly
trade.

endowed by nature have a more

difficult

time in international

Since this prejudice regards countries, though incorrectly, as units the principle

^<J^'

2r2

2.

THE EXPORT INDUSTRIES OF

Three.

Trade

COUNTRY

It was characteristic of the theory of comparative cost that it

could answer simultaneously the two questions of the industry of a
country and of its export industries. For since it regarded countries
as points everything that they produced would naturally be exported.
But for us the answers to these two questions are distinct. Knowing
what industries will be profitable in a country tells us very little
about what that country will export or import. Only when we can
find a new answer to this question will the theory of comparative

have been entirely replaced.

Under the assumptions of the theory of comparative cost, which
were more or less fulfilled at the time it was developed, countries
from an economic standpoint are completely arbitrary constructs
to be used as a frame of reference. Thus nothing remains but to
determine, first, the production of all locations without regard to
political frontiers, then to draw in these frontiers and consider their
effects upon the size of the market areas. Then all goods whose
market areas are intersected by frontiers are export goods if the
production center lies within the frontier, and import goods if it
lies beyond. The same is true of supply areas.*^ This is the solution
of the second problem that the theory of comparative cost has set
cost

'^^

itself.

is

perfectly suitable for

its

refutation.

And

so long as

no theory existed that could take

account of the inherent multiformity of differences within a country, the principle

of comparative cost had its place even in the theory of international trade.
46. At
Here net

best the theorem

might still be applied to locations in the narrower sense.

would have the same function as the wage per unit

profit per unit of land

of time has in the case of persons.

Nevertheless, this

way

of looking at the matter

is

unnecessarily complicated.

The

47.

smaller the country, the larger the proportion of

that will be cut by the border.

all

domestic market areas

Consequently the relative importance of international

trade diminishes with the increasing size of a country. For example see
"

Herberts,
J. H.
Importance du commerce exterieur dans I'economie frangaise," in L'Activite co-

nomique

(Paris, 1937)

p. 6.

According to B. Ohlin {Interregional and International Trade [Cambridge, 1933])

a country specializes in goods requiring factors of production with which it is rela(See p. 30, note 33, and pp.
tively best endowed. This may or may not be true.
248 f.) That local variations in the scarcity of factors of production is not a necessary
48.

or even sufficient condition for the exchange of goods can be seen, on the one hand,
from our model of economic areas in which trade is carried on despite an equal dis-

on the other hand, there will be no trade between

two islands differing in nature and separated widely enough, despite all price differences. Ohlin overemphasizes supply, as though demand were less important. Yet he
would then have to consider also the prices of raw materials and supplies for he does
tribution of productive resources;

not think basically in terms of space.

The

Six

253

Problems Discussed Individually

the regional network for one single

product. When individual markets are small but countries large
lie within and
it is clear that some of the regional centers will
article will be
same
others beyond the border. In other words, the
of the same
parts
both imported and exported, though in different

Consider for a

moment

the market areas are large in comparison with countries and if their centers are perhaps even concentrated in a narrow space, as is true of many natural resources,
certain countries will be typical exporters and others typical im-

On

country.

the other hand,

if

porters of the product concerned.

2.

Localities

in

the Narrower Sense

The

solution of the problem of the personnel of a locality,

mutatis mutandis, applies here also. A locality in the narrower sense
goes to the enterprise that is willing to pay most for it. This can be
visualized by assuming that all settlements and their industries are

Somewhere in the network of

be filled, and the question is, what

given, with the exception of one.

settlements, therefore, a gap

is

to

industries can squeeze in here and, inseparable

precisely

where

shall they

from

this question,

be situated. ^^'^^

is systematically examined to see what

would be profitable if land were free.^^ The net profit
that it will yield under this assumption shows the highest rent that
the indsutries in question will be able to pay for the place under
consideration. This amount will be negative for most industries;
neighboring competitors leave them no room at all. The few industries that yield a positive return will generally show a profit at sites

First,

each possible place

industries

that lie close together at the center of the free space, or even overlap.

Industries compete for these favored

sites,

and not

exist with free land will continue to be profitable

all

when

that could
competitive

bidding begins to increase land prices and to raise costs. Thus the
number of industries exceeds the number of available sites at first,
49. It

cannot be emphasized strongly enough that the frequent separation of choice

of region, choice of locality,

and choice

of site

may be pedagogically. For of what

good sites? The problem of location must be
useful

it

We

is

use

not tenable in a
is

strict sense,

a favorable locality

if

it

however
no

offers

solved at one stroke.

we do not
assume the prices of all lots except one as given (in conformity with the procedure
in section d, 2, but only the prices of all except a few. This broader formulation makes
50.

thus go outside the most rigid formulation of the problem, since

the processes

still

51. In practice

locations.

An

clearer.

one

will

have

to be content

with rough calculations for several likely

exact scientific solution for a concrete case

is

generally impossible.

Trade

Part Three.

254

for with free land

many

enter the race that

increase in the price of land.

come

with an

to grief

Prices are raised in such a

way

that

but one buyer remains for each site. Even with relatively few
sites and competitors the determination of this equilibrium price
presents a difficult mathematical problem (calculus of variations)
No simple solution exists for the problem of who shall acquire
individual sites and at what price, and who shall be completely
finally

eliminated.

This

is

we have not even considered the fact

depend on the final result, especially on

true even thougrh

that revenues, in turn, also

the related ultimate determination of the prices of the factors of

production, on the exact location of the railroad station, of the
road system, and so on. The revenues at various locations are as
much a function of the lines of communication as the reverse.
Finally, there remains the difficulty that different industries never
compete for exactly the same sites, but for overlapping ones. This
shows the great complexity of the problem. There is no simple
method of determining the industry that will finally settle in a
locality.

All that can be given in a few words are the conditions

that the victorious enterprise

must

must not only be more

anywhere else; it must also

satisfy: It

profitable at the particular site than

more for this site than the other competitors.^^

Tables 13 and 14 give a very simple example of the method for
determining who is to acquire a piece of ground and at what price.
They show competition by three industries, a, b, and c, for two sites,
I and II. The winners are industry a, which acquires site II at a
offer

price of 4,

and

b,

which

gets I at a price of 2.

contrary, loses out even though

It is interesting that site

Industry

c,

on the

shows relatively high gross receipts.

I should go to industry b even though
more profitable at the purchase price.
it

would be still
Table 13 shows that at price 2 for site I industry a achieves a net
profit of 2 on it, whereas industry b achieves a net profit of only 1.
industry a

Nevertheless industry b alone

is

it

more

also that

52.

fulfills

the condition that not only

profitable at the site obtained than

it is

anywhere

else,

the highest bidder, since industry a prefers site

Thus within

certain price limits there

is

a bilateral monopoly.

but

II.

See R. Triffin,

Monopolistic Competition and General Equilibrium Theory (Cambridge, Mass., 1940)

p.

172.

The

Six

Problems Discussed Individually

EXAMPLE OF DETERMINATION OF THE

PRICE OF LAND

Tables 13 and 14.

Competition among three enterprises,

Price

Net

Profits of Enterprise Less

of

and

a, b,

c,

II

II

and

Cost of Land on Site

Site

for sites I

Table 14
a

Price of Site

f.

II

Chooses Site
II
II

lor
I

or II

II

II
T

II

II

II

II

II

II

II

THE LOCALITY OF AN INDUSTRY"

L

Industries
a.

in

The Regional

General
Basis

Industrial locations are usually not distributed at random, but

group themselves in economic landscapes with a metropolis as a
center and a general distribution of the remaining towns that is
favorable with respect to communication lines (see Chap. 11)

Rules of

p.

Strictly

speaking

Thumb
all

for Special Agglomerations

locations

are

dependent.
53.

The

Summary

No one
and the others

interdependent.

location or location factor can be called leading

location system, like the solar system, hangs free

of the most general conchisions of Part

I.

Part Three.

256

Trade

nowhere suspended and held together only

In practice, however, those natural factors to whose
sources production is necessarily bound have special weight as a
rule: arable land, natural resources, valleys, harbors, and climate.
The most important of these are the factors whose occurrence is on
the one hand limited and concentrated and to which, on the other,
a relatively large amount of economic activity is tied. Natural
resources, for example, rank above soil. There still remains the
in space, so to speak,

within

itself.

choice

among

several possible sites of these resources, but in

many

and superior quality of several natural factors

is so strikingly combined that such regions may be regarded with
high probability from the first as cardinal points in the location
cases the proximity

system.

whose locations are not uncondiextreme case those that

by nature are strongly consumer oriented, are more or less attracted
Other production

bound

tionally

centers,

to natural resources, in the

to this leading concentration or at least located with respect to

The

it.

resulting aggregation of populations finally results in large-

such as would have been impossible with more

equal distribution. The extent, importance, and proximity of these
favored localities determine whether only regional centers will arise
in them, or whole regional systems more concentrated than elsewhere, though often concentrated to the point where they can no
longer be recognized. It is mainly the need of space for agriculture
that prevents complete concentration of industrial production and
of trade in a few places. For this reason even the urban population
is much more uniformly distributed in predominantly agrarian
countries. As soon as the important group of agricultural consumers
is widely distributed the advantages and disadvantages of distance
begin to play a role for many industries. Their concentration breaks
up, which in its turn causes other branches of industry to follow
them. In the language of economics: The more the market networks expand, the greater becomes the distance between the centers
of individual markets.
scale enterprises

We

determined inconsistencies, though

The Chinese
mineral deposits, for instance, would have led to a much more
intense concentration of the population if the economic development of the country had not been so backward. But a respect for
history must not be carried to the point of contempt for logic.
shall neglect historically

in practice

Here we
tion,

they are temporarily very important.

are interested in the rules of

thumb

for logical distribu-

not for the distribution that has actually occurred.

Examples

The

Six

will

Prohlons Discussed Individually

be offered only

if

257

they permit a logical as well as a historical

explanation.

The importance

of source is obvious in the distribution of popuboth Europe and the United States.^* Why is the
population of the North American continent concentrated in the
northeastern part of the United States? ^^ The most important
reason is the climate: too cold in the North, too hot in the South/^
too dry in the West. Then the soil: on the whole it is poorer in
the West than in the Middle West and the East, and often below
the requirements for grass, not to mention grain.
Climate, soil quality, and man co-operated to produce the result.
In the South some of the soil is very good even today, an example
of the fact that a natural factor alone is of no great significance.
Natural resources are not unequivocally on the side of the Northeast, though they may give it a slight advantage. ^^ Its situation in
respect to communications, on the contrary, is unusually favorable.
in

lations

It lies

nearest the industrial areas of Europe,^^-^^ has the best harbors,

We

54.

combine discussions of the distribution of people and

of their industries.

The

boundaries for the rectangle of dense population are about as follows:

a vertical line west of Iowa; in the east, the ocean; a horizontal line through Montreal
55.

north and another through Washington to the south (somewhat further south

to the

for the agricultural population as a whole. See Fig. 64)

The

less dense must be the agricultural population with

same crops, and the same plane of living, and the larger, therefore, the
individual farm. Even when the heat does not affect natural fertility it prevents the
intensive use of the soil that is possible further north, though these differences must
not be exaggerated. In the United States, of course, it is not so much the agricultural

56.

the same

hotter the climate the

soil,

the

as the industrial

population that

to historical reasons.

math

The

is

concentrated in the Northeast. This

feudal system in the South and, after

is

due partly

collapse, the after-

its

War, which manifestly broke the backbone of the South, did not
But a more important reason was that most of those who
did come in were accustomed to a northerly climate, in which they were more efficient
and, perhaps most important of all, in which they felt better. In this case the influence
of climate probably makes itself felt through consumption rather than through
of the Civil

favor any extensive influx.

production.
57. In

freight)

the South
iron

and

and coal) and near Duluth (ore; coal as a cheap return

could be produced more cheaply, but their relation to the

(ore

steel

market is so unfavorable that factories cannot reach their optimum size, at least near
Duluth. See A. Predohl, " Die ortliche Verteilung der amerikanischen Eisen- und
Stahlindustrie," Weltwirtschaftliches Archiv,
58.

Which

XXVII

(1928), 286

includes the fortuitous advantage that

Europe over the

329*.

ff.,

when immigrants

shortest route they landed in the Northeast

and

arrived from

at first

remained

there.
59.

Even though certain

freights to

Europe are now the same

for all harbors

the East Coast despite the different distances, the time costs such as interest can
be saved over the shorter northern route.

on

still

Part Three.

258

Trade

Of course artificial measureseconomically determined discrimination of freight rates to the disadvantage of its great rival,
the Mississippi Valley have strongly emphasized the natural advantages of the Northeast.
The belt of strikingly dense population that stretches slightly
southward from the English industrial areas across northern France
and Belgium, southern Holland, the Ruhr, central Germany, Saxony,
Upper Silesia and the neighboring parts of Bohemia and southern
Poland, into northern Rumania and the Ukraine, where it turns

and the waterways

the

like

of the Great Lakes.

rather

politically

than

Inhabitants per

square kilometer

Over 100

Fig.

60-100

25-50

1-25

Population density of northeastern Europe,

55.

about 1930.

(After

Goode and

toward the northeast in the Donets

others.)

area,^

is

chiefly attributable to

the presence of natural resources, particularly iron and coal. But

the fertility of the soil on the northern edge of the German

Mittelgebirg Chain and the Carpathian Mountains also plays a part,

So does a naturally favorable

especially in the areas of black soil.^^

60. It is really astonishing,

how

and further proof

of the attraction of large aggregations,

regularly the population density falls off with distance from this belt, especially

toward the north. In the south the pattern is distorted by, among other things, a
second densely populated belt that runs up the Rhine Valley and continues on the
other side of the Alps

down

to the tip of Italy

(See Fig. 55)

According to Haufe this belt was very thickly settled even before the days of
On the relative
industrialization {Die Bevolkerung Europas [Berlin, 1936], Map 1)
61.

locations of industry
"

Regionale

and

especially productive agriculture to

Statistik," Weltwirtschaftliches Archiv,

LIV

one another,

(1941)

292.

see O. Schlier,

The

Problems Discussed Individually

Six

259

situation in respect to communications, for example, with

the lower Rhine, and central Germany.

London,

repeated that, strictly speaking, this is no explanation of

because it omits not only historical factors but also the whole
interdependence of economic forces. But as a first approximation,
and above all in the face of such extensive regional differences,^^ j^
is useful to put the most important factors into the center of the
picture even though they are not the sole effective ones. The idea
was not to provide a complete derivation of a rational choice of
location. The result is not conclusive, though it is probable. Such
limited rules of thumb are more important in practice than scien-

Be

it

reality,

tifically

exact emphasis

2.

on boundless interdependence.

The Individual Industry

a.

The

In General

individual agricultural and industrial enterprises are of

such size and so distributed in space that the total number of

independents, and in this context the income of every individual,
Accordingly a single good is produced in as many
is maximized.
localities as possible S'^ The solution might be visualized in some
such way as this. A network of market areas small enough to allow
no profits, at least to a marginal entrepreneur, is placed over a region.
It is shaped and placed in such a manner that the demand for the
individual is, nevertheless, as large as possible.''* (See pp. 94 f.)
p.

1.

The Individual

THE GENERAL SOLUTIONIS

Corporations erect a factory where

The more we

62.

factors
63.

get

down

it

will yield the greatest profit

to single localities the

more important do the other

become.

This

is

true only for given techniques.

opposite tendency to decrease the

64.

Enterprise

The

number

Technical progress

may

bring out the

of producers.

upon maximization of the

upon maximization of the ground
tendency determines the regional network for a product when the site

choice of a locality by an industry depends

producers, the choice of an industry for a locality

rent.

and

The
size of

first

the networks for all other goods are given.

The

second regards the networks

themselves as given, and determines their relation to one another.

have disproved elsewhere the solution given by the theory of comparative cost:
where the comparative advantage for its type of production is greatest." (" Wo gilt das Theorem der komparativen Kosten? " Weltwirt65. I

"A

factory chooses that locality

schaftliches Archiv, July, 1938, pp. 50

f.)

Part Three.

25<)

Trade

market conditions show monopolistic elements) or at least where

can just continue to exist with a normal return on the capital
Such a location is objectively unequiinvested (pure competition)
vocal. Individual entrepreneurs may choose another location, since
they are not concerned with money profit but with the greatest total
(if

it

The

utility.

scope for this subjective choice of a location is objecmost it may cost profits and the entrepre-

tively limited, since at

neurial

wage.***^

Monopolistic profits are possible chiefly in

the
is

amount

limited.

offered
(3)

is

limited.

When

relative to the size

(2)

When

even with free

of the market, so

five cases:

(1)

When

number of producers
entry their number is small
that new entrepreneurs can
the

enter only discontinuously. (4) When the market areas cannot be

reduced exactly to the smallest necessary size because of the disconFor those entrepreneurs
tinuity of the original settlements.
(5)

who

are more skillful than the marginal producer.*'^

But in all cases where entry into an industry is free, where the
number of possible enterprises is large, and development goes on

smoothly, the pressure of potential entrepreneurs always tends toward the elimination of profits and a condensation of locations
accordingly. In this case an enterprise is established simply where
it can exist. Its existence depends primarily also upon the location
of neighboring enterprises that compete either for sales or for factors
of production. If a new bank, say, is to be founded, a gap in the
already existing bank network must be found that will assure an
adequate supply area of deposits on the one hand, and an adequate

market area for bank credits on the other.

2.

SPECIAL CASES

few special solutions that have dominated the past literature

are valid only in the rare cases in which their very restrictive assumptions are fulfilled.
1.
A factory chooses the locality with lowest freight costs. This
assumes that production costs are the same everywhere, and also
that the number and demand of consumption centers are unchangeable. If their number is variable the total freight or the average

66.

True

in a free

economy. For a planned economy the statement must read: An

it can best serve the interests of the government.

enterprise will be established where

and (2) are rents that depend upon natural or artificial

due to indivisibility; and (5) an entrepreneurial wage
Competition, Pliopoly and Profit," Economica, 1942, p. 164)

67. In a strict sense

scarcity;
(F.

(3)

Machlup,

and
"

(4)

(1)

profits

261

Tlie Six Problems Discussed Individually

would be lowest when

remained limited simply to the

of consuming localities is fixed
producing locality.
of
two localities may still show
variable,
one
but their demand is
freight;
but
only because the demand
the lower total and average
from remote points is too small to be of any importance. A shifting
of the location in their direction might increase their demand so
much, and need decrease so little the demand of places that now
freight

If

become more

the

sales

number

distant, as to

make

the

new

location

more favorable

Indeed, the increased demand

might lower costs so greatly that the price might fall even in the
deserted location. Finally, the first condition for location at the
point of least freight cost, namely that production costs are equal
at different locations, is seldom fulfilled even in times of uniform
in spite of

prices
2.

its

higher freight

costs.

and uniform wages.

factory chooses the locality with the lowest cost of pro-

Obviously this is true only when shipping costs and

personal contact with the customer play no role. In this rare instance
all factories of the same branch of industry collect in this one locality.
It should be said at the same time, however, that local costs are never
duction.^^

constant but depend in turn

upon

their

power

of attraction.

Local-

with favorable cost curves naturally exert a special drawing

power, but it cannot be emphasized strongly enough that much
depends also upon their position with respect to one another and
to consumers. The final list of locations need by no means contain
the localities with lowest cost of production. ^^-^^
ities

3. A factory chooses the locality with lowest delivered price

Weber and
(production costs -f freight on the finished product)
Palander have been principally occupied with this case, of which
one-sided production or transportation orientation constitute only
limiting cases. All the objections already brought forward under
.

(I)

(2) apply to it. The assumptions of this solution are

only under exceptional circumstances.

and

filled

68.

Unlike the case of pure production orientation discussed on

on raw materials and

Suppose a mine is to work an

also the freight

69.

individual enterprise

is

demand

as follows:

Is

p. 23, these

ful-

include

supplies.

especially rich vein.

The main problem

of this

there a sufficiently large uncontested territory

But for the mining industry at large this

mine may be profitable, but perhaps
the total number of entreprises could be increased if all mines were so distributed that
instead of this single mine, two others, perhaps less rich and so profitable only alternatively with this one could be worked.
70. In agriculture, too, pure transportation or pure production orientation are
obviously marginal cases and interdependence, on ihc contrary, is the rule. Neither the
best nor the nearest land need be cultivated.
(do supply and

curves intersect)

does not yet settle the question.

The

particular

Part Three.

262

CONCLUSION

g.

The
necessity

division of labor

and

is

inclination.

Trade

determined by the two great principles,

By

necessity

when producers

(person or

but in turn should be as numerous

by inclination when a fixed number of producers attempt
to maximize their utility. In the first case the income of the individual is constant and the number of income recipients is variable;
in the second the situation is reversed. However, the variable should
always be maximized. Now as a rule the number of individual
producers (workers) at any one time is fixed, that of producing
combinations and their leaders (enterprises and entrepreneurs) on
enterprises) can just barely exist,

as possible;

the contrary, always variable; that

is,

number
number of

the constant

of pro-

groups.
ducers can be collected into a smaller or larger
If Malthus were right, if man, like the lower animals, continued
to multiply so rapidly that each individual would be just able to
exist,^^ there would be no such difference. But because man restrains
his multiplication his income rises above the minimum of subsistence
It is

from work) and there is scope for his inclinations.

employed rather than the independent producers

(profits

precisely the

that are free within these limits to choose a location.

In contrast

to these, the smaller number of independents can be increased at

will from the great reservoir of the employed. Their lot therefore

resembles that of enterprises. Their choice of a location is decided

more by necessity than by inclination, and there is a perpetual
tendency to eliminate again the entrepreneurial profit, which would
allow some degree of freedom to the entrepreneur also. There is
more an " iron law of profits " than an " iron law of wages." Any
entrepreneurial profits that appear nevertheless, may be attributed
for the most part to the same cause as the " profits from work "; the
limited multiplication of man. Thanks to this, man can place himself largely as he likes in the great spatial division of labor, whereas
enterprises necessarily tend at least to seek gaps.

71.

Of course

the

minimum

of existence of a nation lies above that of

citizens, for certain necessary functions

just able to exist.

cannot be performed by persons

its

individual

who

are only

Chapter

18.

Price Gradients

In a free economy the spatial division of labor is guided by

geographical price differences. In equilibrium these often constitute
regular gradients of three types: (1) The price in any part of a
single supply or market area differs from the central price at most

by the

costs of distance.

make up

The

and price funnels

commodity is produced at

resulting price cones

the market gradient.

(2)

If a

the same time on several levels of an economic landscape hierarchy,

that is, in localities of different size and rank, a landscape gradient

may

arise

among

central prices in these localities.

(3)

Price dif-

ferences occur also between different economic landscapes in localities

of equal importance: a world gradient, of

which national and

continental differentials represent sectors.

Landscape and world gradients apply to goods of different producers; market gradients affecting industrial products apply to goods
of the

same producer. All these differences are

at

most equal to

the costs of distance in the broad sense, which also includes trade

Even within the limits of these differences all prices are

uniquely determined; each is such that the conditions of locational
equilibrium are fulfilled.
margins.

1.

Here

der Preise
lished

it

(in

is

possible only to sketch

what

is

discussed at length in

my

Geographic

preparation) and Zur Beurteilung des westostlichen Preisgejiilles (unpub-

monograph)

263

B.

The

Disturbance of the Equilibrium

theory of trade has two tasks; First, to explain the principles

show the mechanism by

which they prevail against disturbances.^ The first task has already
been discussed in the preceding chapters; the second will be taken

of the division of labor and, second, to

up

in the following one.^

1.

dismiss as insoluble a third traditional task; to calculate the gains from inter-

national trade.
2.

The most important

results are

summarized

in

my

article, "

des internationalen Handels," Weltwirtschaftliches Archiv, 1939.

presentation offered here will provide a complete understanding.

264

Eine neue Theorie

But only the detailed

Chapter 19.

a.

Self-Regulation

TRANSFER OF PRODUCTS DURING SHORT-RUN

DISTURBANCES (THE TRANSFER PROBLEM)
^

change in the division of labor even between two localities

eventually alters the whole system through movements of
prices. The effects of a temporary disturbance are substantially
exhausted by shifts in income, fluctuations in the volume of employment, changes in the place of employment but only seldom in that
of residence, and a rearrangement in the flow of goods and of capital.
In short, the size and composition of the balance of payments change,
but the locational pattern as a whole is unaltered. Everything connected with these price fluctuations (how they come about, what
form they take, their locality, time, direction, extent, and effect)
is among the most important topics of the theory of international
only,

We

trade.
shall discuss here these aspects of price fluctuations for
the most important subjects and the spatial constructs that are used
as a frame of reference in international trade.

1.

Individuals

with very simple conditions. Suppose the demand

Jung increases because he has joined a
large club, the members of which now favor him. He will ask a
slightly higher price, if not because he is anxious for profits then
at least because his work has become more irksome because of the
longer hours. On the credit side of his balance of payments, the
value of his " export " increases; first, because he commands a higher
price; second, because he works longer hours; and third, because
he now finds it advantageous to give up much of the work that he
used to do about his home and to repair shoes instead. The situation
corresponds to the diversion of production from a domestic market

Let us

for the

start

work

of the cobbler

to exports in international trade.

On

the debit side, the value of

1. Here it is my purpose to explain the new fundamental ideas, whereas my theory

presented more compactly but systematically more completely in my article, " Die
Lehre vom Transfer neu gefasst," Jahrbiicher fiir Nationaloknonmie, CLIV (1941)

is

385-402.

S65

Port Three.

o(35

Trade

First, for the reason just mentioned of a

simple shift in production. He will no longer paint his garden fence,
for example, but will have this work done for him. Second, because
with his larger income he can afford more. Whatever remains he
will deposit in the bank. In other words, he will expand his capital
export. The prices of most of the goods that he buys will hardly
increase, because on the whole his customers or his competitors will
now buy less of those articles on which he spends more; besides, the

his " imports " increases.

amounts are

so dispersed as not to affect prices.

Of course he may be more free with his money, less careful about
his purchases, shopping in more expensive stores and there paying
higher prices even when they do not correspond to better quality.

The

landlord

may have

the best chance to profit from his increased

Our cobbler now lives in an atmos-

prosperity by raising his rent.

phere of prosperity:

more

freely,

and

this applies to his

since their loss

Jung

will

He

asks higher prices, pays

is

be most severely

with distance.
One day a

new

more

rent, spends

The opposite of all

competitors, though to a much smaller degree,
divided among many. The cobbler nearest to

deposits

more

in the bank.

affected, since

even club

tax bill arrives unexpectedly

the same problem that

Germany had with

loyalties

and puts

reparations:

weaken
to

Jung

unilateral

must be made. His " import of goods " and his " export
of capital," both of which he will decrease with a sigh, will most
likely bear the chief burden; he will spend less and be able to save
less. But in addition pressure will be exerted upon the whole level
of high prices that surrounds Jung. Forced by necessity, he will
again buy more carefully; he will bargain with his landlord, and
transfer

reduce his prices somewhat, in order to recover at least a part of

the tax. In short, Jung will pass through a deflationary crisis. This
"
crisis will be aggravated if other cobblers should now join the club
in order to take away the customers that Jung had just gained, and
until the tax has been paid he may even be worse off than ever
until at last everything is as it was in the beginning.
Thus does the mechanism that is familiar to us only on a large
scale operate in miniature, and with different emphasis. We shall
now examine it once more and in greater detail for larger economic
units than the individual.
2. If this does not work, and the loss of customers has to be regarded as permanent,
one or another of the cobblers a few blocks from Jung will move away in order to
gain more customers. Here we embark on the combination problem, to be discussed

later.

267

Self-Regulation

2.

Factories

Suppose that a Stuttgart shoe stored suddenly orders 1,000 marks'

worth of shoes, which it formerly ordered from a local seller B, from
J5i,

located in a smaller place such as Tuttlingen. The additional

for shoes from this town will raise their price, partly because

demand

the Tuttlingen firm has to fear only imperfect competition, but

perhaps also because its production can be expanded only at
increasing cost. By offering higher wages, it will attract additional
workers away from other local enterprises. If this does not suffice,
further wage increases will enlarge the supply area of commuting
workers at the expense of neighboring factories, and wages will
finally rise so high that labor will be attracted from a distance.
This in turn will raise rents. The building boom that results will
increase the pay of masons and other artisans. Vegetables and milk
will become dearer because their supply area has to be enlarged;
in brief, the local price level will rise. It is of fundamental importance, and of the very essence of the theory presented in these pages,
to have an exact idea of the further course of such a local price

change.
<x.

Price

Waves and

How

They Spread

We

can distinguish a direct and an indirect spread of a local

Distant customers of and sellers to the firms involved
will be directly affected; the prices of competitors and those of other
goods will be affected indirectly. The direct spatial spread of a
local price inflation (hatched in Fig. 56) is retarded by freight costs
and neighboring competition. However, the effects of the inflation
on the region controlled by its point of origin are twofold. The
higher price of its own products narrows their market area (in Fig.
56, for instance, from radius B\G\ to B'lG'z) and the higher prices
of imported goods widen their supply area (for example, from B\D\
to B\D'^ always to the advantage or disadvantage of neighboring
competitors. The increase in prices does not operate uniformly
throughout these market areas. Though for all goods it is relatively
greatest in the " last " production locality, this " last " locality is
the central point {B\) for the area for export; and the border {D'2,
for instance) for the import area, which happens to be the location
where no freight costs (which need not rise concomitantly) are
included in the price.
The indirect spatial extension of a local increase in prices goes
further. At first it is transmitted to the adjoining competitors of B\.
If B\ enlarges its supply area at the expense of B\ by raising prices.
price change.

Part Three.

268

Trade

the scarcity of imports will raise prices in B'2 also, though not quite
so high as in B\, since the special cause operating there is absent.
" focus of infection " for
B'z, on its part, now constitutes a new

B\ can no longer affect directly. In addition the price

transmitted to other goods, not only through the producers selling to B\ but also indirectly through its customers, who
spend more money for other things after B\ increases the price of
localities that

inflation

its

is

shoes.
^;

^i

Fig. 56.

(3.

Effects of a price inflation

The

on market areas

Direction of Price Waves

Price waves always move away from their point of origin. Each
consecutive temporal and spatial link in the chain of purchasingpower transfers is necessarily farther removed from the starting point
than the preceding one. For a recipient of increased purchasing

power

it to better account in a direction away from the

(Tuttlingen, in our example) where prices have not yet
been driven upward. And those factories affected by the falling-off
of purchasing power in Stuttgart will endeavor to dispose of their

source

will turn

269

Self-Regulation

goods in the opposite direction from that city, because nearer Stuttgart they encounter the still stronger price-cutting competition of B.
y.

As the

The Damping

price change widens,

of Price

its

Waves

intensity diminishes for four

different reasons.

1.

DECREASING INFLUENCE OF THE POINT OF ORIGIN

and market areas of a locality B definitely

and
other factors, but within these areas
restricted by freight costs
business connections with B as a rule grow closer the nearer it is
approached. Although it happens occasionally that B receives important imports from remote points,^ so that an inflation at B can jump
directly to distant localities such as coal or ore fields, purchases and

Not only

are the supply

sales nevertheless decrease

with distance.

are especially striking their importance

is

Because cases like these

apt to be overestimated.

Analyze the expenditures of consumers in any given locality, and

how large a proportion goes to local activities (builders, retailers,
The next
artisans, teachers, newspapers, beverages, and so on)
largest part goes for goods from the near vicinity, the radius of
which naturally varies with the size of the town (greens, potatoes,
Another portion of its
milk, eggs, firewood, brick, stone, and so on)
see

supplies comes from a greater hinterland (cattle for slaughter, fruit,

butter, flour, furniture)

while many industrial goods whose share

may be small come from all parts of the

of the total expenditure

country, and only a small remainder of agricultural

products
3.

is

imported from the world

But only

to

at large.*

and

The

industrial

truth of this

export them again in the products of local factories a type of

finishing trade.
4. B.
Barfod (Local Economic Effects of a Largescale Industrial Undertaking
[Copenhagen and London, 1938], p. 44) calculated that in Aarhus 45 per cent of consumption expenditures (dwelling up to 85 per cent, clothing 30 per cent, food 25 per
cent) was retained as local income. According to Isenberg (" Zur Stadtplanung in den
neuen deutschen Ostgebieten," Raumforschung und Raumordnung, 1941, p. 137) in a
,

German

agricultural region

up

to 60

who

per cent of the expenditures of those

farmers will become regional nonagricultural income again. This he

calls

are not

the " intra-

For economic regions in which industry and agriculture are intermixed it would have to be considerably higher. According to the same
author (ibid.. Vol. 6, p. 18)
29.3 per cent of German productive workers were

regional expenditure quotient."

employed
27.1

in 1939 for local requirements, 27.3 per cent in agriculture

per cent in remaining industries

world markets)
is

divided

among

If

(public services, wholesale trade,

the rest

these groups

locality decreases absolutely

it

and

forestry,

and

(grouped according to regional, national, and

and communications)

proves to be true on the whole that the

with distance.

demand

of a

Part Three.

270

Trade

when it is realized that the market area around

square of the distance from B. If this is divided
into rings of equal area it will be found as a rule that with incrasing
distance a constantly diminishing fraction of the product of each
ring is sold in B, and a constantly smaller proportion of its purchases
are bought from B. This is obvious for one and the same product,
and especially for the exports of B. It is true also for the imports
of B, since the increasing distance from B even smaller localities
can carve out for themselves constantly growing supply areas from
the region that supplies B, and since home consumption rises with
falling producers prices. But the statement holds also for any group
of products. It follows that the effects of a price change diminish

becomes
B grows

still

clearer

as the

gradually with distance from

2.

its

point of origin,

INCREASING ABSORPTION OF A CHANGE

IN

PURCHASING POWER
Assume

that A, in Fig. 57,

is

the

man who

has ordered the

and so on,
and Ci, jEi, Gi, and so on, are consumers, and the rest are producers
of one product each: B, of shoes; D, of bread; F, of butter, and so on.
additional 1,000 marks' worth of shoes from B^.

C, E, G,

Suppose that a unit of each product cost initially 1 mark. Now let
disturb the equilibrium. Let the chain of trade connections be as
in the figure. Thus D, the baker, for example, would have supplied
C and perhaps E also, but he would have supplied neither A nor F.
Such a selective chain is the rule in reality where imperfect com-

petition prevails.

marks more to Bi, A pays out that much less as

In order to win a substitute buyer, B reduces his
price to one half. At this price a new customer C buys from him
the 1,000 shoes that were not taken by A, Since C now buys 500
marks' worth more from B than formerly, he must diminish his
purchases from
by an equal amount. But in order to sell his
500 units of bread, D will offer them to E at the reduced price of
80 pfennigs instead of 1 mark. He need lower his price less than
fiand this is the point because his loss of sales amounts to only
500 marks; not to 1,000, as with B. E buys 375 units at 80 pfennigs
each for 300 marks, while C, for whom the reduced price also holds,
buys 125 additional units of bread; which, to simplify the argument,
would reduce the value of his purchases from D, despite the lower
price, by only the 500 marks already mentioned. D's loss is reduced
thereby from 500 to 200 marks. And so on. So much for the spread

By paying

1,000

a customer of B.

from B, the center of the price depression.

271

Self-Regulation

Now

for the center o the price inflation B^.

As the demand

for

his shoes suddenly increased, B^ raised his price to 1.5 marks. C,',
whose income has not gone up, will no longer buy 1,000 marks
worth as before, but only 500 (so that B^ will sell 667 units to A

and

.333

units to C,)

and use the remaining 500 marks

for the

goods of Di, which so far have not risen in price. By joining D/s
long-established customers with an additional 500-mark demand,
he drives jDi's prices up also, though by less than A Avas able to do
with his additional purchasing power of 1,000 marks from B^, and
so on.

CO

CO

ca

CO

Fig. 57.

The spread of price changes. (Complete

demand greater than 1 are assumed.)

transfer in goods

and an

elasticity of

In this way it comes to pass that with distance from the center
of origin both the fall in purchasing power and prices (starting
with B) and the increase in purchasing power and prices (starting
with jBi) will flatten out.^
5.

This conclusion

is

reached under the most probable assumption for these con-

ditions: that the elasticity of

were equal

to

I,

demand

or B^ would suffer

they set their prices.

If

another, an elasticity of

but one producer, an

B and
demand

elasticity of

is

greater than unity. If the elasticity everywhere

all

the loss or gain all the profits

no matter how

B^ each are several producers competing with one

of less than unity

demand

is

conceivable;

(if

each represents

of less than unity implies that

he

failed to

Part Three.

272

THE DISSIPATION OF PURCHASING POWER

3.

So far
entirely

Trade

on

we have assumed that the shifted demand of A fell

seller B, who in turn could gain only one new customer
But in

as a substitute.

several sellers,

and

reality

will reduce his purchase

will gain several

new

from

Thus

customers.^

the

reduced demand will affect the individual seller less and, in

addition, he need not lower the price so much to dispose of his
unsold goods. This dissipation increases in geometrical progression,
whereas the distance from the origin of the disturbance increases
only in arithmetical progression. The price change therefore dies
out in space even more quickly than we should have had to assume
from the foregoing argument.

THE INCREASING TRANSFER OF GOODS

4.

The

three causes thus far described cause a price

out with increasing distance from

so far as a
as

its

more and more extensive

origin because

wave
it

to flatten

divides.

In

transfer of goods takes place,

the two price waves approach one another, they flatten out

because they disappear.

B.

This will be described below.

The End

of the Price

Waves

Whereas local price differences are very great in the first economic period, the fall in prices widens and flattens out in the
succeeding ones. It must be remembered, however, that so far as
the causes of this phenomenon (discussed under 1 to 3) extend,
the sum of the increases or decreases in purchasing power remains
the same, even though it is divided among more and more persons
by partial shifting. This is the law of the conservation of purchasing
power. Thus, though the total fall in purchases from B, say, was
1,000, he suffers a loss of only 500 marks and through a price cut
shifts the further loss of 500 to D, who in turn absorbs 200 marks
of it and passes on a loss of 300. The sum of the amounts absorbed
)
is
(500 + 200 4-90 + 40 +
exactly 1,000.
The shift from
-

movement of
upward with B, downward with B^. At best B could shift the entire loss to D; at the worst, B^ would have
to transfer all the profits to D^, until at last profits and losses reached Z and were
equalized there. The effect of a combination of different elasticities is still more com-

set his price at

prices

may be

Cournot's point)

In this rather improbable case the

exactly the reverse of that described in the text:

plicated and, for a general discussion,

still less

interesting.

Here we speak of dissipation within groups of buyers and sellers, whereas in 2

dissipation between (individual) buyers and sellers was discussed.
6.

Self-Regulation

273

income period to income period is to be distinguished from this

from person to person. If in the second period A were to buy
his shoes again from B as usual, the latter would nevertheless have
received 500 marks less in the first period with which to buy leather
from Z. B's loss therefore consists in the curtailment of his purchases from Z, and once he has dealt with this loss the storm has
passed him.^-^ But now the cloud hangs over Z.
The disturbance would be carried over from one income period
to the next and continue to claim new victims, were it not gradually
dissipated in two different ways. The compensatory absorption
about to be described must not be confused with the damaging
absorption already discussed. The latter reappears again and again,
and if the other did not intervene (that is, if we dealt with a closed
economic system) it would come to an end only with a general and
uniform price reduction in the region in which the purchasing
power has fallen. The former is final. The manner in which it
appears first, though not most frequently, is this. j5i, for example,
with his increased income, wishes to buy from Z exactly what B
had to give up because of his reduced purchasing power. In this
case Z's prices remain unchanged. But such a prompt agreement
between increased and decreased demand is hardly to be expected.^"
As a rule there would start from jB as a producer not only the series
of price drops illustrated; from him as a consumer with 500 marks'
less purchasing power there would start also a corresponding series
of price drops that is not shown in the figure. The same would be
true for D, with his 200-mark reduction in purchasing power, and
so on. Buyers B, D, F, H, and so on, would pass on together to Z
a purchasing power reduced by up to 1,000 marks; not directly,
of course, but through chains of intermediaries. Z must exist someshift

7.

Thus B has

C, even

though

shifted

at a loss,

when he

has sold 500 marks' worth more of merchandise to

and bought 500 marks, worth

the next production period with exactly as

preceding one.

from

Unless part of the loss in purchasing power

customers, the transfer

8.

less

is

over as far as he

Z.

much purchasing power

is

still

Then he

enters

he had in the
affects one of his
as

concerned.

In the case of single disturbances, therefore,

we

deal with a true wave, not simply

with a price gradient.

Here two

must be distinguished. The drop in purchasing power shows

new economic period, but within
one and the same period its effect is exhausted as soon as all goods have been sold,
even though in part at reduced prices.
10. It is still more improbable that B^ should obtain his increased requirement
directly from B. As a general rule B would endeavor to dispose of his stock by trading
with a third person, and B^ would try to replenish his in the same way.
9.

situations

again at an increasingly distant place during every

P'^^^

274

Three.

Trade

where, however; that is, there must be one or several places where
diminished and increased purchasing power balance one another
without altering prices.
Besides this there is still another possibility, more probable at
first: That Z)i and Fa, with their combined additional purchasing
power of 300 marks, will become new customers not o Z, but of D,
and the price drop
in place of E. The series will then stop with
will no longer reach F, H, and so on. Consequently their demand
from Z will not decrease, which equalizes Z's loss of an additional
demand from D^ and F^ previously assumed. In other words, these
two simultaneous possibilities of a link between chains of price
increases and price decreases mean that those who gain in purchasing power, either as a simple result of its shift (through Z) or
after a preceding price change (in the case of D, for instance)
demand what the persons with reduced purchasing power have
given up. Both are typical examples of the real transfer, which is
achieved when decreased and increased purchasing power meet

somewhere.

The

spatial distribution of these two forms of transfer is imporAt first those persons or places with decreased purchasing
power dp and those with increased purchasing power ip may be so
far apart that no equalization occurs at all. But as the waves of
purchasing power spread dp and ip move closer together. At first
only their largest supply and market areas overlap slightly, and the
shift in demand from ip to dp of those few in the region of overlap
tant.

Z can

Consequently only a slight

Gradually the
overlaps increase and dp and ip even move into each others' areas,
influence their prices but

little.

real transfer occurs at first at sharply altered prices.

so that a direct real transfer develops at prices that are very

At

much

dp and ip coincide with Z, and the final

transfer is completed at unchanged prices. With time, that is, as
the waves of purchasing power spread, the localities between which
the real transfer takes place approach one another, the transfer
increases in extent, and the prices at which it occurs depart less
and less from the normal ones.
less

changed.

last

The territory involved in the real transfer does not as a rule

coincide entirely with the areas of increased and decreased purchasing power, but lies necessarily within their borders. The real
transfer takes place

between parts of areas with decreased and

increased purchasing power.

Self-Regulation

275

Economic Landscapes

3.

The economic

connections of an enterprise are not the same in

on the contrary, it is generally situated in an economic
landscape toward whose center it is oriented. This is not without
influence on the spread of price waves. Although the movement of
prices always remains especially pronounced about its origin, the
central points of economic landscapes reflect local changes anywhere
in the hinterland relatively early and strongly; on the one hand,
via the whole area; on the other, the movement jumps from these
central points to those of neighboring landscapes, which thus are
exposed not only at their borders but at their centers as well. That
all directions;

is

exposed throughout.^^
This important function of economic

to say, they are

price fluctuations

(of

capitals,

a cyclical nature also)

to

the transfer of
their

economic

landscapes or, conversely, from these to the rest of the world,^^

becomes

still

more

when

clear

it

is

recalled that the final

money

transfer takes place as a rule through central banks, not directly

between those concerned.

therefore, there

If,

is

any

logic at all in

the substitution of simplifying spatial constructs for the individuals

who

are really the ones affected by disturbances of trade, these con-

structs

should certainly be economic regions [rather than countries],

Countries

4.

Do

disturbances in economic relations always exhaust themselves

on those first concerned and by spreading

through the channels of their originators' business connections, or
are special phenomena added when payments have to be made
across national boundaries? We must now examine the significance
of political boundaries for the overcoming of temporary disturbances
in the described effects

11.

This

is

really a special case of

point in a wave
12.

may become

Huygens' principle, according

the center of a

which every

Individual industries in a landscape will of course also maintain direct connec-

and a machine factory,

more by way of industrial

tions with the outer world,

revival in other regions

customers than through the capital of

there

to

new wave.

is

no organized landscape

at

landscape, a local improvement in

all.

its

its

own

When

for example, will feel a cyclical

areas or

its

particular circle of

even more obvious where

a town has but little connection with its
region. This

is

economy cannot spread through the region but

must be dispersed here and there. This need not mean its complete dissipation, for
the arming of a fort, say, may at first chiefly benefit one single factory somewhere in a
it does mean an irregular geographical distribution,
which of course may suffice to rob it of the cumulative cyclical effect which otherwise
would occur in the course of interregional trade.

region of heavy industries; but

Part Three.

376

Trade

of equilibrium; not their significance for the equilibrium itself,

since that has already been discussed. In so far as countries coincide

approximately with economic regions, either fortuitously or by compulsion, what has already been said of them holds here also. Has
the state as such, not as an economic area, additional significance?
a.

Currency

Differences in currencies are the

international trade.

first

important characteristic of

Differences in monetary policies will form the

subject of the next chapter; here the question

is

whether differences

in the fundamental construction of currencies alter the transfer

mechanism. But first we shall separate from this problem a more
basic one.

I.

THE SIGNIFICANCE OF THE FACT OF CREDIT CREATION

FOR THE TRANSFER

payments are almost never made directly, but

we could have asked long ago what is
changed in the process of transfer so far described when banks
create credit. But this question has been postponed in order to
discuss it together with the influence of a modern monetary system
on transfer.
Suppose the monetary system were such that on the basis of the
money generally acceptable between debtors and creditors (gold
or other international means of payment, bank notes or deposits
with the central bank for trade within a country) a greater amount
in not universally accepted money ^^ (bank notes and bank deposits
in international, bank deposits also in domestic trade) could be
Since

large

generally through banks,

created that

would

circulate only within the central area of the

Then a debtor might pay a foreign debt

in money, but not necessarily in internationally accepted money, so

debtor's or creditor's bank.

that the creator of the local

procuring the

transfer described above

results of

money would

still

face the

problem of

money. In this case the final

preceded by a preliminary transfer, the

rest of the international

which are

is

later nullified

by a reaction.

(aa)
Preliminary Transfer. The preliminary transfer is brought
about by a further price movement, which is added to that caused
by a shift in purchasing power.
13. I shall call a medium of payment that
wise restricted group " local money."

is

valid only within a spatially or other-

Sclf-Regidnlion

277

Shifting of the Price Level.

First:

price drop,

somewhat sharper about

its

An

additional and general

source, however, will occur

in the area of those banks that have received the

amount to be
transferred in credit money, whereas they themselves have to remit
in monetary reserves." There is first the local bank, which receives

amount

the

in

its

own

serving as regional

deposits and pays it out again in money

means of payment. ^^ Another is the regional

bank, which has to change its deposits into notes; finally, the central
bank, which receives notes and has to pay out gold. Suppose a

payment of

1,000 marks has to be made from Stuttgari to

suppose that in Germany gold is not the only medium
of payment but that there arises on it a superstructure of, say, twice
unilateral
Paris.

And

many

on the

basis of which a tenfold amount of deposits

the Reichsbank sends 1,000 marks in gold to
Paris it must collect twice as much in bank notes by raising its
discount rate (assuming that only the minimum reserves are kept
at all times)
The credit basis for the Bank of Wiirttemberg,
as

will

notes,

be created.

If

which sent 1,000 marks in notes to Berlin, has shrunk even more.
It must reduce the amount of deposits by 10,000 marks, either by
raising its rediscount rates or by direct curtailment of credits. Consequently prices in Wiirttemberg fall ten times more than if there
were no deposits, and in Germany twice as much as if there were
no bank notes. This true shifting of the price level occurs only
with credit creation; that is, with a hierarchy of different kinds of
money, whereas in a region with a uniform currency the price waves
started by a shift in purchasing power necessarily suffice for transfer.^^

Due Date (Immediate Partial Transfer).

in relative price level will not go so far, however, for

Second: Effects up to the

The change

counteracted by the increasing export surplus that it is supposed

But gold shipments exceed nevertheless what would
be required merely to cover the price waves. Thus, if only 50 marks
it is

to bring about.

some time

between the creation of the deposit and its disposition,

problem of whether the banks will intervene in the transfer
with short-term loans of the idle amount. In this way the debtor's bank could counteract the local deflation that he has caused, and the creditor's bank could anticipate the
local price inflation. But this would be wise bank policy only when it was certain that
the owner would not first dispose of his deposit; that is, if no further transfer
14. If

passes

there arises the additional

threatened.
15. For example, a transfer of reserves with the local Federal
Reserve Bank from
one commercial bank to another within the same Federal Reserve District. W. F. S.
16. Not only money rates, but all prices must have
at least the same tendency; not

merely some,

as with price waves. In this case the change in the price level
instead of only a fictitious average, as with price waves.

is

a reality

P^^f^

2y8

Trade

Three.

in gold were sent to France, on the basis of which 1,000 marks in

would be created there and destroyed in Germany,^' 950

deposits

marks' worth of goods would still have to be transferred. But this

is impossible at this price level as long as the two price waves are
On the contrary,
still in the neighborhood of Stuttgart and Paris.
Germany can pay punctually only if more than 50 marks in gold go
to France. In anticipation of this the Reichsbank raises its discount
rate, which immediately lowers the German price level up to the
frontier. For opposite reasons the Bank of France will just as quickly
force a general increase in prices. Whereas the price waves approach

one another slowly, the areas of falling and rising price levels meet
This
almost instantaneously (at least with neighboring countries)
goods,
which
probably
transfer
of
considerable
and
rapid
causes a
takes place chiefly in the border regions. We shall disregard the
capital movements that also are released and assume that 700 marks
in gold and 300 in merchandise are transferred at first, which must
be paid when the German payment comes due.
.

Third: Effects After the Due Date (Early Total Transfer)

Although the disturbing payment has now been completed, the
transfer is by no means finished. For the price shifts still continue:
the price waves because they are still too far apart to neutralize
one another entirely, and the relative shift in price levels because
there are still 700 marks in German gold in France. As long as
the change in the German relative to the French price level persists,
the German export surplus will continue beyond the original due
date. But now it must be paid by France in cash since the 1,000
marks have long since been paid, partly in gold and partly in goods;
that is, all but 50 marks of the German gold flows back from France,
price levels return to their former height,^^ the German export
surplus dries up, and after a further 650 marks' worth of goods has
been shipped the transfer of goods appears completed.

The

But the price waves started around

power are still on
their way, and approach one another. Even during this process
they are partially equalized, and completely so when they meet, as
has already been described. This levelling off of increased and
(bb)

Paris

and

17.

Thus

Final Transfer.

Stuttgart by the shift in purchasing

a gold shipment to this extent has

no further influence on

prices in

addition to that of the transfer of purchasing power.

18.

Only mathematically

is

the French

price

level

because of the continued increase in the amount of

versa for the

German

price level.

slightly

money by

higher than before

1,000 marks;

and

vice

279

Sclf-Regululion

decreased purchasing power represents the genuine transfer of goods

that takes place in any case, whereas a preliminary transfer, which
must be sharply distinguished from it, is added only with a certain
type of monetary system.^"

Thus 950 marks in goods were transferred

result of the change in relative price
time
the
as
twice: the first
of the price waves. Thus
neutralizing
levels, the second with the
France
orders an additional 1,000
If
there is one transfer too many.
one
of the two waves crosses
marks' worth of German products when
the frontier, she would have to pay partly in gold and partly in
goods, and finally up to 50 marks in the former and 950 in the latter.
Hence exactly as much French gold flows temporarily into Germany
as she lost of her own gold in the beginning, except for those 50
marks, which cover the price waves; this gold movement alone is
not reversible, because the price waves are not. Thereupon the
German price level rises above the French by as much as it was
below this before. So in the final settlement the exact mirror image
of the original preliminary transfer is repeated. Later the whole
process is again undone. Although technically necessary with credit
in a
creation (when it resulted in redeemable local money)
deeper sense it was superfluous. The preliminary transfer and the
subsequent reaction cancel out, and neutralization of the waves of
purchasing power remains the sole essential feature in the entire

The

(cc)

Reaction.

transfer.

2.

THE SIGNIFICANCE FOR TRANSFER OF THE EXTENT OF

CREDIT CREATION, AND OF DIFFERENCES IN CURRENCY

Various Possibilities in the Construction of Currencies.

money has but little international means of payment
as cover (as with credit creation)
or none at all (as with paper
currencies) payment on the due date offers a special problem for
the debtor as well as for the debtor country, which is solved by the
preliminary transfer. We shall now compare it for the whole scale
(aa)

Where

local

from complete

to zero cover, always

under the assumption that the

money must be created, which is redeemable in generally

money must be additional, at least in part; it must not
simply replace international money. The additional money must be local money.
The creation of more generally accepted money has different effects. The local money
must be redeemable, otherwise there arises no necessity to destroy it. Though not
necessary, it is usual tor this creation of local money to take place in the process of
19.

Additional local

accepted money.

credit creation.

The

local

Trade

Part Three.

28o

currencies of debtor and creditor countries are similarly constructed

and that the reserve ratio, like the exchange rate, is strictly

maintained.

Suppose once more that 1,000 marks are to be sent from Stuttgart
to Paris. (I) If transfers are made in hoarded gold and the receiver
hoards it in turn, no price fluctuation will be necessary.^" (II) If
the local money is 100 per cent covered by gold in both countries,
but this time the amount owed has to be withdrawn from circulation, both price waves due to the shift in purchasing power will
be started; the immediate payment, however, will likewise be made
at first almost entirely in gold, into which the local money accumulated by the debtor can be converted without further trouble.
(Ill) If there is a 10 per cent bank-note coverage behind deposit
money and the bank notes in turn are fully covered by gold, we
have the typical case of intranational trade, already described above,
Now the local money can no longer be
simply converted into gold; on the contrary, gold shipment reacts

also in international trade.

tenfold

on the amount

the creation of local

of deposits.

To

money must be

and brought about in the

other.

the extent of 10,000 marks

reversed in the one country

shift in the price level takes

Perhaps 200 marks will now be

transferred in goods, and only the remainder in gold. (IV) if the
gold cover of the notes is only 50 per cent a gold shipment of 800
marks will change the amount of notes by 1600 marks and the
amount of deposits by 16,000 marks. Price levels will shift still
more than in the preceding case, because the remainder that is paid
place in addition to price waves.

on the monetary circulation.

marks were transferred in gold, in

in gold has twenty times the effect

Whereas

in the

first

case 1,000

the second almost 1,000,

and in the third

at least 800,

it

is

now

a pure paper currency no monetary

perhaps 700 marks. (V)
gold will be shipped; on the contrary, the 1,000 marks will have to
be sent entirely in goods up to the due date. Moreover, there occurs
the greatest shift in price levels that can accompany the transfer
of this amount.
Decreasing reserve ratios or, which amounts to the same thing,
increasing the creation of local money, therefore means a growing
risk that this creation will have to be temporarily reversed. ^^ There

With

20.

This

is

of the creditor.

true only

immediately true when gold flows from the hoard of the debtor to that
If it flows from the hoard of one to that of another bank of issue it is

when both

neutralize the effects of the shift in purchasing

power by

their

credit policy.
21. It

is

therefore

no meaningless caprice

of the currency

mechanism when countries

281

Self -Regulation

but one alternative: a fluctuating exchange rate. Then the relative

change in prices takes place through this instead of directly.^^--^
As paper currencies are conceivable also without credit creation
and as fluctuations in the price level, either directly or through the
exchange rate, are especially pronounced with paper currencies, their
causes must lie even deeper than we have been assuming until now.
They consist in currency differences in the widest sense; that is, in
is

the fact that all, or at least the created, means of payment of the
one banking area are invalid in that of another bank.^* Thus there
with low reserve ratios have to resign themselves to wide price fluctuations. This

is

the

natural drawback of their extensive creation of credit.

22. This would not contradict in the least our assumption of a fixed reserve ratio.
For whether the amount of local money, and with it the price level, is lowered by
one tenth because of a gold loss of 10 per cent of the reserve, or whether the price of
gold, expressed in local money is raised by one tenth (for a 10 per cent depreciation

mean only this) so that the physically diminished gold reserve will regain its
former nominal value and the amount of local money can thus be left unchanged, the
actual reserve ratio is the same in both cases. We must accustom ourselves to the idea
that the individual features of the old-fashioned gold standard, such as fixed reserve
(See my article, " Die
ratios and exchange rates, do not necessarily go hand in hand.
can

vom Transfer neu

Lehre

1)

Nationalokonomie, CLIV [1941], 395,

may be accompanied by fixed or fluc-

gefasst," Jahrbiicher fiir

Paper currencies too

tuating exchange rates.
note

(no reserves)

23. The difference appears especially in the difficulties of transfer. When a creditor
country buys nothing from a debtor country in spite of an enormous drop in the
exchange rate, the latter cannot pay if the debt exceeds its gold supply, but its economy

had happened. With fixed exchange rates, on the other

hand, the debtor country will be bankrupt, not only externally, but also at home
goes on as though nothing

because of the severe deflationary

lies in sales

alone.

With

crisis.

It is clear that

the cause of transfer difficulties

dissimilar currencies they appear earlier, to be sure,

and the

smaller the reserve ratio, the greater are their secondary deflationary effects because
the fewer the installments that can be paid at first out of the supply of international

means of payments, the more the gold drain alters the amount of local money. The
more inflexible the reserve ratio, here more quickly the secondary effects begin to
appear, but they are avoidable with variable exchange rates and thus not to be
ascribed to the currency difference itself. Only for fixed exchange rates does F. W.
Meyer {Der Ausgleich der Zahlungsbilanz [Jena, 1938], p. Ill) correctly make the distinction that the gold cover may be insignificant for restraining the creation of money
but that for international payments, on the contrary, its size must be appropriate to
Moreover, even with the old-fashioned gold standard,
thanks to fluctuations between the gold points, price fluctuations will be replaced at
least in small part by fluctuations in the exchange rate, an advantage that would be
the gravity of the disturbances.

abolished by international clearing through BIS (Bank for International Settlements)

as W. Sulzbach has emphasized (" Der wirtschaftliche Begriff des Auslands," Weltwirtschaftliches Archiv,
24.

XXXII

[1930], p. 75)

Hence one must think here not only

of the

bank notes of various

countries, but

For instance, the notes of Federal Reserve Banks

in the United States are returned to the issuer when they reach another Federal Reserve

also of differences within countries.

Part Three.

282

Trade

a slow transition between gold and paper currency. The greater

the
the supply of international means of payment {gold cover)
smaller are price fluctuations at first and the greater the movement
is

of gold,

and

.^^-^^

vice versa (Table 15)

Table 15
Preliminary Transfer by

Construction of Currency
Deposits

Gold cover

Note

(fractional)

Gold

Price

of notes

circu-

reserves

movement

movement

lation

by notes)

Gold

II

Excess

Immaterial

100%

No

Zero

currency
III

100%

IV

99-1%

Yes
!>Yes

Zero

Paper currency

These

differences lose

some of

their significance, however, since

in all cases even the preliminary transfer

must be made in goods.

As a consequence price changes are more

lasting the smaller they

are; that

is

to say,

takes all the longer for the great stream of gold

it

The

remaining difference between transfer

is that with the former (paper
immediately
in goods, whereas
place
currency) the transfer takes
(intranational
similarity
with partial (gold currencies) or complete
trade or a world currency) it is distributed over a longer period.
to flow back again.

with dissimilar

District.

of issue.

sole

and similar currencies

This was the case also with the notes of the Bavarian and Wiirttemberg banks

The

deposit

money

of a

bank

is

invalid outside the circle of

Conversely, the circulating media of different currency systems

in practical dealings.

Thus American

bills,

and

to

its

customers.

may have equal

some extent Canadian

value

as well, are

usually accepted at face value throughout a rather wide zone along the border,

and

the coins, in particular, of both countries are so similar that they can be used in slot

machines on either side of the line.

25. Poor nations that can afford only a small gold cover therefore do well to go
over to " free " rates of exchange, which render the wide price fluctuations considerably

less

harmful.

on frictional difficulties, why

As the shift in the prices of
goods and the reaction of foreign trade to it require time, whereas nominal transfer
must take place immediately, in all cases the largest part of the payment, neglecting
short-term captital movements, will be transferred at first in gold until the transfer
of goods begins. Btit approximately the same gold movement has less effect with a
26.

There

is

a second

and

different reason, based only

price fluctuations are smaller with a high gold cover.

higher than with a lower gold cover. For this reason a high gold cover
able with fixed exchanges.

is

more

favor-

Self-Regtilatjon

The

283

sharper and
In brief, the more
uniform the currency, the more slowly preliminary transfer in goods
shift in price levels in the first case is therefore

shorter, in the second

weaker but more

lasting.

takes place."

Creditor and Debtor Countries Have Differently Constructed Currencies. When the degrees of cover are unequal, the
actual shift in price levels and the effect on each country, varies
with the degree of cover.-^ Table 16 shows, first, what we have
already seen in the last section: That the higher the gold coverage
with one participant in a transaction, or even with both, the larger
the portion of the resulting payment through gold movement alone.
(bb)

Table

TRANSFER WITH DIFFERENT RESERVE RATIOS

16.

Gold Shipment,
Marks from

Note
Coverage in
Gold,

Explanation:

The

10
10
40
30
40

10
40
10
50
40

Column
Column

Price

Price

Fluctuation

DiflFerence

A toB
A

2:

The

3:

over

-20
-26

+20
7

50
44

8
-16

+30

41

+ 10
+ 12

28

200
260
300
490
500

-12

order of magnitude, but not

its

31

gradation,

is

arbitrary.

marks in each country is

assumed. Deposits are supposed to be nonexistent. Country
A and Country B are supposed to be equally large.
total note circulation of 10,000

table shows further that

when only one

of the participants

3) has a greater coverage than in the comparison case

fluctuations
are smaller for him, and greater for his partner,
price
(1),
high reserve ratio gives the same gold flow a smaller
than in case 1.

(cases 2

and

effect

on prices than a lower

27. In

ratio. ^^

our former example it took place slowly outward across the Wiirttemberg
were valid on both sides. Beyond the national frontier it

frontier, because reichmarks

took place quickly, because of dissimilarities in currency.

28.

Temporary differences in the full utilization of note coverage resemble lasting

With a 50 per cent gold coverit. These differences may be unintended.

differences in

may

cause a change

on the upswing,

in the other of

age in each of two countries the shipment of 1,000 marks in gold

of 2,000 marks in the

hardly 1,000

if it is

amount

of notes in one

if it

is

in a depression.

This among other things explains the slight reaction of prices in gold movements in the United States and France, where the actual, if not the legal, gold coverage
of notes is very high and, in addition, deposits in central banks have to be partly
29.

Part Three.

284

Trade

It forms a cushion against the effects of cyclical changes originating abroad and of international capital movements. It moderates
deflationary crises and inflationary upswings, though in return it

prolongs them. Indeed, it even mitigates the deterioration of the

barter terms of trade of the debtor (that is, his increased cost of
For we do not get the same
imports compared with his exports)
result when we interchange the reserve ratios of debtors and creditors
.

(compare cases 2 and 3) If we were to assume that in case 2, as in

3, 300 marks in gold had been shipped, and that prices therefore
fell in A by 30 per cent and rose in 5 by 8 per cent, so that in comparison with case 3 only the roles of A and B had been interchanged,
the end result would still not be the same. In contrast with the
.

case

original situation

(=

100)

in case 2 the prices in

A would

stand

at 70 and in B at 108, or 54 per cent above those in ^; in case 3 at

92 in A and 130 in B, or only 41 per cent above those in ^. If
equilibrium prevails in case 3; that is, if the price difference is just

700 marks' worth more exports from A to B, which

together with 300 marks in gold is exactly equal to the amount of
the debt; then the export surplus in case 2 would necessarily be
more than 700 marks. The price change therefore went too far;
less than 300 marks in gold would suffice to compel the remaining
transfer of goods. Nevertheless the gold shipment is large enough
to raise prices in B by 44 per cent above those in A, instead of by

enough

to cause

only 41 per cent as in case 3.

Interchange between a country with paper ^ and one with gold
currency takes place according to the rules that prevail with different

Gold shipments are reduced to a minimum.^^ We

have already discussed the different price fluctuations.
Of course these differences are only temporary. (1) The larger
reserve ratios.

covered by gold.

The

great accumulations of gold in these countries are not explained

thereby, since according to the table

it is

not the creditor whose actual coverage

is

far

debtor (Case 2) who receives large shipments of gold, but the one
In addition this gold should
that has a debtor also with a high coverage (Case 5)

above that of

its

flow back to the country

whence

it first

came.

Here fixed cover excludes an exchange stabilization fund consisting of monetary

which with variable reserve ratios moderates price level changes even when the
country formally has a paper currency.
31. The same is true when paper currency is associated with variable exchange
rates. If the debtor country has a gold currency, whereas in the creditor country the
price rise includes also the commodity gold, gold will flow temporarily to the latter
from the debtor country and from other countries as well. Conversely, when the
debtor country has a paper currency, so that its price fall includes that of gold too,
commercial gold will flow into the creditor country and into other countries with a
30.

gold,

fixed gold price.

285

Self-Regulation

and therefore the smaller the price and comfirst, the longer will these movements persist
before the preliminary transfer has been completed entirely in goods.
the gold shipments

modity movements

at

Thus higher note coverage does

7iot

decrease the necessary transfer

of goods, hut merely distributes it in time. As a result, the terms

of trade of the debtor remain unfavorable longer, the less they
deteriorate at first because of large gold shipments. This means

however, that the same quantity of goods can be transferred at

lower cost on the whole when the transfer is distributed over several
economic periods. Thus higher note coverage lowers the cost of
This is not of much importance, of
preliminary transfer.
(2)
course, as long as these costs are

made good

in the reaction.

But

with different constructions of currency this need no longer be

invariably the case. Consider once more situations 2 and 3 in Table
16. With the preliminary transfer the terms of trade of A deteriorate
more (price difference 44 per cent) than they improve in the reaction
(price difference 41 per cent) .^- Accordingly, the statement that
higher note coverage decreases transfer costs has a truer meaning
than would appear at first sight. In the final judgment it should
be remembered, however, that the higher note coverage, too, had
to be accumulated at some time, with transfer losses or the foregoing of transfer gains. When this process, which has generally
occurred far in the past, is taken into account also, it turns out
that in the final analysis the construction of a currency is immaterial
for the transfer.^^ If the past is disregarded, however, the possibility
cannot be rejected that despite the cost in interest of a large gold
32.

A and B must

supposed

to

be imagined as interchanged in case 3 of the table since we are

be dealing with the same participants as in case 2, only with transfer in

the other direction.

33. In

common

with Lutz,

F.

W. Meyer ("
XLIX

rungsform," Weltwirtschaftliches Archiv,

Devisenbewirtschaftung
[1939], 415-471)

als

the thesis that the gold standard could no longer function today because,
things, countries often

considerations.

endeavor

to sterilize the effects of gold

neue Wah-

has skillfully defended

among

movements out

other

of cyclical

In other words, they act as though their reserve ratios were consider-

Now

although this results in larger gold shipments, most of the gold,

even with protracted unilateral payments, soon flows back again to the debtor, whose
ably higher.

prices

need

compared with those of the creditor and in contrast with the prevailing view,
than if gold movements could affect the credit structure (see Table 16)

fall less

remains true nevertheless that the construction of a currency (and the

sterilization of gold movements means only a supplementary change in this construcBasically

tion)

is

it

immaterial for the transfer in the final analysis.

policy of sterilization

becomes dangerous only when it attempts also to neutralize the shift in purchasing
power proper (not only its multiple effect on the credit structure) that is, when it
tries to prevent the origin of the waves of purchasing power that bring about actual
;

transfer.

Part Three.

286

reserve, price fluctuations

much

Trade

transfer costs hit poor countries very

and

harder than rich ones.

With

monetary standards (that is,

monies
that
are only partially covered
when there are various local
by international means of payment) even those wholly unconcerned in a transfer (the entire debtor and creditor country)
co-operate at first with the individual economies concerned (debtors
and creditors) in making the transfer. The central bank of the
debtor must make the necessary international money available on
the payment date, and with a fixed reserve ratio this can be done
only if it recalls or devalues a certain amount of its local money.
Both courses release part of its international money, one by decreasing the amount of local money to be covered, the other by
increasing the value of covering international money. Both provide
it, in addition, with more international money by reducing prices
in the region where its local money circulates compared with those
(cc)

Summary.

different

abroad, thus increasing the export of goods. Compared with the

second (additional exports) the first source of gold (freed cover)
flows more abundantly the higher coverage, especially its own. With
fixed reserve ratios the creditor bank must support these endeavors
,

of the debtor bank.

All these events are repeated in the opposite

and leave no permanent

direction during the reaction

3.

effect.

APPLICATION OF THE NEW THEORY

Our train of thought carries such wide implications, yet corresponds so little with the traditional view, that it may be good to
apply it to a few important examples.
(aa)

Do

International Obligations of a Part

the Whole?

Does
foreign exchange
Does it shift the

Mean

Injury

to

our preceding example, reduce the

for the whole country by its payment abroad?
Stuttgart, in

costs of transfer to others?

The

old theory of

international trade, which regarded the preliminary transfer as the

sole

and

tionably

final one,
it

is

would have

to

answer in the affirmative. Unques-

the function of an increase in the

rate to expedite the transfer

by drawing in

German discount
who are not

also those

concerned in it; that is, all those within the sphere of influence of
the Reichsbank, not only those situated in the Stuttgart wave of
falling prices. It worsens the barter terms of trade also for those
who either have already shifted their share in the loss of purchasing
power to others or who, with a uniform currency, would have had
nothing at all to do with the transfer. But we now know that this

Self-Regulation

287

is only temporary, and that it will be compensated

by an equally great improvement. The contributions of nonparticipants in the transfer are not permanent. The whole is not
burdened by the acts of individuals.

deterioration
later

The Results of Transfer Aid for Those That It Favors.

(bb)
In contrast to the situation where Paris and Stuttgart lie within an
area in which the same simple metal currency is valid and nothing
occurs, therefore, save the final transfer, additional price fluctuations

appear in Stuttgart also. The smaller the sphere of influence of the

central issuing bank, the sharper are these fluctuations. If Wiirttemberg had still had its own issuing bank and had sent gold directly
to London, the rise in the Wiirttemberg discount rate would have
been much greater than in that of the Reichsbank, because the same
amount of gold would have meant for little Wiirttemberg a disproportionately greater loss than for the whole country. Compared
with this situation (case A) the co-operation of the entire country
(case B) has moderated the price fluctuations in Wiirttemberg.^*
Hence in case B prices in Wiirttemberg are higher, and in the rest
of the country lower, than in case A. As a consequence it takes
longer for Wiirttemberg to achieve the export surplus required even
for the preliminary transfer. The co-operation of the entire country
does not relieve Wiirttemberg of the preliminary transfer,^^ but
,

spread

it over a longer
period of time. Prices in Wiirttemberg have to remain lower for a
longer time, though the decline is less. Nevertheless, even in case
B they are still below German prices as a whole: (a) because of
decreased purchasing power, and [h) because of a restriction in
bank credits consequent upon the decreased circulation of notes due
to this decline in purchasing power. This restriction in bank credits
is in addition to the general national restriction, which is associated
with a reduction in the gold reserve.

facilitates this transfer in so far as it helps to

The Extent

(cc)

of

the Preliminary

Transfer.

For various

reasons the preliminary transfer does not assume the proportions of

the final one.

1.
It does not take place if debtors and creditors make early
arrangements in anticipation of payment, which unintentionally

34.

As a

Unless similar disturbances started simultaneously in

rule,

the world)
35.

however, the larger the currency area

,

the

more

For so far

of these will be opposite

as deposit

money

exists

all

parts of the country.

(at least until it includes

about half

and compensatory.

such a preliminary transfer

still

be carried out between Wiirttemberg and the remainder of the country.

remains to

Trade

Part Three.

288

provide the debtor bank with additional foreign exchange until the
date of settlement.^ If we disregard capital movements because
they merely postpone the problem, the debtor must bring about an
export surplus of the size of the payment. This may be done by
decreased buying (his imports) as when he keeps a smaller stock
on hand; restriction of his enterprise; relinquishment of plans to
enlarge his factory, and the like; and by increasing his exports.
The former lowers wages and the prices of imported goods; the
,

latter,

the prices of the debtor's products.

In expectation of payment the creditor also will make certain

arrangements. He will install new machines, hire workers, and order
an addition to his building. This will raise somewhat the prices of
his imports, and local wages in particular, even before the actual
payment. Thanks to this anticipatory behavior on both sides there
is, on the one hand, a German export surplus in consequence of
the mere shift in purchasing power; for example, because the debtor
restricts among other things his purchase of goods that formerly
were imported into Germany.^^
On the other hand, price waves begin their course, which is
accompanied by a gradual transfer of goods, even before the transfer
of cash is to be made. It is important to note that this need not
necessarily be a final transfer; that is, an equalization of increased
and decreased purchasing power. As we have already seen, the
movement of the waves of purchasing power is nothing but the
result and cause of a lasting transfer of goods. It might be called
an " advancing wave transfer." As soon as the wave of price reductions, or probably in this case merely its forerunner, has passed
the national frontier, the transfer of goods is to this extent completed for Germany, although the final equalization may not occur,
perhaps, until later, and far from the frontier, in Lorraine or even
deeper in France. So far as shifts in purchasing power and price
waves caused a final transfer of goods across the German frontier,
a certain amount of money is already available on the date of payment, and to this extent a " preliminary transfer " is superfluous.^^
36.

of

Applied

(Paris)

to

our former example, the preparation for (Stuttgart) or expectation

a transfer of cash increases the supply of foreign exchange in Berlin, and

only with the remainder of

its

demand

rate of exchangs for the franc until

37.

it

for foreign

exchange does Stuttgart

raise the

reaches the upper gold point.

In countries that specialize in the production of one or a few goods, as

the case in South America for example, a falling off in the

demand

is

often

one of these
exports may automatically cause a decrease in imports. See H. Backe, Urn die Nahrungsfreiheit Europas (Leipzig, 1942) p. 75.
for

38. Strictly speaking, therefore,

even in a

final transfer of

goods one must distin-

Selj-Begvlation

289

The preliminary transfer can be replaced to a certain extent

2.
by short-term capital movements. These not only postpone the
transfer problem temporarily, as followed from the classical view,
but obviate the (strictly speaking) superfluous preliminary transfer.
This is desirable because of the unfortunate secondary effects of
shifts in the price levels. The following types of credit have this
result: (I) Those based on a shift in purchasing power or the waves
of interest to which it gives rise. The credits must expire as soon
as the reaction would have set in. In so far as this serves to discharge
the credits (at most up to half the debt) the preliminary transfer
becomes superfluous. (2) Credits between central banks, except
when not only is the preliminary transfer thereby avoided but the
effects of waves of purchasing power are compensated in addition.
Otherwise preliminary transfer would not be avoided, but merely
postponed. In our example either the credit must not exceed 950
marks, else the Reichsbank would be able to bring the 1,000 marks
withdrawn from circulation in Stuttgart back into circulation by
granting an equal amount of new credits; or the 1,000 marks can
be credited in full if Berlin withdraws them from circulation and
sterilizes them, and Paris, nevertheless, pays them out to the buyer.^^
The credit must expire as soon as one of the two waves of falling
prices passes the German frontier, thus providing an additional
amount in foreign exchange of 1,000 gold marks. *" (3) Partial
crediting of the debt through the creditor (payment by installments)
With continuing payments a preliminary transfer is necessary only until the first price waves have reached the frontier.*^
Then the yield of foreign exchange from the passage of price waves
beyond the frontier is sufficient to make good the current transfer
,

between a mere " advancing wave transfer " and a final equalization of
and decreased purchasing power (concluding, or final, transfer of goods in
the narrow sense) and, (2) in both cases between such a transfer within and beyond

guish:

(1)

increased

currency boundaries.

Example: obligatory clearing credits. See my article, " Die Lehre vom Transfer
Nationalokonomie, CLIV (1941), 400 f.
40. This recalls the procedure employed with the reparations payments, except that
then the tribute money collected by the Reichsbank did not have to be sterilized upon
which everything depended.
41. If payments are repeated at sufficiently short intervals the waves become a continuous price drop. The price differential around health resorts during their season,
for example, is of this type. The high prices in such places result not only from the
influx of purchasing power, however, but also from the fact that their season is very
short. It is also important that production for their own consumption, like that in
towns populated by rentiers is comparatively small, so that their supply areas have to
be greatly extended during the season.
39.

neu

gefasst," Jahrbiicher fur

Part Three.

2()0

Trade

From this moment on the regions that are not concerned

are eliminated again from the transfer mechanism. The reaction
does not follow, of course, until payments have ceased. Unlike those
described, such credit movements, which are due to the discount
of cash.

but only a special

form of the preliminary transfer.^^
3.
If some waves of purchasing power pass beyond the German
frontier after the due date, but before all German gold has returned,
an appropriate amount of gold serves to pay for the German exports
which have increased with that passage. To this extent the export
surplus thus disappears because of the relative change in the price
policies of central banks, are not a substitute for

The interjerence subsequently reduces the extent of the preliminary transfer of goods, and consequently also the reaction.*^

level.

Transfer Aid Necessary? When the legal or economically advisable reserves are fully used in the creation of notes
or deposits, the bank authorities cannot chose whether or not to
co-operate in the preliminary transfer. With a reduction of the
reserve they must raise the discount rate. If, on the other hand,
*^
the reserves are sufficient, so that both central banks can sterilize
the gold movements, the situation is exactly as with a purely metallic
currency: The preliminary cash transfer is not, nor need it be,
associated with any sort of transfer of goods. It is accomplished
Is the

(dd)

simply out of the excess reserves, and the circulation of money is

decreased only by those means of payment that are withdrawn from
circulation when the debtor accumulates the amount to be paid.
It is not quite so easy to judge the absence of the transfer aid
when only the creditor, but not the debtor, can sterilize gold movements; that is, Avhen these lead to a fall in the debtor's price level.
This drop results in a smaller export surplus than if prices in the
creditor country had risen at the same time. Consequently a larger
Die Lehre vom Transfer iieu

42. See "

CLIV

(1941)

391

gefasst," Jahrbiicher fiir

Nationalokonomie,

f.

43. See my article " Um eine neue Transfertheorie. Zur Verteidigung der alten
Lehre durch Fritz Meyer," Jahrbiicher fiir Nationalokonomie, 1943, pp. 23-25, a reply
to Fritz Meyer, " Eine neue Transfertheorie? " Archiv fiir Wirtschaftsplanung, I (1941)

171-180.
44. It

is

only reasonable to prevent a shift in price levels by foregoing a change in

the discount rate, but not to prevent price waves by open market operations. Moreover,
it would be a mistake to believe that the effect of an influx of gold on purchasing
power can always be compensated by issuing government bonds instead of bank notes.
If the economy wants more money, credit will be created to the limits of possibility,
the bank discount rate will rise and attract foreign money, more gold will flow in,
and it will become increasingly difficult to counteract its effects by issuing more bonds,

because the prices of previous issues have fallen.

291

Sdf-RegulalioTi

part of the preliminary transfer will consist at first of gold, and a

smaller part of goods, despite a sharper drop in prices. The sterilization policy of the creditor hurts the debtor through the unfortunate
effects of such a particularly great and lasting fall in prices. In the
case of large

sums the

severity of the price decline,

success of the preliminary transfer depends

and with it the

upon whether

essentially

or not the central bank of the creditor provides transfer aid.

Whom Do Transfer Costs Affect? The advance of both

(ee)
waves of purchasing power is associated with shifts in prices, and
hence in incomes, that are partly their result and partly their cause.

We

and " transfer gains." As for the

must be distinguished: (1)
cases
two
two
consumers,
pure
that is, if we deal with
If debtor and creditor are
payment,
offsetting
the effects of
payment without an immediate
a transfer are exhausted by a temporary fall in prices where the
debtor reduces his purchases, and a rise where the creditor buys
more. All purchases become cheaper for the payer and dearer for
the payee. The debtor makes a transfer gain, the creditor suffers
a loss. Their suppliers are affected in the opposite way. (2) It is
different when those principally concerned are themselves producers
and a debt for goods is to be paid, as was assumed in connection
shall call

them

" transfer costs "

parties chiefly concerned,

with Fig. 57. Then it is probable that the debtor will bear a transfer
burden. For he has bought at a higher price from the creditor B3,
though more cheaply from his former supplier B, as set forth above,
and he will reduce his own prices in order to raise the additional
amount. Conversely, the creditor will make a transfer gain, which
will be limited, however, by the fact that his increased demand
makes the services of his workers and sellers more expensive. The
change in the selling prices of those chiefly concerned diminishes,
though in small measure, the losses or profits of their sellers in so
far as these in turn buy from them. Even for those chiefly concerned, this business connection means too little for the change in
purchasing power of their workers and sellers to be noticeable at
first. With time, of course, both will shift part of their loss or gain

power to others in the manner already described,

thereby diminishing their disadvantage or advantage. At the same
time, though to a smaller degree, the price movement will be passed
on to the regular customers of those chiefly concerned, which
increases their transfer gains or losses.*^ The remainder taking part
in purchasing

45.

The

business

is

severity of the repercussions varies according to

how

connected with the source of the movement.

It

strength will decrease with distance from

it.

is

closely

and

elastically

probable that their

Part Three.

2()2

Trade

in the advancing wave transfer will be less affected by the losses

and gains the farther removed they are iTom the points of origin,
for price changes decrease with distance, as we have seen. But it is
not true that all those in the region of a wave of rising prices will
make transfer gains and all those in other regions "\vill undergo
transfer losses. If the environs of Paris and Stuttgart are divided

who made

into rings those buyers in every ring about Stuttgart

and the sellers who have to force

the advance
the advance will lose. Conversely around Paris. Now as almost
everyone is both buyer and seller, he makes transfer gains only
when he loses less by the cheapening of his own goods than he gains
through the cheapening of other goods. This is the case with Stuttgart in all except the two innermost rings, which include the debtor
and his suppliers, since the transfer costs decrease from ring to ring
and buyers thus gain the higher transfer costs from the ring preceding their own, whereas sellers bear the lower costs of advance
to the next ring. The sum of these net gains, which decrease with
possible will gain,

distance,

is

The

equal to the

loss

sustained by the suppliers of the debtor.

German

frontier remains to
Buyers in the Germ-an frontier ring gain from Germans,
sellers in the preceding ring, whereas sellers lose to
that is, to buyers in the French frontier ring. Thus in

situation at the

frontier ring, as in all

Germany

others,

whole a transfer

there

is

be

clarified.

is, from
Frenchmen,

that

the

German

a transfer gain, but for

though it is not very

away from Stuttgart.*^ In contradistinction to political frontiers, no income shifts appear at all on
economic frontiers, where the two waves of purchasing power meet,
because here the final settlement is completed without changes in
as a

loss results,

great because the frontier lies far

price.

One more

significant error in the old theory remains to be

In so far as the creditor buys simply what the debtor
has relinquished, the transfer of goods was thought to succeed
through mere transfer of purchasing power without change of price.

corrected.

This argument disregards the importance of distance. In Fig. 56,

page let BA^ be the radius of the former supply area of the
debtor, and let J5,/ii be the same for the creditor. Because of the
transfer of purchasing power, prices fall in B., whereas they stiffen
in ^1. The new price cones are hatched. The region between Ai
and A.., which formerly supplied B>, does indeed fall to the creditor;
,

46.

The

because

it

old theory recognized only this loss at the fiontier, and overestimated

was equated with

confused the

losses

tlie losj

of the seller in the innermost ring.

Moreover,

during preliminary transfer, later made good, with the

it
it

final losses.

293

Self-Regulation

at one single point C is the price received by the seller

old
one.*^ To the right of it the sellers lose, to the left of
still the
it they gain, exactly as we have concluded in general for regions

but only

with a

loss

or gain in purchasing power.

Significance of the Size of a Country. All bank customers,

especially those of the central bank, constitute a transfer community, since means of payment circulate among them that are
(ff)

and

invalid with outsiders.

The

smaller such a

community

is,

the

more

but because of the compensatory

effect of the reaction this fact can be of consequence only as a result
of frictional difficulties. For it is not countries or service areas of
banks that take part in exchange and are affected in the end by its
mechanism, but individual economic units. Geographic differences
is it

at first affected

by a

transfer,

prevail eventually against

at first

movements

nationwide [see (bb)

(gg)

Depreciation.

that for technical reasons are

].

Like a change in the discount rate of the

central bank, a change in the exchange rate affects an entire country

even when caused by only a part of it. Suppose that upon repayment
of a large loan by a Berlin firm to a London banking house, the
Reichsbank prefers depreciating the exchange rate by 20 per cent
to a sharp increase in the discount rate. As soon as the preliminary
transfer has been completed the exchange rate goes up again to its
former level, and even higher during the reaction. If the Reichsbank
wished to maintain the lower rate, German prices would have to
rise instead. When through depreciation one aims merely to avoid
such price fluctuations, it is wrong to adhere forever to the lower
rate of exchange.
Let us compare exchange depreciation to facilitate transfer with
the results of a depreciation to revive the economy. If a 20 per cent
is assumed in both cases, the price levels will eventually
by 20 per cent in both. But what will happen before matters
have gone this far is decidedly different. (1) According to extent:
With transfer the price level rises in the reaction by as much as
40 per cent, but with a depreciation for cyclical reasons never by
more than 20 per cent. (2) According to direction: With transfer
the calculated price average falls at first because of the wave of
lower prices, and again later when the reaction subsides (from 40
whereas with a cyclical revival
to 20 per cent above the old level)

depreciation
rise

47.

Only when the supply

in

expressed solely by the fact that

will

no price change occur.

Aj^

Z?i

is

very large, so that the shift in

and B are now supplied

demand

is

in different proportions,

Part Three.

294

and without the

continuously.

Trade

necessity of a reaction, the price level always rises

Geographically:

(3)

The manner

in

which the

rise

the same in both cases, to be

accomplished
to be examined more closely in the case
of a depreciation for cyclical reasons. Depreciation lowers domestic
prices at first compared with those abroad. The foreign, and with
it the total demand increases; so, too, do prices therefore in both
domestic and foreign currency. But they do not rise uniformly.
As a rule, though not necessarily, the smaller exports were before
depreciation relative to domestic sales, the less important will be the
increase in foreign dem.and and the less prices need rise in consequence. For this reason the price rise, and with it the revival is
regionally quite different at first, but with time it is diffused from
the region and the branches of business first affected, to all equally.
At last, if we disregard secondary cyclical effects, all prices except
interest rates will rise in the same proportion as the rate of exchange
has been lowered.
This second phase is hard to demonstrate in concrete cases,
because it appears so late that new events distort the picture again.
The first phase, however, is well shown by the example of the
American depreciation. In 1935, as compared with 1932, the year
preceding the depreciation, the prices of such typically domestic
goods as fuel and furniture rose least, the former by 4^ per cent.^^
Industrial goods of which a few were exported rose more: e. g.,
textiles by 29 per cent. The greatest increase was shown by agricultural products with a high export quota; cotton, for example, of
which more than half the crop is exported, rose in price at New
Orleans by 87 per cent.^^ The still greater increase in the case of
wheat, almost none of which was exported, was caused by failure
of the harvest.^" Measures to limit the acreage under cultivation
also played a role, though not a decisive one.
Hence depreciation benefited most America's great depressed
area, the cotton-raising South Avhich, conversely, had been hardest
hit earlier by the depression. The situation of the cotton grower
was naturally communicated to the prices of the goods he used, but
not in such a way as to change them immediately and uniformly
throughout the whole United States; on the contrary, they reacted
most strongly first at the seat of the cause. Thus up to 1932 the
retail prices of food had fallen 33 to 37 per cent below those of 1929
of the price level

is

sure, yet instructive

48. See
49.
50.

U.

is

enough

S. Statistical

Abstract, 1936, p. 299.

Department of Agriculture, Agricultural Statistics, 1936, p. 83.

See S. E. Harris, Exchange Depreciation (Cambridge, Mass., 1936), p.
U.

S.

341.

295

Self-Regulation

in the individual census regions comprising the main industrial belt:

New England, Middle Atlantic, East North Central. By comparison,

they had fallen in the cotton belt, i. e., the South Atlantic, East South
Central, and West South Central States, by 35 to 39 per cent. Conversely, in the industrial area in 1935 they were 15 to 20 percent and
in the cotton belt 20 to 22 per cent above those of 1932."

The same

result

emerges in a comparison of the cost of living

for workers in six cities of the industrial area

New

(Boston, Buffalo,

York, Philadelphia, Chicago, and Cleveland)

six in the cotton belt

with those for

Memphis, Mobile, New

Between 1929 and 1932 they fell 20 to

(Atlanta, Houston,

Orleans, and Savannah)

26 per cent in the industrial area, to 22 to 27 percent in the cotton
belt, and rose 3 to 6 per cent in the former in 1932-1935 and 4 to
.

10 per cent in the latter.^It must not be forgotten, however, that the export quota merely
determined the rate at which the prices of various goods eventually
adapted themselves equally to the depreciation. With transfer, the

price average adjusts itself in the described manner more slowly

and among regions less uniformly. The fault lies with the wave of
lowered prices, which is added to the true shift in price level and

changes the arithmetical average.

First,

it

is

clear that the original price fall relative to other

Germany

by loss of purchasing
power (spreading outward from Berlin in our example) is greater
by the effects of this loss. But even within the Berlin economic area
countries in the part of

In the

there are differences.

industries decline.

Even

first

later,

affected

place, the prices of the repaying

when

the price drop

ferred to other businesses, a difference remains

is

being trans-

compared with the

debt-paying branches. The change in local prices depends, therefore,

entirely on the industries of the place concerned: those primarily
affected by the lower prices, those only moderately affected, or those
that are wholly untouched. The price level of the Berlin area does
not fall evenly, but by separate drops here and there.
Even within the market areas of the industries particularly
affected the price drop is not uniform. As a rule, production costs
in the industries concerned have to fall more sharply (though not
equally in all branches) than shipping costs, which also depend
upon sales in other businesses. Consequently prices drop by the
51. Calculated

from U.

pp. 8-9.
52. Calculated from U.

Bureau of Labor

Statistics.

S.

Bureau

of

S. Statistical

Labor

Statistics,

Retail Prices, Serial No.

Abstract, 1935, p. 298.

384,

Original data from the

Part Three.

2g6

Trade

largest percentage at the site of production and less sharply on the

borders of the market area; because freight, which has hardly
decreased, is an important factor there. In addition, the whole
wave of lower prices eventually draws away from Berlin and flattens

out as

it

hits other places.

Finally, instead of paying attention to these local differences, let

us compare the calculated average for the economic landscapes of

Germany regardless of the causes of its change. Although German

whole fall at first compared with foreign prices, those in

once compared with those in Berlin, if we regard
representative of the part of Germany affected, and Munich

prices as a

Munich
Berlin as

rise at

temporarily unaffected part; that is, not yet

reached by the wave. Gradually the depreciation, which for no
reason at all has lowered Munich export prices also by 20 per cent,
leads by way of the resulting export surplus and decline of imports
to the restraining rise in the price level that has been described

as representative of the

Penetrating from the frontier to the interior of Germany,

fall in the exchange rate for the whole country
in so far as this is not actually affected by the ebb in purchasing
power originating in Berlin; and later, during the reaction, more

above.
it

equalizes again the

than equalizes it. This last difference in price levels persists, even
though between changing regions, until the wave has receded from

Germany.

From

all this it

follows that repayment of a foreign loan

first raises

and then lowers the German price level on the average; but that
within Germany, within its great economic areas, within individual
small market areas, and even within single enterprises something
entirely different takes place. ^^

The

difference

started in Berlin.

is

not merely a matter

Munich

will reverse what

This example shows what a great number of

of subtle variations; they go so far that

the concept " general

price level "

conceals. But, to
return to our starting point, it shows above all that a depreciation
due to a transfer works quite differently from a depreciation to

differences

revive the economy.

Fluctuating exchange rates present the transfer theory with yet

another difficult problem: The two waves of purchasing power seem
no longer equivalent in value terms; how, then, can they equalize
one another? Suppose 1,000 marks originally equal 1,000 francs. But
because of exchange depreciation the German debtor has to pay
be seen in meteorology. Within widespread weather
German cities often maintains its own
entirely distinct climate, which shares with varying intensity in a change of weather.
53.

Something very similar

is

to

conditions every street and every "square in our

Self-Regulation

297

1,100 marks for 1,000 francs. On the other hand, with the higher
exchange rate that results from the passing of the ebb in purchasing
power across the border, 1,100 marks might now correspond perhaps
to 1,300 francs. An ebb in purchasing power of 1,300 francs and a
tidal wave of only 1,000 francs would then meet in France.
But as a rule events do not occur in this way. The fate of the
true Stuttgart ebb in purchasing power of 1,000 marks and of the
additional Stuttgart exchange loss of 100 marks is different. The ebb
is locally limited, whereas the corresponding increase in purchasing
power ^* among exporters, who export more, and importers, who
import less, is distributed throughout all Germany and raises the
price level everywhere.^ Exchange profits and losses are similarly

distributed spatially and the Stuttgart loss is generally indistinguishable from the others. It is decisive that the small waves of ebb
and flood that arise everywhere in Germany because of the altered

exchange rate equalize one another more

rise in level

great

and the

wave has

just

than do the general

Only at first, when the
do the ebb and the excess
easily

local Stuttgart ebb.

begun

purchasing power that

its

course,

not yet absorbed through higher prices,

equalize one another. The greater part of the ebb, hower, will reach
the national frontier. The small exchange waves, on the contrary,
cancel out within a short distance luiless the Stuttgart disturbance
Thus the essential processes in the transfer are
is unusually severe.
the same with fixed and fluctuating exchanges.
is

(hh)
Does It Make Any Difference in What Currency a Debt
Payable? Whether in that of the creditor or the debtor? It is
obviously immaterial for the countries concerned whether the
creditor or the debtor starts the fluctuations in price level or exchange rate in the process of changing one currency into another.
With a fixed exchange rate it makes no difference to either, but with

Is

variable rates the one that

makes or

money

loss.

bears the exchange

receives

^^

payment

in foreign

54. It does not leave Germany, as would be the case with a fixed exchange rate
through the shipment or the destruction the money.
55.

On

56.

This

the average
is

it

does not

rise, if

improbable, however, for

he does not wish

to

the ebb

is

who would

also taken into account.

desire

payment

spend? But so far as the statement holds, and

for foreign deposits in banks,

movements because

it is

in a currency that
it

holds especially

true that fluctuating exchanges hinder international

risk involved.
With paper currencies,
added to the general reasons why capital is less mobile
than within countries. But on the whole one can agree with Ch. R. Whittlesey (" Internationale Kapitalbewegungen bei gebundener und freier Wahrung," Weltwirtschaftliches Archiv XLIV [1936]) that the restraining effect of free exchanges on the international movement of capital has been greatly exaggerated in the past.

capital

of the exchange

therefore, special reasons are

ParL Three.

2q8

Trade.

Unilateral Waves of Purchasing Power. A local upswing

(ii)
can release a flood of purchasing power to which no ebb corresponds
anywhere. As in the normal case, goods are drawn into the center
concerned without necessarily having to be paid for by a corresponding increase in exports. Payment may be made out of hoards,

still more striking example is the sudden and often

great
of prices in newly discovered gold fields.
increase
fantastic
appears,
power
purchasing
of
augmentation
local
and unexpected

for instance.

with which the local production of goods does not keep pace. Trade
with the outside world must first be established. In the beginning it
is very much harder and more expensive to import goods than to
export gold. As the flood of purchasing power is not equalized by
an ebb it is gradually distributed rather uniformly throughout the
world, and may lead to a world-wide boom. For otherwise than with
a normal transfer, prices will rise everywhere and permanently.
Equalization of the Balance of Payments. Price movements are never necessary for mere equalization of the balance of
payments, because since every claim must be paid, deferred, or
canceled, it is always equalized. Only when the equalization is to
be brought about in a certain way, that is, otherwise than through
(kk)

deferment or default, may it become a problem. With identical

currencies even such a fair equalization still comes about automatically; since, for example, if the export (that is, the income)
of an individual decreases, he must necessarily restrict his purchases
correspondingly or, if he can, part with some of his savings. For the
equalization of payments between transfer communities, on the
contrary, it is not enough that the individual fulfill his obligations
since his payments, which with similar currencies would suffice, are
now made in local money as a rule," and must first be converted
into generally accepted money by special measures. Thus only with
different currencies does the principle of a fair equalization of the

balance of payments constitute an ordering, even though but temporarily effective, force.

Comparison with the Old Transfer Theory. ^^ The difference between the two views appears clearly in the different
(11)

57.

For an exception see

58. See

my

p. 288,

note

critical discussion of it

37.

("

Eine Auseinandersetzung uber das Transfer-

problem," Schmollers Jahrbuch, LIV [1930], 1093-1106 [typographical errors corrected

in LV, 192]; its defense by F. Meyer (" Eine neue Transfertheorie? " Archiv fur Wirtschajtsplanung, I [1941], 171-180); and my reply (" Um eine neue Transfertheorie. Zur
Verteidigung der alten Lehre durch Fritz Meyer," Jahrbucher

fiir

Nationalokonomie,

299

Self-Regulation

and second price movements that

the shift in level. The old
and
arise during transfer the waves
school itself is divided into two camps, one of which holds that under
certain circumstances only the second price movement, due to
changes in the discount rate, makes the transfer possible,^^ whereas
the other is of the opinion that even the first price movement, due

significance attributed to the

first

purchasing power, merely facilities transfer while,

on the contrary, the mere shift in purchasing power would usually
to the shift in

suffice.'"

Both camps have confused the preliminary and the final transfer.
shift in purchasing power (which of course generally leads to
price waves even when creditors now wish to buy in addition what
debtors forego) does indeed suffice for the final transfer. For the
success of the preliminary transfer in goods, however, an artificial
shifting of the price level is necessary, but its effects are later
annulled by a reaction. The advocates of the old school thought
statically, and neglected space. For them the results of a loss of
purchasing power, and of a rise in the discount rate, were, equally,
a lowering of the " price level." They had no real notion of the
movement of a change in purchasing power in space and time.
They could not recognize, therefore, the fundamental difference
between the preliminary and the final transfer, which is ultimately
caused by the varying strength and proximity of the two price
movements. The crests and troughs of the two price waves are too
ill-defined and too far apart to result in the rapid transfer of goods
that with different currencies is required to complete the transfer
of money. Only for this reason does there occur the preliminary
transfer of goods, which can be brought about only through a shift
in the price level. The prompt effect of a discount policy, and
especially ^^ of the exchange-rate mechanism, depends, besides their
influence on the movement of capital, upon the fact that they bring
the two opposite regions nearer together by jumps, since in point

The

1943,

pp.

19-28)

Agreement with the new theory has predominated so far. For

(" Der Raum in der Wirtschaftstheorie," Jahrbiicher fiir

example, see E. Schneider

Nationaldknonomie, CLIII

[1941], 727-734.

59.

In the transfer debate

60.

For details see

my

lem," Schmollers Jahrbiich,

61.

I,

too,

article,

LIV

"

agreed with the

first

group on

this point.

Fine Auseinandersetzung iiber das Transferprob-

[1930], 1103.

Against the advantage of fluctuating exchange rates that the

prices of goods occurs automatically

and without

advantage that the discount policy very quickly

so that the

somewhat slower

effect of a

loss of time, fixed

affects

movement

in the

exchanges have the

short-term capital movements

changed discount rate on prices can be awaited.

Three.

Pd'ft

aoo

of fact shifts in the price level extend uniformly at

first

Trade

to the

national frontier.^^

Because the central bank cannot wait until the wave of purchasing power reaches the frontier it simply anticipates the effects
of this, in so far as they are of importance to it, by changes in the
discount rate, for these effects are the same in both cases: Goods
in a broader sense, of the
flow mainly from the border region,
one country into that of the other. Even with a shift of the general
price level the international equalization is thus completed at the
border, to which are then added domestic transfers between the
interior and the border region.*^* But apart from this, price waves
^^^

shift in price level operate in an entirely different manner

both spatially and chronologically, and therefore fulfill different
functions in the transfer. Most advocates of the old theory regarded
the preliminary transfer, associated with the shift in price level, as
the final one and greatly overrated the importance of monetary
factors in consequence. But even when the theory recognized the
decisive significance of the shift in purchasing power associated
with price waves, a lack of any spatial vision prevented the recognition that the final transfer must be complemented by a preliminary

and the

one.
ft.

Tariffs

^^

Customs duties aggravate the price fluctuations necessary to the

completion of a transfer. They obviously do so when, as in the
United States, they are newly introduced for this express purpose,
to prevent the flow of goods from a debtor country. But even old
customs duties have this effect since they so restrict the volume of
trade that, despite a higher elasticity in demand,*'^ a greater price
to bring about any given absolute change

movement must occur

in foreign trade.

62.

power

The
is

principle

equalized.

What customs
is

duties

mean

to

commodities trade,

the same as that according to which the change in purchasing

Furthermore,

ringlike trough of the purchasing

its

equalization

power

loss

is

more important

and the ringlike

the nearer the

crest of the influx of

purchasing power approach one another in space, or the deeper or higher they are

from the very first.

63. Goods with a large necessary shipping distance, and small

countries,

are

exceptions.
64'. The direction in which these domestic transfers move is the reverse of that taken
by price waves. They begin at the border and progress gradually toward the interior.
65. It follows from our theory that customs duties affect the frontier zone most and

that their effect

66.

and

Compare

is

least in the interior.

the discussions on pp. 141

and

147

on the relation between

distance, the effects of x^hlth resemble those of customs duties.

elasticity

3f>i

Self-Regulation

political risk

means

to international

movements

of capital.

One

could easily imagine a tariff policy that would not make transfer
more difficult, but rather facilitate it by simply taking the place of
discount policy. If the receiving country lowers and the paying

country raises its duties, the effect takes the place of a

rate of exchange or in the price level."
y.

Reviewing our

results,

shift in the

Summary

we

find

that

transfer across political

frontiers generally calls for greater price movements than a corresponding transfer within a country. This is due to the following
causes:

Customs duties and

1.

direct prohibition either limit the range

may

actually be transferred, or limit at least the effect

of price movements themselves on such goods as enter into foreign
of goods that
trade.

partial or complete differences in currencies (which

brief but acute shifts
countries are usually pronounced)
in the price level are added to price waves.

With

2.

among

Payer and payee in international trade are apt to be farther

away from one another than in domestic trade. But the wider
separation of regions with decreased or increased purchasing power,
or even higher or lower discount rates, allows a presumption as to
the smallness of their trade, so that greater changes in the price
level are required to achieve the same preliminary export surplus
for which smaller changes would suffice with more extensive trade
3.

connections.

movement of labor and capital meets with greater

which will be discussed below. It must therefore be
replaced by a movement of goods.
4.

Usually the

obstacles,

The use of credit, which moderates price fluctuations, is more

5.
uncommon and unpredictable in international trade. On the other
hand, a sudden big withdrawal of short-term credits that gives
to price fluctuations

these sharper

price

reaction.

67.

rise

more frequent. However, a large part

movements is fully compensated later by
is

Export or import premiums are another substitute.

of

Trade

Part Three.

202

5.

Other Extra-Economic Spatial Patterns

When

a Berlin firm has to pay 1,000 marks in Paris this

is

what

actually takes place: Prices fall in the area of decreased purchasing

power around Berlin, and rise in that of increased purchasing power
Paris. Decrease and increase of purchasing power together
with price shifts advance on the average farther from their point
of origin with every income period, until finally they meet somewhere, partly as a result of price shifts and partly without them.
Then the transfer of goods is complete; ^^ that is, an export surplus
from the region of lower to that of higher prices to the full extent
of the payment to be transferred.
These are the facts, beyond which it is a purely arbitrary matter

around

or a question of interest to what greater whole the movement of

prices and goods is to be imputed. As a citizen the Berlin merchant
has lowered the average of German prices; as a Protestant he has

lowered prices in a Protestant as compared with a Catholic region;

as a dweller on the right bank of the Rhine he has reduced prices
there in comparison with those in countries on the left bank; and
as a German, in comparison with those of the Latins. His action
disturbs every circle in which he moves, but it lowers the statistical
average of prices only in those that are predominantly within the
region of decreased purchasing power. Only when Germany as a
whole fulfills this condition should one speak of a fall in German
prices; in reality they fall at first only around Berlin. And only
when the center of the price drop is predominantly within German
frontiers should the German price drop be regarded as the essential

phenomenon.

Now it is not very likely in most international transactions that

any given price wave will include one country completely and essentially alone. This might perhaps be true if international trade were
carried on between the central points of large rounded-off countries.
In reality, however, the average German and the average Frenchman,
for example, is separated by more than half the distance from the
center of his country.^^ Thus the price rings that develop around
Two

one of which moves forward from Berlin

moves backward and toward the Berlin
effect. In other words, goods to the value of 1,000 marks move in constantly new form
towards Paris, to which, however, they have already been delivered in advance by its
environs, which in their turn borrow them again from their neighbors, and so on
until the shipment from Berlin reaches the last of these.
68.

transfer effects are combined,

whereas the other,

69. It

is

as

if

anticiapting

its

arrival,

probable that the locality involved in international transfer in a circular

and evenly populated country with a radius of

is

not

its

center, but a point about

Self-Regulation

his

home

303

will very soon

the frontier of his country in a

cross

particular direction, even before they have reached its center. Nevertheless, it is at least probable in the case of sufficiently large and

rounded-off countries that the greater part of the inner region of

most concentrated shift in purchasing power will lie within the
same country, and that the greater part of this country will be
affected only by the wave of purchasing power that originates within
its

own

frontiers.

Regions of import and export surplus can be delimited in the

same way. One thousand marks' worth more of goods flows to the
side on which Paris lies across every line between Berlin and Paris
whether it passes midway through the region of increased or decreased purchasing power, or to the west of places that actually
order more from Berlin and thus over political frontiers as well.
This would be a truism only if 1,000 marks' worth more of goods
were really sold from Berlin directly to Paris. But the statement
holds absolutely, and thus even if Berlin and Paris have no business
connections at all. That this is so can easily be seen in Fig. 57, p. 271.
Any desired line can be laid through it. As long as B and B^ do
not lie on the same side, the side of B^ has a passive trade balance
of 1,000 marks. In general: Across any arbitrary line between two
places, one of which makes a payment to the other, more goods flow
toward the receiving place to the extent of the payment.

6.

The Globe

So far we have been following the waves of purchasing power

spreading out from Berlin and Paris only in longitudinal section,
as it were; that is, only in so far as they lie on direct lines (BB^ in
Fig. 58)
For this reason they meet at one point Z. But the Berlin
wave of lower prices runs not only to the West, where it meets the
northward,
tidal price wave from Paris, but also eastward (PQ)
and southward. If the amounts involved are small it is dissipated
.

here in open space. This merely reduces the problem of its fate
to insignificance, however, instead of solving it. What happens when
not a thousand, but a thousand million marks are transferred? The
decrease in purchasing power rolls onward, farther and farther
around Berlin. Long after equalization has occurred in the West,
0.7r

away from

this

(with an evenly distributed population a circle with a radius of

0.7r divides

the population

eccentrically.

Large areas of

parts of other countries.

into halves)
its

own country

Hence the point directly concerned lies

away from it than neighboring

are farther

Part Three.

304

Trade

approximately in Belgium, and normal prices prevail once more in

Berlin, the unequal ized portion of the ebb is still on its way, its
strength scattered but still undiminished, among Eskimos, Negroes,
and to the ends ot the earth. In spite of all dispersion it cannot be
lost until it encounters the flood tide somewhere. Where does this
happen?

(2 --'>=

Fig. 58.

World-wide price waves

If all conditions were perfectly uniform throughout the whole

world the locus of the points of final equalization would be the
great circle passing halfway between Berlin and Paris, on which lies

also,

among

other places. Here the final equalizing transfer would

it had not been carried out before flood and ebb

had arrived at the great circle. They reach it first at Z, between the
two capitals. Then the point of each final transfer runs along the
great circle in both directions around the world ^ until the last

occur, in so far as

transaction has taken place at the antipode to Z. Thus waves of

purchasing power are propagated from the center of decreased and
that of increased purchasing power, each over half the world, not
to disappear smoothly and completely until they reach the juncture
of these halves.'^^

70. Its velocity

is

somewhat greater than

that with

which waves of purchasing power

are propagated.
71.

The

strength of the waves, represented in Fig. 58 by the line

the various crests

B and

B^,

lie,

most slowly on the longest connecting

shift in price level.

QP^iQi on which

diminishes most rapidly on the shortest connecting line between

line.

The broken

line represents the

3^5

Self-Regulation

REDISTRIBUTION OF THE FACTORS OF

PRODUCTION WITH LONG-RUN DISTURBANCES
(THE COMBINATION PROBLEM)
b.

1.

Equalization by Migration

discussed adjustment to temporary disturbances:

the transfer problem. Now we come to the effects of final shifts:
the combination problem; that is, the problem of new spatial combinations of labor, capital, and land.^- Such final shifts in supply

So

far

we have

and demand may be due to changes in taste, the exhaustion or discovery of resources and countries, protracted unilateral payments,
increased

tariffs,

different rates of population

increase,

technical

Disturbances like these manifest themselves

in persistent deviations of wages or interest from the former equilibrium levels.
Examine Fig. 57 once more. If A had shifted its demand from
B to JBi permanently rather than temporarily, a lasting price differential between the two places instead of temporary price waves
advances, and so on.

arisen. Hence prices would have remained permanently

lower in the region of decreased purchasing power, and permanently
higher in that of increased purchasing power. So much for the
transfer mechanism. If everything were to be reconciled to its effects,
a new equilibrium would be reached as soon as a complete final
transfer of goods had been achieved, which would be repeated in
every income period to the extent of the shift in purchasing power.

would have

But the permanence of the price

shifts causes a redistribution of

productive forces: It alters the location pattern. In the area of

decreased purchasing power (particularly around B) not only money
wages but, in so far as imports become more expensive, real wages
as well decrease; conversely, they rise in the area of increased purchasing power. Because this shift appears to be permanent, labor
migrates away from B toward B^J^ As a consequence of this migra-

which had originally gone up because the debtor

borrowing and his bank raised the discount rate, now
falls around B and rises around B^. Capital movements follow the
migration of labor, which temporarily presents the region of detion,

interest,

restricted his

72. It

could be called also the

itdistribution problem," or the

problem of the

spatial redistribution of productive forces.

73.

In so far as the differences are

inconvenience of a change of locality

now found
itself,

increasing distance from one's birthplace.

and

great

enough

to

compensate for the

for the disadvantages associated with

Part Three.

joG

Trade

creased purchasing power with an additional transfer problem. The

solution of the transfer problem is price movement; that of the

combination problem, migration.

Like the movement of goods, migration need not occur directly
between B and ^i. If the same work earns 50 pfennig in B, 60 in D,
and 70 in F, much of the migration will occur by many workers
in B moving not to unfamiliar F, but to neighboring D, and only
those who are crowded out there will go on to F. So it was, for
example, with migrations of labor during the past century. Native
Canadians moved to the United States or opened up their own west,
western Europeans supplanted them in eastern Canada, and migrants
from eastern Europe took their places in western Europe.
The outward migration removes the pressure of the shift of
demand from B. The supply of its goods falls and prices and wages
rise again, though perhaps not quite to their former level. As a rule
the smaller scarcity in B (because of the desertion) and the greater
scarcity in B^ (because of the crowding in)
as 'well as the smaller
marginal productivity of the land, will prevent a return to the old
prices. The new situation is characterized as little as the old by
an interlocal equalization of wages, for reasons already advanced.
Hence, not much is known about it. In most cases all that can be
established is that migration takes place away from regions of falling
wages and toward those where wages are rising, though it cannot
be said in general ^vhere incoming migrants are from or whither
outgoing ones are bound. It is certain, however, that distance plays
a role in both cases. ^^"^ Neither can it be stated in general by what
the new state of equilibrium is to be recognized, except for individuals. See what has already been said in Chapter IV.'^^
A renewed equalization of interest rates also, at least up to the
costs of distance and the risk premium, is to be expected only within
the same market area, whereas between financial centers they can
,

74.

men

Naturally

it

is

known

way that with complete freedom to migrate

them most, or to those where they can at least gain a

in a general

will go places that please

and industries to places where they can make a greater profit or at any rate
costs. But in this connection such knowledge is too general.
75. For examples see the maps in National Resources Committee, The Problems of
a Changing Population (Washington. D. C .,1938) pp. 93 fl.
livelihood,

cover their

Save

when

by a sufficiently large
number. Then, perhaps, there will be with wages, as with prices of goods, some scope
within which they can vary from place to place without causing greater migrations.
In such cases one may speak of an upper, or inward, migration point and a lower, or
76.

interlocal utility differences are similarly felt

outward, migration point for local wages, though not with the same precision as in
the case of

homogeneous goods.

307

Self -Regulation

be equalized at most temporarily, and even then only if capital has

moved between them. Later, interest may vary arbitrarily between
them again, as prices between markets for goods, by twice the costs
of distance; indeed, because of subjectively different estimates of
by much more. In short, it is not correct to say that migrations

risk,

continue until wages and interest are everywhere equal once more.
in neither the old nor the new equilibrium.

They need be equal

Results of Migration

2.
It is possible,

though not necessary,

for the

movement

of production to substitute for the

movement

of goods.''^

of factors

As experi-

migrations are followed very often, if not

generally, by shifts in demand ^^ toward the emigrants' country, so
that an increased export of products occurs in addition to the
migration of productive factors. ^^ It is generally recognized that
emigrants remain faithful customers of the mother country and
introduce its exports to other countries besides. Similarly, loans are

ence has shown, in

fact,

used generally, and often by stipulation, to buy in the homeland of

Such threefold movements of men, goods, and capital

same direction are actually the rule in colonial history. The
choice for overpopulated countries, therefore, is not " whether to
export men or goods," but whether to export only goods, or men

the lender.
in the

as well.

In the latter case export

and the

real question

is

for this assistance; that

is

substantially facilitated, of course,

whether or not one

is,

is

ready to pay the price

a loss in population.

Every autonomous change of location such as shifts in rural

population or the removal of a factory from B to -Bi, raises a question
that is important even in a free economy, and really vital in national
planning: How much further migration of craftsmen, subsidiary
industries, and so on from B or to B^ will this cause? Strictly
speaking, we deal with a disturbaijice of the local balance of pay77.

The

movements

opposite

is

much more common, movements

of factors to a certain extent, as

78. Strictly speaking,

it is

not so

much

of goods taking the place of

Ohlin has so well shown.

that there

is

new demand

at first for goods

from the emigrants' country, as that part of the emigrants' demand and part of the
demand created by exported capital is retained by the emigrants' country. What is
new is merely that this demand now comes from abroad, and hence leads to export.
79. The more so since the prices of exported goods may very well rise. For on the
one hand emigration reduces the supply of goods produced in the emigrants' country,
and on the other increases the demand for them from the immigrant country, as has
already been set forth above. That is, the supply curve is displaced toward the left

and the demand curve perhaps toward the

may

easily

be

much

higher.

right, so that the

new equilibrium

price

Part Three.

3o8

Trade

ments, which is settled by means of the entire mechanism that such

a disturbance sets in motion: by lower prices and changes in occupation as well as by migration. How much later migration will

may even happen

of
out
5i and develop
that nonagricultural enterprises are crowded
own
if those who
its
in deserted B instead. Or B may at least hold
their
occupations
remain behind would rather earn less or change
than migrate. If these possibilities are excluded, the extent of fur-

actually take place depends

upon many

things: It

ther migration depends upon how much of their income those who
were left behind have received from those who migrated ( a per cent)
and how much from elsewhere (b per cent). The remainder of their
income consists of consumption of their own products or exchange

themselves (c per cent). Hence a -{- b -\- c = 100. The emimay continue to buy something from their former suppliers
per cent), who depend to the extent of about (a -f b) per cent on

among
grants
(!

Consequently there remains 100(ai -f b)

per cent; the rest likewise migrates elsewhere. Conversely,
the farmers that have migrated to Bi raise the number (determined
by a -\- b) of artisans already present (ag -\- b) -^ {a -\- b) times (the
latter at first derive a per cent after the influx ag per cent of their

foreign exchange income.

-{-

(a

-\-

original

b)

income from the farmers)

and b are zero, which often

approximately the case, everyis then especially easy

thing finally leaves B. The absolute
example,
how many artisans
to calculate. If it is desired to know, for
a given number of farmers support (that is, how many they provide
with the craftsmen's equilibrium income less the consumption of
their own products of these workers and their exchange with one
another) it will be known how much farmers spend for the products
of craftsmen, and how much of it these earn (10,000 marks) .^
Furthermore, let c (the proportion of the artisan's income spent
40 per cent
10,000 marks, and
locally)
60 per cent. Then a
consequently a-f c= 100 per cent
25,000 marks.^^ If an average
artisan earns 5,000 marks, five artisans will emigrate.
If !

is

number

80. According to B. Barfod (Local Economic Effects of a Large-scale Industrial

Undertaking [Copenhagen and London, 1938], pp. 21-38) wage payments and local
purchases by the firms involved do not increase the local income to the same degree,

but by only about 70 per cent.

81.

The

multiplier

is

then 100

-f-

40

2.5.

That

is,

every

mark

of original

income

that craftsmen derive from farmers raises their income by a further 1.5 marks through

trade among themselves to a total income of 2.5 marks. Not that the total national
income has increased by that much (Keynes's error) A rise of one mark in original
income in B^ results only in an additional 1.5 marks of the total national income being
shifted there, just as those remaining there are not simply unemployed but are
.

39

Self-Regulation

Interference with Migration

3.

a.

Consequences

Ever since the days of the

classical

writers the smaller inter-

national mobility of labor and capital has been so overemphasized

that with few exceptions ^- the problem of the combination of the
factors of production has been practically excluded from the theory

Haberler, for instance, says hardly a word

argument, that the classical
writers were correct and that international migrations are especially
of international trade.

about

it.

difficult.

Assume

What

first,

for the sake of

and the

follows from this in respect to trade

inter-

national division of labor?

ARE INTERNATIONAL WAGE DIFFERENCES GREATER?

1.

Comparison between

Places: It

is

uncertain whether differences

in efficiency wages (and only these can be geographically

are increased or decreased by migration.

Wages

rise,

compared)
be sure,

to

where workers leave and fall in the places to which they migrate.
If it were certain that migration occurred only from places of low
to those of high piece rates, wages would become more nearly equal
interlocally, the easier and therefore the more common migration
becomes. But the money wage, or even the real wage, may be lower
at the destination of the migrant because he wishes to increase not
his purchaseable, but his total utility. In this case, wage differences
would be increased by migration.
Comparison over Time: In a region of decreased purchasing
power, wages not only tend to fall in comparison with a region of
increased purchasing power, but tend to fall absolutely also, in
comparison with previous wages. Matters remain thus as long as
frictional resistance or the prohibition of migration prevent a fresh
distribution of labor.^^ Of course migration must not be expected
unemployed only
Moreover,
as

is

cit.,

at their

former

site,

in their former trade,

unnecessary to calculate the multiplier as the

easily seen, or

even to think of

it

and

at their

sum

former wage.

of an infinite series,

as originating in this way, as

do Barfod

(op.

and the author of " Zur Stadtplanung in den neuen deutschen Ost(Raumforschung and Raumordnung, 1941, pp. 100-230)
In other respects

pp. 39, 51)

gebieten "

both

it is

articles are excellent.

82.

For example B. Ohlin,

internaticnalen

nomie,

II

(1930)

"

Die Beziehung zwischen internationalem Handel und

Zeitschrift fur Nationalokno-

Bewegungen von Kapital und Arbeit,"

,

161-199.

Here we deal with restrictions on migration for police, military, or political

reasons. Those that are economic in nature will be discussed in the next chapter.
83.

Part Three.

oio

Trade

wages completely to their old level, as has already been

even in equilibrium they may fluctuate between the upper
and lower migration points. The possible extent of the fluctuation
is greater, however, the more difficult the migration, and with complete prohibition it may be of any size whatsoever. Thus the greater
the restraints that migration encounters, the less need (not " must ")
wages be brought back to their former level by migration. On the
contrary, it must be presumed that after interference, wages differ
to restore

said, for

more from their earlier level, the smaller the extent of migration.
Hence the degree of the mobility of labor permits conclusions only
on the extent to which wages differ in time, not on the extent to
which they differ in space the very question in which we are most
interested in the present connection.

2.

ARE INTERNATIONAL MOVEMENTS OF GOODS GREATER?

boundaries obstruct the flow of men in favor of the

have already seen that trade in goods may be
heavy because migration is extensive, as well as because it is slight.
Thus the international flow of goods need not be greater just because
international migration is less extensive than domestic.

Do

political

flow of goods?

3.

We

WOULD POOR CONTRIES

BE

DEPOPULATED WITH

FREE MIGRATION?

The

classical

economists held the view that obstructions to

international migration raise the principle of comparative cost to a

predominating position, according to which even poor countries
(that is, those with only comparative and no absolute advantages)
could compete in international trade.
We shall explain the identical facts in our own way as follows.
Even locations that are handicapped in some respects may be competitive if they can balance their disadvantages against advantages
of another sort. Thus if their production costs as a whole are very
high they can still be protected against competitors by a cushion of
freight costs. Or if only some are very high these may be offset by
economies in other directions. For example, if the services of land
are very expensive and the classical writers had this situation chiefly
in mind their competitive position will not be affetced as long as
some men are ready to work for appropriately low wages.
Why are there such men? In the first place, they may feel that
a greater abundance of free goods compensates for a scarcity of
purchasable goods. They would prefer to be here even though

Self-

Regulation

311

second group would migrate were it not that

would be wiped out by the disadvantages of traveling to them. Their misfortune lies in having
been born here. For both these groups the prevailing wage is the
equilibrium wage, even though it may vary from place to place;
that is, it procures them all the utilities they can possibly get. A
third group, finally, is made up of those who are prevented from
migrating by police regulations, or by those inner restraints that
may prevent us from doing what we have recognized to be right,
even though migration would be to their best advantage. Only for

born elsewhere.

the advantages of other localities

a part of this third group

is it

true, therefore, that countries create

wage differences and lower the incomes of their citizens

through an enforced choice of location.
Thus countries more scantily endowed by nature would be populated even though international migration had not been made
especially difficult.
Indeed, they would be settled even though
migration cost nothing at all. But of course they would be more
thinly settled. Improvements in means of transportation and the
easing of international migration would encourage the depopulation
of unfavorably situated localities and the agglomeration of population at the more favored sites.
artificial

j8.

Reasons for Obstructing Migration

Even had the classical writers been correct, it follows from what
has been said that the results of difficulties in the international
movements of the factors of production are neither sufficiently
important nor characteristic enough to justify preserving the strong
and unique position of international trade in the theoretical structure.^* But were the classical economists correct at all? Is it not
true that in their time, and throughout the reign of their theory,
no particular obstacles to international migration existed, though
there might have been hindrances to migration within countries?
Often enough national frontiers created no special difficulties for
migration, but merely adjusted themselves to these. In fact, countries even promoted migrations through their customs duties. Do
such special hindrances as prohibition of migration or love for the
fatherland operate any differently in principle from the usual curbs:

and the law of diminishing returns? Even if there

were no frontiers at all, the whole population of the earth would
cost of travel

not collect in regions that possessed " absolute cost advantages

84.

and

For the solution of the transfer problem, for example, though not for
is completely irrelevant.

extent, the degree of mobility

its

" for
origin

Trade

Part Three.

31-

one or another branch of industry. That which the classical writers

extolled as the fundamental characteristic of the international division of labor is neither as characteristic nor as important as they
believed.

4.

Comparison with the Transfer Problem

The economy

adapts

movements
movements of proproblem, the latter a problem

itself to brief

disturbances by

of products; to long-continued disturbances by

The former is a sales

Both goods and migrations move from a region of
decreased to one of increased purchasing power. Both are impeded
by expense and other obstacles associated with any change of place,
by goods as well as by men. With transfer, migration, and with the
new distribution of productive factors, any movement of goods, is
of secondary importance. The purpose of transfer is to bear the
consequences of a shift in demand; that of redistribution is to avoid
ductive factors.
of location.

them.
c.

The

WHAT REMAINS

OF THE CLASSICAL THEORY?

solution of the three fundamental problems of international

trade by the neoclassical theory

and partly inaccurate.

has not been undertaken.

able,

is

partly incomplete, partly unten-

solution of the combination problem

To

answer the question of the

inter-

national division of labor by the theory of comparative cost seems

indefensible.

And

the transfer problem

is

treated inaccurately and,

in important points erroneously.

To mention only the most essential points: The statements

about the form and spread of price movements prove to be incorrect
when carefully examined. First, these do not occur in their essential
features as a uniform rise and fall, like the rise and fall of a water
level. Even when such a phenomenon appears temporarily with a
it and all its consequences are necessarily
compensated in the end through a reaction, a fact that has been

difference in currencies,

far. The necessary price movements take

rather the form of a wave, rolling forward from its point of origin

completely overlooked so

with lasting disturbances, of a gradual price gradient. Second,

the regions over which these necessary price movements extend do
not usually coincide with political areas. Consequently it is to be
or,

expected that prices in different parts of the same country will shift
in opposite directions.

3*3

Self-Regulation

which interpreted countries as units,^^ was

an important achievement for its time, but it touched reality only
in part and even there only as a first approximation, a rule of thumb.
Within certain spatial and chronological limits, it was right with

The

classical view,

respect to the

movement

of the price level of a country as a whole.

In cases where the source of the disturbance was not too far from
the center of the country, it described the change in price level
accurately for the period preceding the reaction. But even within
these limits the price level after all is only an average of organic
differences, among which the wider movements predominate at first,
though the smaller but essential movements prevail in the end.
Everything depends upon separating price waves from real shifts
in the price level, for their functions are entirely different. Transfer
is

understood neither theoretically nor in practice

if

the two are

confused.

Currency policy will be guided by wholly new principles as soon

as it frees itself from the obsolete view. This saw only an incomplete
phenomenon, whereas the new theory views the whole process. The
classical writers explained what took place on the average, but now
As physics now
it is necessary to show what happens in detail.
investigates with profit the minute occurrences underlying the broad
general laws of classical mechanics, so economics will be rewarded
for pushing beyond mere calculated averages to the meaningful
differences of reality. For of necessity we shall have to acquire a
more accurate knowledge of these the more we guide economies
away from a natural and toward a consciously planned development.
If economic policy were to stop at the attractively simple interpretation of the classical writers, it would resemble a hat manufacturer
who made hats of one size only, to fit the average head.
As is the case with price levels, gradual rather than abrupt transitions appear upon examination also for different currency systems,
varying mobility of productive factors, natural differences
The

among

reasons for this view are easily seen. There was a wish to derive principles
from simple cases that were at least roughly applicable to English conditions.
Working with whole countries offered the one possibility of verifying these principles statistically. Finally, the results for zvhole countries were of greater interest than
those for their parts; first, because practical decisions on such problems as free trade
or protection depended on these findings; second, because the main interest of the
classical writers was not in individuals or parts, or even structure, but solely in the
functioning of the whole. They differed from their opponents, who also emphasized
the whole, only in the fact that these latter could not understand how the whole could
be built on the utility instead of on the sacrifices of the individual; on his freedom
rather than on his restraints.
85.

at first

Part Three.

34

countries,

and the determination of what goods

national trade.

Trade

will enter inter-

Real, vivid individuality replaces the

outmoded

subsidiary assumption of uniform mass phenomena. As a consequence countries can no longer be regarded as economic units. We
now think of them in all their diversity and expanse rather than as
mere points. We take space seriously.

Chapter 20.

The

Regulation from Without

advantages of a free economy operating under ideal con-

ditions lie in self-determination of the individual

and

self-regulation

whole or, briefly, in freedom and equilibrium. ^ But, say its

opponents contemptuously,^ this need not be reasonable; it may be
" any kind of equilibrium." There is this much truth in what they
say: it remains to be proved whether a free economy also provides,
of the

as a third

advantage, the greatest possible social product.

however, that economic freedom

Its critics

good in

itself,
might reflect,
and as such constitutes a part of the national income.
This is the first reason why judicious regulation from without
(" intervention ") may be advantageous in principle. But, though
a free equilibrium may not be the best possible one, it is not
therefore arbitrary but reasonable after its fashion if only men
act in accordance with nature and logic. The automatic spatial
organization of the economy, for example, shows a quite acceptable
pattern on the whole, even from extra-economic standpoints, but
now and then the result can be improved by intervention.^ A second
type of meaningful regulation from without attempts not to create
a situation better than that arising from the free play of forces, but
to bring this situation about at a lower cost; that is, to facilitate

Direction should therefore operate

adaptation.
at least

1.

more promptly, than

more

accurately, or

self-regulation.

In a developing economy mere functioning takes the place of equilibrium.

2. J.

M. Keynes,

buch, 1933, p. 82)

3.

is

for

example

("

Nationale Selbstgeniigsamkeit," Schmollers Jahr-

For even perfect functioning of the free play of forces guarantees only that

everyone will achieve his greatest attainable utility for every given constellation of the
other forces.

It

does not guarantee that the general welfare, or perhaps even the

welfare of each individual, cannot be increased under certain

circumstances by a

judicious alteration of the grouping from without. This should be possible, especially

when unwholesome forces are able to participate in the free play. On the other hand,
not many cases can be imagined in which an unwelcome situation could develop from
the perfect co-operation of

wholesome

forces.

Pari Three.

3i(i

a.

Trade

REGULATION OF THE TRANSFER OF PRODUCTS

(THE TRANSFER PROBLEM)
Obstruction of Adaptation

1.

Disturbances in existing trade relationships generally lead to

>

The former

price changes or migration.

plays the chief role in

temporary, the latter in lasting, disturbances. Both are annoyances

today. Men are almost as ready to prevent transient adaptations
as they are to

opposition

is

prevent permanent

shifts.

In the transfer problem

concentrated at two points.

changes in the price level are held to be

know, indeed, that they are not necessary, and
that they can be obviated by appropriate measures. Certainly those
measures customarily employed accomplish their purpose only imFirst, the associated

undesirable.

We

The

perfectly.

which we

sterilization

of gold

movements

moderates

in particular, to

be sure,
but at the expense of the other participant. If not only the unnecessary changes in price level but also the essential price waves are
compensated, and if this occurs on both sides, the transfer of goods
is

shall return later,

made

actually

shifts in prices, to

impossible.

Secondly, the

movements

of goods associated with transfer are

country pursues the senseless policy of obstinately

preventing the successful handling of greater, even though transient,
disturbances (reparations, for example), through continuous increases
objected

in

If a

to.

tariffs,

it

themselves.

may

Men and

especially affected
effects.

If

country

it

start a

movement

capital desert a country that

by customs

duties, since

these effects are felt very

may come

of the factors of production

much

is

protected or

both suffer from their

less

in the protected

either to increased immigration (United States)

according to whether wages or

interest rates are high. Immigration into a country with high tariffs
will be mainly composed of such factors of production as seek
employment in protected industries, whereas emigration will be
or to capital imports

(Canada)

recruited from the remaining parts of the

bear the burden of the duties.

economy

that have to

Regulation from Without

317

Facilitation of Adaptation

2.

a.

By Monetary Policy

THE MONETARY STANDARD

1.

Monetary policy

is

the chief

method employed by countries

facilitate short-run adaptations; that

to

partly to avoid the shifts in

is,

annulled by the reaction in any case;

Secondary effects are
particular
form,
not
with the essence of
associated
with
the
those
prices
exchange
rates fall, the
or
the event. For instance, whether
chief effect is the same an export surplus. The weary road of
deflation, however, has an undesirable and unnecessary companion
phenomenon that is avoided by the easy path of devaluation: a direct
price level,

and partly

fall

which are

later

to avoid their secondary effects.

of prices has a depressing effect,

and may lead

to a cyclical

downturn. To this extent even short-run fluctuations are still influenced by a policy decision that was made far in the past a decision
as to the monetary standard.
A purely local standard (paper currency) leads, in the form of
fluctuations in the rate of exchange, to short but severe price jumps;
an approximation to a world currency (gold standard with a high
gold coverage) on the other hand, leads to small but protracted
,

With perfect mobility this difference would

be of no importance. In practice, however, wide price fluctuations
are disadvantageous in themselves, especially when they result
directly and not as fluctuations in the exchange rate. It must be
considered further that with a low gold coverage the reaction may
not compensate entirely for the transfer costs, whereas with a high
gold cover uncompensated transfer costs arose once at the time
when they were being accumulated.
Furthermore, the high gold cover means loss of interest, though
it has the advantage over a paper currency that the preliminary
transfer is largely completed through capital movements a result of
the discount policy that is necessarily associated with functioning of
the transfer mechanism under a gold standard. Finally, gold countries attract more foreign capital, as we have already seen.
It is very difficult to balance these advantages and disadvantages
shifts in price levels.

4.

We

start

with an old-fashioned gold and paper currency; thus the exchange rate

and the gold cover

will be fixed in the one,

and fluctuating

when

the currency policy will remain within the system

for example,

when with

the rate of exchange

change.

is

a gold currency the coverage

fixed.

We

shall speak of a

is

in the other.

only one factor

freed, or with a

We
is

say that

changed;

paper currency

new system only when both

factors

Part Three.

3i8

Trade

and impossible to compare them in a way that is universally

The result depends almost entirely upon the particular case
and upon individual opinion. This is precisely why there is some
scope for " regulation from without." In my judgment there is
at all,

valid.

always a majority of reasons in each situation for preferring one or

the other monetary standard. To adhere as completely as possible
to a world currency facilitates the preliminary transfer, impedes the
transmission of foreign economic fluctuations, and permits more
reliable calculation.

But only rich countries can afford these advantages, for they
require a great store of gold and exceptional renunciation of credit
creation as we see it realized in the United States. For poor countries, on the other hand, and especially those with great disturbances
in the balance of payments, a paper currency is incomparably more
suitable than a gold currency with low coverage. If a high coverage
were always more advantageous (for which there seems much to
be said at first) it would of course repay a poor country either to
borrow gold or at least to accumulate an interest-bearing fund of
foreign exchange. No doubt only psychological inhibitions or undervaluation of future advantages as compared with present sacrifices
stand in the way. It is true, furthermore, that a high gold coverage
develops its full advantages only in company with a small extent of
credit creation. But as this would mean other disadvantages for a

poor country, a paper currency probably remains advisable.

It is obvious that in the intermediate case of moderately prosperous countries a combination of the two extremes, in the form of
a paper currency with a stabilization fund, is best. Price fluctuations
will generally be avoided as long as the fund lasts. In so far as they
cannot, they will at least occur in the relatively harmless form of
fluctuations in the exchange rate.

2.

MONETARY POLICY WITHIN THE SAME STANDARD

limits is an independent policy possible? That is,

can central banks influence fluctuations in prices or in the
rate of exchange, or replace them with other movements?

Within what

how

far

Gold Standard. Case 1: A central bank may exceed the

As long as it has a free gold reserve (which will be
especially large during depressions because of the reduced note
circulation) it can proceed as though the prescribed coverage were
greater or less. When gold movements occur it need not set the
discount rate so that the quantity of notes is changed exactly as the
(aa)

legal coverage.

Regulation

pom

Without

legal reserve ratio

call

319

(normal discount rate)

On

the contrary,

in fewer notes with an outflow of gold, issue

it

can

more with an

than would correspond to the legal reserve ratio (discount

In the former case the transfer mechanism
below normal)
operates as though the notes had to have a high gold coverage: price
fluctuations are smaller and gold movements larger. In the latter
case the reverse is true. In both instances, however, the gold reserve
dwindles. This policy is limited by adherence to the legal coverage.
On the other hand, a central bank can also call in more notes
with an outflow of gold, and issue fewer with an influx, than would
correspond to the legal reserve ratio (discount rate above normal)
Then in the former case price fluctuations are wider and gold movements smaller than if the legal ratio had been exactly maintained.
In the latter case the reverse is true. This policy encounters no
legal limits, but only the elastic economic limit of the damping effect
influx,

rate

of deflation.

Now

the debtor country will keep the discount rate below,

the creditor country above, normal.

They

and

will thus sterilize the gold

movement; that is, prevent it from affecting the price level. The
gold movements will, of course, be increased thereby. Conversely,
the debtor country will reinforce the effects of the smaller gold
movement on prices with a discount rate above normal, and the
creditor country with one below normal. But this is only rarely

Thus the sterilization of gold will facilitate the preliminary transfer of goods, that is, will distribute it in time; the enhanced
effectiveness of gold will accelerate it.
intended.

The secondary effects on short-term capital movements will accentuate the difference between these various possibilities in the case of
gold movements, and weaken them in the case of price fluctuations.
When gold is sterilized fewer credits flow from the creditor country
to the debtor country; this necessitates a still greater flow of gold.
With increased effectiveness of gold the discount policy brings about

wider movements of credit, which reduces the already small

of gold even more.
In the first case, on the other hand, the otherwise sligrht shift in
price level will be accentuated, in the second the otherwise considerable shift will be moderated. Thus the various possible central
bank policies are even more important to the central bank itself
than to the economy. They affect gold movements more than price
movements. The effects of gold sterilization differ most from those
of a normal discount policy when the legal reserve ratio is low;

still

movement

conversely in the opposite case.

policy of sterilization

is

therefore

Part Three.

poQ

Trade

poor debtor than for rich creditor countries,

though at the same time more difficult.^
Unilateral sterilization moderates one's own price fluctuations
Co-operation
at the expense of the other participant (Table 16)
by central banks would be more sensible, as has often occurred with
exchange control (though there is no necessary logical connection

more important

for

The central bank of the creditor permits the

between the two)
the
debtor to postpone settlement of international
central bank of
accounts until the waves of purchasing power have crossed the
frontier, and the debtor bank has received thereby the necessary
foreign exchange. In order for the waves to start it is essential that
the debtor bank collect the amount in cash from the debtor, and
that the creditor bank pay it over to the creditor at first with created
money.
.

Case

Fixed rate of exchange with arbitrary coverage.

2:

Fixed coverage with arbitrary exchange rate. These

two additional possibilities may be merely mentioned. In case 2
the debtor can use his whole supply of gold before changing his
price level. In case 3 the movements of gold and of the exchange
Case

3:

rate occur simultaneously.

(bb) Paper Currency offers corresponding possibilities for

manipulation; there are thus no clear-cut distinctions compared to
a gold currency. As in case 2, the central bank, for example, can

maintain a foreign exchange reserve, whose function corresponds

to that of a free gold reserve. If it is exhausted, the bank can lower
prices by means of its discount policy rather than permit a fall in
the exchange rate, whereas a price rise might be limited by a legal
limitation

5.

If

on the amount

the cover

and limitation

is

of fiduciary note issue.

relatively high, as in the

of credit

United

States,

therefore correspondingly narrow,

and scope
it

for the creation

does not

make much

whether the discount rate is above or below normal. In contrast to the

Reichsbank, the member banks borrow so little from their reserve banks that these
have to engage in open market operations in order to influence the circulation of
money, because their discount policy would not be effective enough.
6. During the war, when the control of foreign exchange greatly hindered passage
of the waves across the frontier, they widened out eventually to a rise of the price level
in the creditor country. See A. Losch, " Die Lehre vom Transfer neu gefasst," Jahr400 ff.; and " Die neuen Methoden der
bilcher Nationaloknonomie, CLIV (1941)
difference

englischen Handelspolitik," WeltiuirtschaftUches Archiv,

article

by

F.

(1941), 174

f.

Meyer,

"

Eine neue Transfertheorie?

"

LIV

Archiv

(1941), 337; also the witty

fiir

Wirtschaftsplanung,

Regulation frotn Without

CHANGE OF THE MONETARY STANDARD

3.

The

321

preliminary

effects of slight

disturbances can be accelerated

or moderated by a suitable monetary policy. Within certain limits,

for example, the central bank can act as though its monetary
standard were different; or it can really alter parts of it. With
"
extensive disturbances in a fixed currency this behavior " as if
(case 1, above) leads so promptly to the legal limits, and partial
relaxation through a loss of the gold reserve (especially in poor

countries)

so

promptly to the actual limits

choices remain: either to relinquish

ment and

let

all

(case 2)

that only

two

further attempts at manage-

the sudden change in the price level jar the economy,

or to change the basic structure of the currency by temporarily or

permanently freeing the rate of exchange also.^

England made an important and fortunate decision

in

1931,

when

she stopped the drain of extensive short-term credits by

devaluing the pound and risking its repute, instead of throwing
the country into the prescribed deflationary crisis in an excess of
conscientiousness, as did the

Of course, such a change of

upon capital movements that

German government of that period.

may also have secondary effects

front

are similar to those of discount policy.

devaluation serves only to make a domestic inflation possible,
as was the case in France in 1936, and if its limits therefore cannot
be foreseen, the resulting flight of capital results in constantly new
devaluations. One single step within the frame of the gold standard
is then replaced by the transition to freely fluctuating exchanges.
All these measures have this in common: They do not encroach
If

upon the freedom of the economy. Not so with exchange control.

Hence with a systematically liberal attitude exchange control is
resorted to only when the monetary standard cannot be altered
because of psychological reasons. Conversely, if with a paper currency only slight disturbances are to be overcome, it may be advantageous to stabilize the exchange and the coverage; that is, to go on
the gold standard.
In brief, rich countries will prefer a pure gold standard in the
event of slight disturbances, poor countries a pure paper standard
in the face of grave disturbances (see Section I)
As the distin-bances
increase with a gold standard and decrease with a paper standard,
.

a partial (Section 2) and in extreme cases a complete, change

another monetary standard becomes advisable (Section 3)

first

to

7. In case 3 an attempt
exchange by using all gold

will

be

made

at first; that

to

is,

damp

the wide fluctuations in the rate of

making the cover

also variable.

Part Three.

322

Tariff Policy

p.

tariff

Trade

policy can be imagined that

would

facilitate a transfer

by taking the place of changes in the price level or the exchange

rate, and forcibly bringing about an import or export surplus. But
even a tariff policy that seeks to obstruct a free adjustment to disturbances may be sensible under certain conditions. Together with
a suitable discount policy it might, for example, attempt to replace
the movements of goods that otherwise would occur during the
preliminary transfer by capital movements; because, together with
the reaction, they represent an avoidable disturbance of production.

3.

Improvement of the Result

Objectives

a.

Higher Business Profits. A monopolist increases his profits

1.
by adapting his price to the elasticity of supply or demand, and by
differentiating it wherever possible for each individual customer.
A country achieves the same end by centralized control of its foreign
trade. The high cost of the increased administrative machinery
reduces these advantages from the very first, and they vanish as
other countries follow suit. In a world of foreign trade monopolies,
some countries at least are worse off finally than they would be
under free trade. Then the time is ripe for it, and a new cycle
begins.^

A boom

Full Employment.

seems to be doubly endangered

balance
of trade (increased imports,
from abroad, (a) The changed
decreased exports) leads during preliminary transfer to partial
2.

under an

reversal of the cyclical creation of credit, at least

fashioned gold standard,

8.

Thus

(b)

A depression abroad affects

the complete antithesis to free trade

is

old-

the country

not merely protective

tariffs,

but a

system of import and export duties or other regulatory measures aimed at a flexible
exploitation of marketing possibilities.
of Germany's transfer burdens

("

suggested such a system in 1930 for the relief

Eine Auseinandersetzung iiber das Transferproblem,"

LIV [1930], 1093-1106. Typographical errors corrected in vol. LV,

At that time Germany would still have had a temporary advantage, but in
later years it has become questionable whether the German gains from trade were
(H. S. Ellis versus Meyer: " Exchange Control in
actually increased by this policy.
Germany," Quarterly Journal of Economics, vol. LIV, no. 4, Pt. II) Today even F. W.
Meyer, who in 1939 still regarded exchange control as " the only possible lasting
solution " (" Devisenbewirtschaftung als neue Wiihrungsform," Weltwirtschaftliches
accepts our objection advanced above and admits its
Archiv, XLIX [1939], 453)
" validity in time " (" Zum Europaischen Wahrungsproblem," Bankarchiv, 1941, p. 443).
Schmollers Jahrbuch,
p. 192)

3^3

Regulation from Without

through a lowered demand, cut-rate exports, withdrawal of credits,

and also in purely psychological ways. Attempts are made to remedy
the situation (under a) by restricting imports that are cyclically
unimportant and, if this does not suffice to equalize international
accounts, by cheapening exports through devaluation or by export
subsidies; or (under b) by excluding fluctuations in the international
economy to a certain degree through a reduction and control of
foreign trade.

Now

normal upswing that

good time (under a) whereas
protection against economic fluctuations originating abroad is complete only when foreign trade (including capital movements) is
absolutely prohibited and even then waves of optimism and pesThe better the
simism continue to cross the frontier (under b)
in relinwhich
consists
its
cost
higher
protection, naturally, the
it is,

of course, actually desirable in a

credit creation

is

slowed

down

in

quishing the advantages of free trade. Furthermore, protection

against outside influences is of value only when management of
the economy succeeds in avoiding domestic cycles. If it does not
(and account must be taken of the fact that normally the familiar
causes reappear, though in different form) the forces making for
an upswing operate more strongly in an isolated national economy.
But then, on the other hand, a depression can no longer be shifted
abroad. It follows that control of foreign trade guarantees full
employment only under special conditions, such as the German
rearming. Finally, it remains to be seen which is more favorable
to economic development: uninterrupted business activity or, figuratively speaking, the rhythm of day and night that has prevailed in
,

the past.
3.

Autarky.

The

may also pursue

supply by changing over to sources

direction of foreign trade

political aims: to assure one's

within the sphere of influence, by stockpiling of strategic materials,

or by protecting home production; and, on the other hand, impeding
the supply of the enemy by interfering purchases or by the prohibition of exports. This requires regulation not only of the extent
of foreign trade, as with a liberal monetary policy, but also of its
origin and composition.
9.

Again

F.

W. Meyer,

otherwise one of the shrewdest defenders of exchange control,

has generalized unique situations without dealing with business-cycle theory, and has

applied them to large economic areas as though this were a matter of course.
"

Devisenbewirtschaftung

[1939], 415-471;

als

(See his

neue Wahrungsform," Weltwirtschaftliches Archiv,

XLIX

and "Die Sicherung der autonomen Wirtschaftsentwicklung im Bereich

der Aussenwirtschaft,"

ibid.,

LIII [1941], 321-369, particularly p. 364.)

Part Three.

324

Trade

Methods

/3.

In the management of the balance of payments all the means of

and three new ones in addition, are available: direct
regulation of prices (by tariffs and subsidies, regulations and agreements) of amounts (quotas, purchase agreements) and of values
(import: foreign exchange licensing; export: restrictions on the use
to which foreign claims can be put; compensation transactions)
The old methods have been refined and technically developed;
for example, prices are permitted to fluctuate only vis-a-vis foreign
countries, and price discrimination is employed in accordance with
market condition. But above all, the controlling authorities can
largely determine the methods they wish to use. In particular, they
will rarely make use of a direct lowering of domestic prices.^"

self-regulation,

The Course

y.

of

Managed Transfer

Lack of space prevents repetition of what I have shown elsewhere for each single phase of transfer: That despite interesting
differences in details the essential process with free and managed
is the same.^^
In both cases final transfer takes place
by the equalization of waves of purchasing power, whether these
appear as price waves or, with price control, as waves of employment.
In both cases final transfer must be preceded by a preliminary
transfer, and the chief medium in both is the movement of money,
goods, or credit, even though these may differ partly in their importance and in their reasons. In both cases, finally, the results of this
preliminary transfer, which are in many respects alike, are again
eliminated after completion of the final transfer.

equalization

REGULATION OF THE DISTRIBUTION OF FACTORS

OF PRODUCTION (THE COMBINATION PROBLEM)

b.

may wish to expedite and facilitate

mechanism (2) or to change them.
to be even more advantageous than it

Here, too, economic policy

the results of the equilibrium

Either the

new

situation

is

would be without interference

10.
fiir

For details see A. Losch,

N ationalokonomie

CLIV

"

(3, or, conversely,

(1941)

"Die Lehre vom Transfer neu

,

394-402.

This

fact

is

is

to

vom Transfer neu gefasst," Jahrbiicher

and "Die neuen Methoden der englischen

Die Lehre

(1940), 401;

Handelspolitik," Weltwirtschaftliches Archiv,

11.

everything

LIV

(1941)

312-348.

geiasst," Jahrbiicher fiir

overlooked by

all

those

who do

CLIV
how to

Nationalokonomie,
not understand

apply price theory to the new forms of currency and foreign trade, and hence with
seek for errors in the theory instead of in themselves.

much ado

Regulation from Without

remain

as

it

325

was, or at least particular

new developments

are to be

prevented (1).

Impediments to Adaptation

1.

a.

The economic

Preservation of Old Connections

is

distinguished from the natural landscape by

more rapid change. This may go

so far that

its

an entire economic

landscape dissolves: fields are abandoned, industries find better

and people leave. Forces are always at work endeavoring
to prevent such changes, especially in those fortunate cases where
economic landscapes originally coincided with cultural and political
landscapes. A large part of the modern struggle is a result of the
disintegration of old or the formation of new combinations and the
locations,

attempt to prevent this.

The wish to leave everything unchanged often leads to strangely
vague aims: the preservation of England's role in world trade, the
protection of the American South, and the like. In the latter case,

may be meant the people, the land, or industries,

which together determine the character of the South at any
given time. The wish to help would mean, then, an attempt at any
particular time to join together two or even all three of these factors:
people and landscapes (" Its population must be preserved to the
South ") men and occupations (" Our cotton growers must be
helped," perhaps by transplantation to the more fertile cotton fields
or nonagricultural enterprises and economic landscape
of Texas)
(" Let us promote the textile industry of the South ")
And at
worst, a unique historical combination of people, land, and production is supposed to be preserved in its entirety: the original
people at their original occupation on the original site (" The
Negro, the South, and cotton belong together ")
The means toward these ends are compulsion, payment, and
education. Compulsion: prohibition of the migration of men and
for example, there

all

of

enterprises, of the closing

down

of old or the establishment of

enterprises, of the limitation or expansion of cultivation, or of

new
any

employment or the individuals employed.

Payment: principally in the form of duties or direct subsidies.
Education: schooling itself, and modernization of all sorts, perhaps
the consolidation of farms, and the introduction of new industries.

change of the place of

are the results} In the case of a forcible overcoming of

unquestionably an increase in welfare. In other
backwardness,
old

What

Trade

Part Three.

226

an increase in the national or the social income/^

though only one of them at a time and at the expense of the other.
Men can be prevented from moving to places or occupations that
they would prefer, even though they produced less physically and
would therefore be worse off in a material sense. Or they can be
spared migration under conditions in which they are unhappy,
though materially better off. In the latter case, however, it must be
considered whether out of respect for emotional loyalties an unreasonable situation is to be endured forever which the younger generation,
in the absence of such a powerful incentive, would perhaps gradually

cases, at least

abandon.^^

Enforced perpetuation of an originally profitable combination

of interests,

and the perfect preservation

ticular, creates a

museum, which,

of old conditions in par-

like all such institutions, requires

maintenance." As soon as the breaking up of old

economically justified, every attempt to obstruct it
means a sacrifice. A sacrifice, however, that may be vindicated now
and then by the fact that it helps to preserve the political and
cultural existence of an economic landscape for a while even though
Those who have to bear the
it has passed its economic prime.
burden in this case are the inhabitants, who, prevented from migrating, are forced to put up with a lower standard of living. In
the long run they are also politically endangered thereby. If it is
a case merely of a depressed area within a country, the prosperous
areas generally bear the cost. This is not always a wise policy, even
when the importance of extra-economic causes is freely admitted.
It would often be much better to facilitate the breaking up of an
old combination of land, people, and economic activities and seek
large

sums

for

combinations

12. I

the

its

is

define national income as the quantity of physical goods,

amount

of psychic utility.

of their increase or decrease,

individual

is

if

Neither can be measured, though

and
it is

social

income

changes at any one time occur in but one direction.

interested only in the

amount

as

possible to speak

The

of utility, the state chiefly in the quantity

may conflict. Of what use to a country at war

when it needs steel for its cannon? In times of
peace, though, one would rather see happy people than so much useless activity.
13. I am thinking of the poor farmers in the Appalachian mountains, who live on a
miserable soil and near the minimum of subsistence, generally have many children, and
of goods.
is

Social

number

and national

interests

of contented philosophers,

yet refuse to migrate.

14.

The

cases are very different

where men cling

so tenaciously to their

landscapes and their occupations that they are ready and able to
sacrifice solely in

reason,

is

make

order not to lose their connection. This solution, born of loyalty and

often thwarted, to be sure, by the doctrinaire attitude that finds

to equalize

wage

new depressed

economic

a voluntary

rates, fixed prices,

areas everywhere.

and tangible property

it

sensible

taxes, thus creating

many

Regulation from Without

systematically for a

327

new and

rather than to obstruct

J3.

vital one; that

is,

to

promote adaptation

it.

Prevention of

New

Combinations

The prevention of particular new combinations is not quite so

bad as the retention of everything without change. There are two
methods of warding off the corresponding influences coming from
abroad: Making international commodity movements more difficult
may hinder a redistribution of productive factors within a country,
while interference with international migration may impede their
redistribution between countries.

1.

TRADE BARRIERS

change in foreign trade may result in undesirable dislocations of domestic production, which can sometimes be avoided
by tariffs and so on. These changes may be undesirable:
lasting

1.
If consumers gain less than producers lose. This amounts to
an objection against the argument for free trade. To the best of
my belief, it has been proved so far only that the division of labor
(that is, free trade) between two persons raises the physical income
of each when their abilities in the production of two goods are
comparatively different. A larger amount of both products is then

available to each of them.

If

there are several goods,

physical

amounts can no longer be compared as soon as even a single good

is consumed in smaller quantities under free trade than under
autarky (which is conceivable)
But for the individual his psychic
income, not his physical income, is relevant. In the most simple
basic case this also must speak for the advantage of the division of
labor, if we consider only the utilities to be derived from consumption and neglect the pleasure or tedium of work. When these are
taken into account, cases could be found such as that in which a
man specializes so unwillingly in an occupation for which he is
particularly well suited that he does not feel compensated for the
greater disutility by the utilities of increased consumption that it
makes possible. Despite the possibility of physical enrichment no
exchange will then take place. It is different with more than two
persons, and those who gain utilities through cheap imports need no
longer be identical with those who must change over to a production
.

of exports that
15.

"While

it is

may not be

so agreeable to them.^^

certain, of course, that they earn

new occupation than

if

more

(in

Then

there

is

terms of utility) at this

they had continued at their old one (otherwise they would not

Part Three.

328

Trade

in the economic mechanism who can balance the consumer's

rent of the one against the disutilities endured by the other, and it
may happen that the free play of forces will compel a change-over
even though the disutility is greater than the rent.^*^ This balancing
(which, as pointed out before, is in any case very problematical)

nobody

between free trade and protective tariffs, is thus a

purely political decision. But even though the proof that free trade
increases the social product degenerates into mere presumption, as it
does even with Haberler,^^ it is nevertheless probable, and the moral
argument for free trade remains unshaken: That only those who
fear no sort of fair contest can possess an unfailing self-assurance.
The one certain advantage of free trade is freedom itself.
that

this choice

is,

There

good extra-economic reasons for preventing the greater specialization of productive forces by means of
customs duties and so on: (a) because in the end it is more advan2.

are

still

a few

tageous for a people to develop their capabilities in many directions; ^^ (b) because materials for defense must be produced at
home, in so far as they cannot be procured from reserves or from
spheres of influence abroad; (c) because it may be politically
undesirable to have foreign countries profit more by free trade than
the

home

country.

It will

3.

often be useful to change an abrupt redistribution

more gradual one through

into a

change)

it is

customs

duties.^

PROHIBITION OF MIGRATION

2.

As with

sliding-scale

free trade,

freedom of movement would unquestionably

not certain whether they are better

off

than

if

they could have continued

under the former conditions.

16. Furthermore, a few consumers may even pay higher prices under free trade
because the new sources of supply, which are cheaper for the majority, are remote from
them. Who will compare this with the advantage of the favored ones? " If we do not
make the assumption of equal capacity for satisfaction, we are precluded from asserting
at their old occupation

that the repeal of the

Economic Journal,

Corn Laws tended

Only

1938, p. 636.)

to increase the general welfare."

in

(L.

Robbins,

extreme cases do subjective judgments

vir-

tually coincide.
17.

G. von Haberler, Der Internationale Handel

edition (1936)

pp. 221

(Berlin,

1933)

p.

162;

English

ff.

18. Naturally this argument is true only within certain limits. Complete autarky
would condemn almost any people to poverty and impotence.
19. In most cases, of course, a tariff to help over a period of adaptation, like an
infant industry tariff, will be most likely to benefit a nation as a whole only if new
enterprises would be profitable even though they themselves had to bear the cost of a
changeover or of development. (For exceptions see von Haberler, op. cit., pp. 207 ff.;

English edition, pp. 281

ff.)

Regulation from Without

329

be advantageous to an individual in a given initial situation only

If all were to migrate, a man
if he alone were allowed to move.
though
consider
that
even
he adapted himself to a
would have to
well
was
possible,
might
as
it
still be less advannew situation as
tageous for him than the old. It follows from this that even governmental influencing of migration may under certain conditions
increase the general welfare, but this would have to be proved in
every individual case. The prohibtion of migration in particular
is a method, though an imperfect one, of preventing a redistribution
of productive factors that are undesirable for a country. For instance,
if too many dissimilar people were to assemble in a country with
complete freedom of movement, it would be sensible to restrict the
immigration of members of certain nations and races, as the United
States has done, though perhaps it was already too late. The result
is, of course, that instead of the excluded productive factors, their
products attempt to break in, just as, conversely, productive factors
may sometimes be attracted to a country when their products are
excluded.
Finally, provided that only

one of the two

factors has immigrated,

a country that fights the entry of goods as well as of

men

or capital

an outflow of the complementary factor. If, for example, the

United States were to prohibit further immigration from Europe,
North American capital would flow toward South America, to cooperate there with the diverted stream of men, though perhaps
under less favorable conditions.
risks

The Facilitation

2.

Defects of a Free Choice of Location in Reality

a.

One
in

of Adaptation

of the chief defects in the choice of a location as

practice

is

inadequate knowledge of the

facts,

the

it is

made

difficulty

experienced by individuals in drawing conclusions therefrom, and

the interferences in putting them into effect. Now for an example
of each of these frictional difficulties.

There

is

no lack of national price averages, the most important

But there are almost no maps to show

signposts in all economics.

their local variations, as differences in barometric pressure, say, are

shown on weather maps, though they would be

in choosing a location.

offer the first

would be
factors.

on

still

bureau to furnish
opened up locations,
more important than information on single locational

enterprises in the statistical section.

particulars

of great assistance

such for nonagricultural

especially desirable

and

central

easily

Trade

Part Three.

330

Furthermore, location theory has made no real advance in the

past thirty years, that is, since the time of Alfred Weber. The practherefore lacks scientific tools that would facilitate the
solution of his location problem. Still, the answer can be found
only by systematic trial, as was set forth in an early chapter, and
tical

man

thus can never be found for all times. All that can be expected of
even systematic examination is an approximation. But suppose that
a better location has been found. Removal to it encounters diffi-

many of which would have been unavoidable by any means.

buildings, our living, our customs, our whole way of thinking,
in fact, are still adjusted to a settled and immobile way of life.
second major reason why the location actually chosen differs

culties,

Our

from the ideal

in

lies

the entrepreneurial profit.

Its

frequent

appearance prevents a result which theory leads us to expect: that

only those undertakings survive, though really more by good luck
than by good management, that are properly situated. He who makes
a good profit can afford a poor choice of location since he pays for
it not with his every existence, but only with part of his possible
profits.

One more

reason will be sufficient: the accident of an early start.

There are two sides to this. Once a factory has been erected it
cannot easily be moved. Even when the starting point has been
wisely chosen, the location will be overtaken sooner or later by

new

developments; yet unfortunately it cannot be simply abandoned.

For example, railroads still suffer today from the heritage of the
stagecoach: the narrow gauge. The choice of a location may not
only become accidental; it may have been so from the very beginning.
In either case not only will the site of the enterprise directly affected
be not quite right, but also the sites of all others that are closely
connected with it and adjusted to it because of its size or its earlier
start.
is

When

the

file

leader

is

improperly drawn up.^

The accident of an early

tion.

The

first settlers

in the

wrong place the whole company

start is especially

important in coloniza-

naturally establish themselves near the harbor

which they arrived, because the interior has not yet been opened
up. Seen from the standpoint of the history of the development their
choice of a location is wise, but it is wrong in respect to the final
at

outcome. That is, it has the unfortunate end result that the country
is never settled uniformly. An unduly large part of the later immigrants will also settle near the harbor (New York) not only because
,

20. Thus a whole industry

unable to seek more favorable

may be
sites if

poorly located, yet

its

individual units

may be

external economies play an important role.

Regulation from Without

33"

an unconquerable fear of venturing farther, but even after careful

consideration: The market is here, in the Far West the wilderness.^i
To summarize: the actual locational pattern deviates from the
of

ideal principally because the basic assumptions of a free

economy-

knowledge, mobility, and competition are only imperfectly given

in reality. As a consequence production is carried on in the wrong
place from the first, or at least in the course of development.
j8.

Furtherance of the Regulating Forces

very sensible location pattern can be achieved and most of

the specified unfavorable conditions avoided even without govern-

mental planning down to the very

last detail.

A few simple measures

that tend to order space in the large will suffice.

which lead the individual

to the whole,

even when only

motivation. First

measures
that

is

(1)

we

These are measures

to subordinate himself in a sensible

his

own

interests are his

shall briefly sketch the general

and then

their concrete

especially important today

form in respect

way

immediate

nature of these
to

an objective

(2)

Organizing Factors. The realization of knowledge,^^ mobility,

is the basic formula of all liberal economic policy,
competition
and
and we indicate some of its consequences for spatial organization.
Knowledge of the facts essential to a choice of location should be
disseminated. These can be systematically established for places and
nonagricultural enterprises far more completely by government
bureaus than they could possibly be by private persons. The next
step would be to make available to entrepreneurs the scientific means
for evaluating these facts, through institutes or individual investigators that would perform the necessary calculations for them.
1.

In Uruguay settlement proceeded from Montevideo.

There most of the immiand a large part of the population in general have collected. (W. Madje,
Uruguay, Volkwerdung und landwirtschajtliche Erschliessung eines ilberseeischen
21.

grants

Einwanderungslandes [Berlin, 1941], pp. 34-35, 39.)

22. The work of F. von Steinbeis is an admirable example of the efficacy of knowledge. His great achievements were in large part an outcome of the fact that he
disseminated information in Wiirttemberg that stimulated imitation of representative
foreign products, and propagated information abroad that encouraged the puichase
of Swabian products. This he did through expositions; educational trips; directories;
technical schools; provision of foreign machinery, samples, and skilled workers; direct
consultations; advertisement, and so on. He wisely regarded production and sales as of
equal importance. (See F. von Steinbeis, Die Elemente der Gewerbeforderung, nachgewiesen an den Grundlagen der belgischen Industrie [1853]; and J. Haring, Entwicklung und Aiifgaben des wilrttembergischen Landesgewerbeamts, University of

Munich

dissertation, 1937.)

Part Three.

332

Trade

Secondly, the mobility that the entrepreneur needs in order to

act according to the results of this investigation

should be

facilitated.

In particular this would include lowering the cost of a change in

location through special rates, a matter of special importance during
the early days of settlement, when all locations are occupied experimentally and changes are frequent. There is a lack of mobility
today in wages and prices,^^ and a failure of supply and demand to
promptly to their changes. Otherwise even a slight decrease
in prices would necessarily help a structurally depressed area if it
were in close contact Avith the environment on all sides. Exports

react

and the consumption of home products would increase, men would

leave, and new enterprises would come in. Finally, encouragement
of the tendency for the number of independent economic units to
increase in itself stimulates competition.-*

Factors

2.

Making

for Dispersal.

Three

of these are of special

importance: (a) The costs of distance and agglomeration. There

is reason to suspect (see pp. 396 ff.) that the economy underestimates
the former, and communities the latter.^^ Proper knowledge of their
importance, their correct assessment, and their burden, would result
in considerable improvement. Enterprises would be careful to keep

from one another,"'' and communities to restrict

growth (see p. 75, note 11).-^ The natural striving for
independence should be encouraged wherever large profits appear.
Instead of being concentrated in a few great enterprises that are
sensitive to changing situations, production would be divided among
a greater number of medium-sized or even small ones,
(c)
Since

at a suitable distance

their

23.

Not because

but in spite

of,

24. Conversely, free

controlled

competition

economy the

control measures

is

als

contributions of Eucken,
of completeness

it

25. I
26.
"

In addition to this

to,

(com-

for competition of the already existing businesses see

(Berlin,

1942)

Special attention

und

Rohm, and Miksch, and

to p.

196, note

to

the

For the sake

142.

should be remarked that nationalization, or even the

under certain conditions

Leistungs-

called to

is

strict

super-

be a solution that

Public monopolies are even harder to evade; they can crush potential

more easily, need be less afraid of interference from above, and feel
often the cost-lowering lash of the struggle for profits.

competitors
less

See p. 505, note 12.

tendency to increase, whereas in

mere information about, and subordination

vision of private monopolies, proves

cuts both ways.

this

Mittel volksicirtschaftlicher Leistungssteigerung

edited by G. Schmolders

aiislese,

the greater fixed costs.

itself favors

often too high for small businesses.

petition by entry into the field)

Der Wettbewerb

of

cost

of,

Die

still

have been commissioned

to investigate this in greater detail.

There are enough examples

Wahl

of sponlancous decentralization.

See

Z.

G. Dorner,

Industrieanlagcn

und

das Prinzip der Rationalitat,"

Journal der ungarischen Statistischen Gesellschaft,

XIX

(1941)

27.

des Slandortes

A good mayor

is

fiir

proud of the government of

41, 45.

his city, not of

its

growth.

Regulation from Without

333

such a large part of the national income has come to be spent by

the government even in peacetime, an administrative center offers
many locational advantages. Self-government by states and communities in all matters that do not absolutely have to be finally

decided by the central government therefore has a decentralizing

effect.2

Control by Geographic Price Differences. As. a free economy

by prices, so is its spatial organization controlled by local differences in costs of production, prices, and incomes.
These are the levers through which all the factors mentioned above
operate.-^ Every individual faces special geographic differences whose
controlling influence is attuned to his exact location more finely
than any planning could be. Thus there arises a meaningful geographic division of labor that may not be the best possible, but that
in any case takes into account the suitability of men and soil no less
than the significance of their location and the direction of their
needs. If geographic price differences were to be abolished,^ or
even merely frozen, they would soon have to be replaced by complete
spatial planning, which would face the enormous task of taking into
account the effects of thousands of locations upon one another
something that only the play of changing prices has so far been able
to do successfully for any length of time. It would make more sense,
instead, to increase geographic price differences, until they corresponded in general with the actual differences in cost.
3.

is

in general controlled

y.

The

state

Anticipation of the Result

can shorten the costly groping of an uncontrolled

economy toward equilibrium by acquiring an idea of how it is

likely to turn out, and then encouraging an appropriate develop28.

With

question

is

among
The Ruhr was the

the distribution of industries

small towns,

many would,

of course,

Rothenburg idyll. The

whether decentralization reduces the need of vacations more than it does

cease to be vacation resorts.

price of the

the possibility of vacations.

29. So much in the economy is unique, and not comparable with anything else.
Only in special situations that resemble laboratory conditions do comparable features
come together, and they are then treated in the same way. Thus identical products
command the same price in the market, no matter in what uncomparable places and at
what uncomparable costs they are produced. Markets are therefore the strategic points
in the economic activity, from which all irrational activity is guided.
30.

Many

World War

deficiencies

in

the spatial organization of the

German economy

erroneous policies respecting wages, taxes, and the price of land.

areas

were

encouraged.

after

resulted from an endeavor to abolish geographic price gradients through

created

in

this

way,

and many urban

Many new

agglomerations

depressed

extravagantly

Part Three.

334

We

Trade

economic suitability of a
First,
the
most significant advanimportant.
location as especially
investigated.
are
examination
tages of the area under

ment.

1.

single out discovery of the

Labor. In mining regions female labor is cheap, and textile

might therefore be profitable. In overpopulated agri-

industries

cultural countries casual and irregular part-time work (such as

seasonal work) is poorly paid; therefore home weaving or the manufacture of toys or cigars might be possible. ^^ With the eye of genius,
von Steinbeis recognized that for Wiirttemberg highly skilled labor
was the most important location factor, systematically developed it,
and then selected industries accordingly. Without this official encouragement the economy of Wiirttemberg as a whole would hardly
be in such sound condition today.
Soil. Natural resources that are worth developing should be
2.
discovered, and the suitability of arable land determined.
Here many suggestions can be made.
3. Savings in Freight.
Shipping weight can be reduced to advantage by foundries,
(a)
mill, oil and sugar refineries, distilleries, tanneries, wool processors,
waste converters, and the like, (b) In the case of goods with com-

paratively high freight costs, such as vegetables, fruit, meat, milk,^-

and other local needs, artificial

and so on, local production can replace imports.
program for colonial industries is based on this

bricks, crockery, furniture, repairs

fertilizers,

The

fuel,

typical

possibility.
4.

With

Sales.

truly national consumer's goods, the advantages

of close contact are apparent.

The

incomplete indications appear somewhat in the manner

must be thoroughly investigated with a combination

first

given, but they

of location

and market analyses

in the

manner

indicated, that will

bring to light locational openings. The economy can avoid manv

disastrous experiments, though not all, by prompt governmental
investigation.

3.

Enhancement

of the Result

In the third place, the state can compel certain new combinations,
its intervention becomes truly creative. This is a rational
course when the measures adopted aim at achieving for a given

and here

31.

H. Metzdorf,

scfmftsforscItun(r,
32.

XVI

"

Raumordnung und

Agrarpolitik,"

For information on California see G.

Landwirtsrhaft

itn

Vierteljahrshefte ziir

Wirt-

(1941-42), 119.

nordlichen Kalifornien

Pfeifer,

Die rdumliche Gliederung der

(Leipzig, 1936)

p. 40.

Regulation from Without

nation, area,

greater than

335

or industry,

would be

by constructive combination, a result

possible with the free play of forces.

impossible, of course, to give a complete account, but

briefly a

few

we can

It is

discuss

possibilities that are of special interest in the present

connection.

Advancement

a.

A people can

of a People

be made more prosperous,

by fuller utilization
encouragement of
progress; better distribution of national income and national wealth;
more normal distribution of the population; a more reasonable
proportion between working hours and free time; elimination of
first,

of resources already present: by education; the

much harmful, inferior, and useless production; regulation of production and consumption in order to encourage easier and more
complete success of the economically rational; and so on. Second,
by increasing these resources at the expense,^^ or at least with the
help, of other nations. Here belong plundering, subjugation (reparaexpulsion (from the home country or from
tions, enslavement)
foreign markets) development (education of backward peoples and
opening up their territories) exclusion of competing peoples, and
duties that are borne by foreign countries or at least improve terms
of trade. ^* We select for discussion three stages of spatial expansion.
,

These broaden the view, offer new problems, give

crave adventure an outlet for their activities, and may be
of military importance as well. But what is their real economic
Colonies.

1.

those

who

value?

Pkmdering

^^

the soil

may provide

and

of a country

its

people and exhaustion of

great temporary gains, but a harsh, precipitate

man and nature

over long years. The flow of taxes and the advantages of cheap goods,
labor, and land last longer, either because of a natural surplus or
because of an artificially created market condition (monopolistic
demand supply extorted by high head taxes) It is more fitting
seizure removes valuable possessions accumulated by

33. See J. J. Spengler (" The Economic Limitations to Certain Uses of Interstate
Compacts," American Political Science Review, XXXI [1937]) who believes that all
,

state

intervention that does not merely help economic laws to prevail can achieve

results only at the cost of other countries.

G. von Haberler, Der internationale Handel (Berlin, 1933) pp. 215 ff.; English
A. Losch, " Ein Auseinandersetzung ijber das Transfer[1936], pp. 290 ff.
problem," Schmollers Jahrbuch, LIV (1930) 1093-1106 (typographical errors corrected
34.

edition

in

LV, 192)
35.

On

the question whether colonies save foreign exchange see the

of this book, pp. 221

f.

On

Weltwirtschaftliches Archiv,

varieties

LVII

of colonial

(1943)

trade policy see von

first

edition

Miihlenfels,

Trade

Pail Three.

gog

and apparently more profitable also to develop colonies, though it

is more risky in the long run wheti the drive for profit and for power
subsides.^^ Certainly the return to capital and the incomes of the
colonies are at first higher than at home, but how often has the time
soon come when blood and money have been lost for the mother
country: lost either to foreign peoples and new conquerors or by
succumbing to the temptation to strive for independence. Thus
investments are stolen, expropriated, or dissipated. Europe has
already lost untold billions by helping in the development of the
including its own competitorsmore, perhaps, than
it ever gained from this development.
As for these benefits, did it matter who did the colonizing? If
free trade, peace, and the principle of the open door prevailed it
would be practically immaterial, from the standpoint of economics,

rest of the world,

governs a colony. Not quite, however, for its officials would

belong to the governing nation and consequently many official
purchases would go to the mother country, not only because of
sentiment but also because of the many and varied reasons of greater
" nearness." Again, her colonists would have the advantage of a

who
still

common

language, and so on.

does not exist, but preferential treatment
country. Nor does the principle of the
mother
the
goods
of
of the
home capital and colonists of
contrary,
prevail;
on
the
open door
^^
Finally,
perpetual
peace does not prevail,
like race are favored.
reality, free trade

In

but rather the possibility of wars.

Thus colonies increase emigration and exportation from the
mother country, and improve its supply conditions. Trade and
migration follow the flag.^^ If colonists themselves bear the cost of
their government this is certainly advantageous, and may be so if
they need subsidies. ^
the end to predatory cultivation. The
one single product, for example, has ruined wide stretches of African soil.
(G. Lenschow, " Struktur und Probleme afrikanischer Kolonialwirtschaften," Welt36.

One-sided development amounts in

raising of

wirtschaftliches Archiv, LIII [1941], 597

37.

Consequently

it

is

difficult for

ff.

small nations with large colonial possessions to

develop them as quickly as can large nations with but few possessions overseas.
38.

This has

C. Gini

("

also

been proved

Trade Follows the

statistically

the exceptions to this rule are important.

foreign trade of the

through the exhaustive investigations of

though

Flag," Weltiuirtschaftliches Archiv, March, 1938)

In any case, the share of colonies in the

mother country has increased considerably almost everywhere in

(Statistisches Jahrbuch jiir das Deutsche Reich [Berlin, 1938],

comparison with 1913.

p. 148*.)
39.

W.

Sulzbach

("

Der wirtschaftliche Wert der Kolonien.

Kolonialproblems," Deutscher Volkswirt, 1926, pp. 300

this point.

ff.,

334

ff.)

is

Die

Zukunft des

overly skeptical

on

Regulation from Without

If colonies overseas

of the

337

are to guarantee the economic independence

in time of war, a navy becomes necessary.

mother country even

Most of the colonial powers in western Europe lie closely adjacent,

whereas their oversea colonies are far away and promiscuously intermingled. With a few limitations in favor of France, Spain, and Italy,
it is not true, therefore, that in defending its possessions against an
aggressor a single colonial power would enjoy the advantage of
shorter distance from its center of operations, as would be the case
But
if every colonial possession surrounded the mother country.
when no other factors compensate for a difference in naval strength,
it follows that only the strongest sea power, and consequently only
one single colonial power, is really sure of communication with its
overseas possessions in case of war. This one was England as long
as she continued to maintain a navy equal to the two next largest
together. For every rising industrial country in Europe there remained only the choice between allying itself with England or
defeating her, since an unsettled rivalry would entail the constant
danger of being cut off suddenly from essential overseas resources.
Concessions combine the advantage of colonies with a saving in
government subsidies. In order to obtain and keep them, military
power is needed in addition to diplomatic finesse, just as in general
the promotion of foreign trade

is

essentially a political task.*"

Colonies of emigrants continue to offer advantages to the former

motherland long after they have become independent, for a common
language, similar customs, and many personal ties favor trade with it.
A good part of Europe's prosperity is based upon her American
offshoots, her Asiatic concessions, and her African colonies.*^ Up to
World War I the great powers could compete for the size of their
shares in these advantages, but in the course of this competition
the object of dispute itself became smaller. More and more the
common interest of the European industrial nations, preservation of
their hegemony in general, demands consideration. Day by day it
becomes clearer that they must abandon the vital principle of
European special treatment or at least of the open door, if their
armies and navies continue to neutralize one another. Not that
the independence of colonies, the crumbling away of concessions,
the separation of the American countries, and particularly the rise
of new great powers, are merely the result of the decadence of
40.

In

Sombart

special

cases,

of

course,

political

traces the adaptability of the

weakness

German economy

may

in

itself

favor exports.

in the past century to

it,

and

others the increase of Germany's trade with China since 1918.

41.

The

profitable.

association

of

capitalism

and imperialism was

not

essential,

though

Part Three.

338

Trade

European might. Though the course of events could not have been
wholly arrested, it could at least have been delayed.*- It is small
comfort that overseas industrialization benefited Europe also, that
it increased the purchasing power for her goods, and at most merely
changed the commodity composition of the exports: more machinery
instead of finished goods, more quality goods instead of massproduced articles.
It is true that the proportion of overseas trade to the total trade
of Europe changed but little immediately after World War I. In
1910 38 per cent and in 1930 40 per cent of all European imports
came from overseas, while in 1910 as well as in 1930 31 per cent of

European exports went

to countries outside

Europe

{Statistisches

Jahrhuch, 1931, p. 95*) Power and welfare are not absolute, however, but relative to that of others. They diminish in Europe, even
though they may increase absolutely, when countries outside it grow
powerful and rich still more rapidly.*^ European foreign trade has
declined proportionately, though not absolutely. In 1910 Europe's
share in world imports was 66 per cent and in 1930 59 per cent; her
share in world exports declined from 60 per cent in 1910 to 53 per
cent in 1930.** This means that the world outside Europe carries
on increasingly more trade with itself.*^ No longer do all roads
.

42. It is said that the situation

has changed for Europe.

the changed reaction to this situation, which

See A. Losch, " Die neuen

formerly.

wirtschaftliches Archiv,

LIV

(1941)

is

no longer

But the decisive factor

and so decisive

so logical

is

as

Methoden der englischen Handelspolitik," Welt-

338

ff.

contradiction to the otherwise excellent presentation of O. Veit, " Indus-

43. In

und Welthandel," Wirtschaftskiirve, 1936, pp. 349-361. It would be to the

European countries together to limit the exportation of certain patents,
machinery, and books, as well as the emigration of skilled labor to, and the admission
of students from, particular countries; that is, to prevent Europe from being pushed
back into the position of a teacher. Yet the threat to European export must not be
exaggerated. Certain advantages of situation (as compared with North Africa and the
Near East, for instance) of resources (research, highly skilled labor, tradition, coal and
iron)
and of mass production (in so far as this is chiefly based on her own great
markets) cannot be taken away from Europe at all for many years, or only by fantastic
tariffs. This is also Alfred Weber's opinion (" Europa als Weltindustriezentrum und
die Idee der ZoUunion," in Europdische Zollunion, edited by H. Heiman [Berlin, 1926]),
who sees consumption-oriented industries endangered most, labor-oriented industries
less, and material-oriented industries least. On Europe as an agricultural location see
G. Pavlovsky, " Zur Frage der raumlichen Ordnung der Landwirtschaft," Internationale
Landwirtschaftliche Rundschau, Vol. XXXIII, No. I (1942), p. 351.
44. For a more detailed statistical analysis see \V. Scholte, " Zur Frage der sogenannten
Enteuropaisierung
des Welthandels," WeltwirtschaftUches Archiv, Vol.
trialisierung
interest of

'

'

XXXVII,
45.

no.

(1933)

Even within Africa World

War

II is said to

South Africa became the most important supplier

have developed a considerable trade.

as far

north as the Equator. Enter-

Regulation from Without

converge on Europe.

and Europe

339

The world

threatens to shake off

becoming more and more

is

others/^'*^ yet finds this to

just

its

leadership,

one continent among

be right!

Their economic value (for their

2. Large Econornic Areas.
military-economic value, see p. 202) depends upon whether they
represent what is left of a world empire or are composed of smaller
areas; that is, whether they originate analytically or synthetically.
In the former case, the results are disadvantageous in almost every
respect; in the latter, it depends on the individual case. To what
extent the advantages of free trade materialize is contingent on
whether hindrances to trade increase or decrease on the whole; that

on whether
restrictions on
is,

formed by the increase of

trade with the outside world or by the reduction of
a large

economic area

internal trade restrictions.

is

In addition

it is

essential to distinguish

the country at the geographical center whose market areas are most
expanded by the removal of internal barriers, from the frontier
all are curtailed by the increase of
outward barriers. The connection between the formation of a large
economic area and the stabilization of economic development is not
so simple as has been represented by some of those with no knowl-

regions whose markets above

edge of cyclical

relations.*^

economy

by political tenon its edge. In the monetary

field it is possible to replace the shipment of international money
also, most motives that used to
by the less expensive clearing;
lead to exchange control between parts of the large area will perhaps
disappear.^" Economic planning will be facilitated, since internal
Certainly the

will be less disturbed

sions at the center of the area than

'^^

need appeared everywhere and more and more raw materials

from overseas are worked up on the spot. Industry continues its spread, and world
trade necessarily loses in importance thereby.
46. The loss of England's dominion over world trade around the middle of the

prises supplying local

See K. Wiedenfeld, " Raumis now followed by Europe's loss.

gebundene und raumunabhiingige Wirtschaft," in RaumiXberwindende Miichte, edited
by K. Haushofer (Leipzig, 1934) p. 274.
47. This may have undesirable repercussions on the other continents also. As a
domestic economy cannot function without a strong government, so the world economy
cannot function in the absence of a leading power or group of powers.
48. For this I must refer to my forthcoming work, Wesen und Niitzen ivirtschaft-

nineteenth century

licher Grossrdume.

See also pp. 322

f.

This has always been done within the sterling area. (A. Losch, " Verrechnung
und Goldwahrung ein Vergleich," Die Bank, August 21, 1940.) To this extent the
49.

Keynes plan
50.

offers

For the

nothing new.

rest,

the monetary standard within a large economic area

is

partly a

matter of no consequence, and partly raises the same problem that would exist also

Part Three.

340

Trade

disturbances will be eliminated by pacification and external ones

by isolation, especially in the central region of the area and to a
smaller degree also on

borders.

its

in the space available, but even so

More than
it

is

cannot be said
clear that the advantages
this

economic areas depend upon many conditions, and that

the vision of genius is required to recognize in what situations
their creation would be profitable.^^

of large

Unions.

3.

people can further increase

its

wealth not by

forcing preferential treatment from others or laying claim to leader-

but by uniting with them as an equal. Then all customs

among them will disappear as a rule, even though only
gradually.^2 Vigorous industries push their market areas far into
an adjoining country, whereas weak ones are thrown back from

ship,

duties

the frontier or

succumb

entirely.

The

advantages of unions are, first, that all goods are brought

from the cheapest place. Second, the wider markets enable particularly small countries to take full advantage of the economies
of mass production in a good many industries. ^^ Thus not only
without the formation of such an area. I hope to throw light on these questions in
Theorie der Wdhrung. [Weltwirtschaftliche.s Archiv, LXII (1949) 3-88.]

my

51.

The

first

large economic area was carved out

by England from the pre-existing

Handelspolitik seit Ottawa [Jena, 1937]. A.

world economy.

(A. Schlie, Die britische

Die neuen Methoden der englischen Handelspolitik,"

Losch,

"

Archiv,

LIV

Weltivirtschaftliches

[1941], 312-348.

52. The abolition of tariffs was incomparably easier a hundred years ago, when the
German Zollverein was formed, than it is today, because most industries still had very

short sales radii. In the main, therefore, only enterprises near a frontier suffered from
the competition of an adjoining country. After a union has been formed, prices will

drop more sharply in the country with higher duties. First, because the prices of
imported goods will be perceptibly reduced; and, second, because the resulting import
surplus (= loss of purchasing power) depresses domestic prices.

From
demand

53.

the

a definite price

onward

(the highest delivered price at the

former frontier)

curves of those enterprises with the lowest delivered price at the frontier

fall less after

union than those of neighboring competitors beyond the border. Then

the Chamberlinian operation has been undertaken, the

may even happen that, after

new point of tangency between
it

the demand and cost curves lies lower when the latter
Figure 48)
This is shown in Figure 59, where A^' is the new
demand curve and P' the new equilibrium point. The market area within the frontiers
of the old state may be curtailed or extended, but the sales must extend into the other
is

not broken

(as in

member

of the union if prices are to fall. In Figure 60 the limits of the market area
before the formation of the economic union are represented by a continuous line,
those of the new one by a broken line. If Eastland had previously collected duties of

a height DJ, the market of A in Eastland would be bounded by CDE if deliveries

could be made directly to every point, and by FDG if only through the customhouse B.
If
represents not a customs border but a narrow river with a bridge at B, the

HK

eastern market area

would be bounded by the

arc

HJK.

Regulation from Without

34'

has everyone in either country free access to the cheapest sources of

supply in both countries, but many goods can be produced more
cheaply than before. The advantages of mass production are added
to those of free trade/"'

Westland
Fig.

59.

Possible effect of cus-

Fig. 60.

Eastland

Reduction of market areas by a

tariff

toms union on demand and price

54. Tliese necessarily

outweigh the disadvantages of a possible deterioration in the

when

relation of import to export prices, such as easily occurs

small countries are able

produce their export goods more cheaply, whereas their increased demand is apt to
make imports more expensive (if it affects them at all) These countries gain less per
unit through free trade, but because by specializing they can produce and exchange
to

greatly increased quantities, they gain

For the following train of thought

more

in

all.

consider countries as units. Suppose

America produces 200 cars and 200 chemicals, and that
Germany produces 10 cars and 15 chemicals in ten days under the assumption that the
United States is surrounded by a tariff wall. But let German production be 100 cars
and 150 chemicals if the United States should change over to free trade. The exchange
ratio of cars to chemical can thus fluctuate between 10 10 and 10 15. If the United
it

suffices to

that in ten days of labor

States pursues a protectionist policy, the barter terms of trade will be in the neighbor-

hood

of 10 cars to

lOJ^

chemicals.

With American

around
With American protection the United

mass production,

4|^

chemicals.

it

will

Germany

change

to

free trade

and the resulting German

10 cars to 14^ chemicals.

States thus gains | chemicals

and Germany

With American

free trade the

therefore gets the lion's share.

United States exchanges 145 chemicals for 100 cars, thus gaining 45 chemicals compared with their no-trade situation. Germany gains only 5 chemicals, on the other
hand, since she could produce 100 cars in the same labor time as 150 chemicals. The

from trade per unit goes to the United States.

But what difference does it make to Germany that she can buy her

lion's share of the gains

cars in the

o<2

Part Three.

Trade

If Eastland is more thinly settled than Westland and migration

unrestricted, the population in the two countries will become
even, other things being equal. This is easily said, but how strongly

is

it

influences social customs

and

attitudes!

In Westland, for example,

the trips of daily life become longer. It is farther to the

to the baker, to the town hall, to the city.
neighbors,
fields, to
entirely, whether or not they are overdisappear
Individual villages
some of the towns are reduced in
and
taken by the wilderness,

almost

all

^'^

importance; the whole hierarchy of central places is slowly thinned

out. People voluntarily leave certain occupations, or marginal producers are forced out by the impatient. Average productivity rises,

and the question now is whether this will

exceed the increase in the costs of distance. Only where there are
no possibilities for large-scale production (see p. 175 and pp. 179 f.)
will efficiency and the size of markets decrease also. But in all other
cases people widen their horizons, become healthier, more openminded, more self-confident, but perhaps also more awkward, more
sluggish, less sociable. The towns draw nearer to nature since they
spread out more, yet, being less numerous, become unfamiliar again

at least in agriculture,

to

many

inhabitants of the country.

In Eastland all is reversed. Such a revolution in the modes of

settlement and living requires much capital. In Westland it is not
replaced or destroyed, and is newly invested in Eastland.^*' Furthermore many traditions are lost in Westland, and must arise again
in Eastland.
yS.

enough

Is it

to

United States for not

Furtherance of a Country

remove the

much

less

^"^

evils associated in reality

with the

than she could produce them for herself, provided

she specialized in car production and free trade prevailed, compared with the fact that
she can

now exchange

ten times as

many

cars

although at a

less

favorable price?

Even though the German barter terms of trade (per unit) have deteriorated, her gain
from free trade (namely, 125 chemicals: 150 30 -f 5) is incomparably greater than
(Of the gain of 125 chemicals, 120 are due to increased
the American gain of 45.
productivity which free trade, compared with autarky, makes possible, while 5 chemicals
are due to the gains from trade proper. Expressed in chemicals, the productivity under
autarky would be only 30.) [Translated from the first German edition, pp. 196-197.]
55. Instead of many villages becoming too small for local industries.
56. Thus, by increasing the amount of capital the Italian policy of the HohenstaufEen Emperors was a precondition to settlement of the East. See Dannenbauer, in
Festgabe
57.
state.

state

fiir

For

The

Haller.

many

was ready

that the

years

its

territory rather than

its

people was the main interest of a

emigration of hundreds of thousands of citizens caused no concern, but the

main

to

make war over

interest of

every square mile of land.

young countries should be

in

It is

more understandable

territory or,

under certain

Regulation from Without

343

free choice of a location?

That

is, is it

merely a question of creating

the conditions under which reality comes nearest to the ideal result
of the free play of forces without a long detour (2)
this ideal case still show defects?

1.

Or

does even

RESULT AND DEFECTS OF A FREE CHOICE OF LOCATION

IN THE IDEAL CASE
impossible to state in detail how the spatial order of the
in the ideal equilibrium of freely operating-

It is

economy would appear

We

cannot solve the general equations of location, but we

know the equilibrium conditions that they express and, as a first
approximation, their geographic pattern as well. After all, this provides a general impression of a spatial order whose principal features
one can accept: organic arrangement of economic landscapes with
a favorable mixture of town and country (if man but desire this)
regard for the suitability, but also for the geographic position, of
land and peoples; equal use of all space by as large a number as
possible of separate and economically independent units; ^* protection of the producer against excessive competition, and of the
consumer against exorbitant prices; a larger national income; and,
to crown the whole, equilibrium in spite of freedom.
Indeed, the most important result of this book is probably
the demonstration of the surprising extent to which free forces
operate favorably. But there are shadows in the picture, too. The
mechanism is not guaranteed to work toward the welfare of the
individual as correctly understood, or adequately toward the highest
forces.

common

good.

First,

respects

it

all

human

wishes sight unseen,

whether these are Avholesome or unwholesome. It assures the best

supply of opium as of milk, and takes note of a desire for the metropolis just as it does of a love for the soil.'"'^ In short, as soon as sound
conditions, the people living in

the variables, whereas under a

58.

The

at

it
it

any given

tiinc.

decisive advantage of the free location

be independent Avithout subsidies.

nor the lowest costs of production.

Here the people belong among

the land.

is

But

On

it

is

that

it

permits economic units to

guarantees neither the greatest production

the contrary, the national income

may

be raised

at the expense of the social income,

pations where they

59. If

men were

may be

less

by forcing persons to work in places or at occuhappy but produce more in physical terms.

indifferent in this respect, as in our simple scheme, the free play

would bring about a fairly regular distribution of settlements of various size,

which would be somewhat denser only along lines of communication. Thus abnormal
agglomerations are due only to man and to natural differences, not to the economic
mechanism. Even the unsatisfactory liviii^r cond'tions in these agglomerations arc
chicflv ihe result of an injudicious use of income, not of an increase in the price of
land. (A. Spiethoff, Boden und Wohnung [Jena, 1934], pp. 90, 109.)

of forces

Part Three.

^^

instincts are lost

it

Trade

makes the influencing of the human will not

Education, propaganda, and pressure

superfluous but necessary.

have to take over the function that habit used to perform.

Second, the free market mechanism works much more toward
the common good than is generally supposed, though with certain
exceptions. It offers hardly any protection against disturbances of
the equilibrium in nature, or against the ruin of beautiful landscapes. Moreover, an economically advantageous location may be
unfavorable from a military standpoint. But it would be wrong to
conclude from this that economic considerations are irrelevant;
that in doubtful cases, and thus in effect always, the military point
of view should prevail and simply assign locations to each economic

and militarily desirable locaFor example, it is favorable from a military

standpoint if large places do not lie close to a frontier, since they
can then be more easily protected. But the free play of forces
works in exactly the same direction under the influence of political
frontiers. As a rule the various economic implications of a political
frontier greatly curtail market areas in an adjoining country, and
most places with a central function therefore keep a certain distance
from the border. The most important exceptions are supply-oriented
activities such as ports, which, however, even a decree could move
to another place only with difficulty.^" In the second place, even in
unit.

In the

first

place, economically

tions often coincide.

the interest of defense the economically best location

is

actually

abandoned only in urgent cases, because every such removal lowers

economic efficiency in case of war.
Finally, the free play of forces guarantees the economically best
result only in a static state.
to introduce every technical

the

moving van

In a developing economy it is wasteful

improvement immediately and to order

instantly with every shift of the best location.

To

common

misconception: the waste does not lie in

the fact that the old discarded machinery was still perfectly good,
or that removal was carried out at a loss. As long as production
is cheaper with old machinery than with new, even though perhaps
ignoring depreciation that is, as long as the old has real economic
(not technical) value it will not be discarded at all.^
Similarly with a change of location. A location will be abananticipate the

60. Most of the large Canadian cities, for instance, lie surprisingly near the
American border. This is mainly because of climate and the natural routes of
communication.
61. This has been shown with the utmost clarity by G. von Haberler, Der internationale Handel (Berlin, 1933), pp. 138-139; English edition (1936), pp. 183 ff.

Regulation from Without

345

does not produce cheaply enough even though

the cost of all installations has been completely written off. The
difficulty lies elsewhere: the new machinery and the new location
are more advantageous only under certain assumptions. In the
calculations a definite length of life or a definite, and generally

doned only when

it

shorter, amortization period

and the newly erected

still

better, or

the

if

plant.

new

is

If

assumed
the

location

is

for the better

new machinery

changed again before the end

of this period, the calculation was wrong.

In retrospect,

that considering their actual length of life the

the

new

machinery
replaced by

is

location did not produce by any

it

turns out

new machinery and

means

so cheaply as

had

because future improvements had been

not
at all. If the future had been known,
incorrectly
or
anticipated
would never have been sacrificed to
enough
the old factory often
the first improvement. One would have waited until a second

been assumed

originally,

improvement, still greater in comparison with the original condition, had arrived. Not to be able to wait, always to want the best
machines at the moment (not only technically, but economically
best) to react instantly to every change in locational factors, merely
decreases profits in some cases, but in others it means real private
and social loss. The latter is more probable the less superior is the
second machine or the second location to the first. ^,

Z.

RESULTS FOR SPATIAL PLANNING

We have found two compatible aims of a sensible location policy:

about the results of a free economic mechanism (2)
and to modify them. To bring them about when they are reasonable
in themselves and not fully achieved without help only because of
To modify
frictional resistance (lack of knowledge and mobility)
them, first, when even in the absence of frictional difficulties these
results represent not the most advantageous economically, but a
historically conditioned situation, either because they still depend
upon accidents in past development (the first start) or are in danger
of being refuted later by the incalculable future. To modify them,
second, when the utility calculations of the individuals upon which
the economic result was based are acceptable in their own interest
to help bring

to buy up new inventions

on progress that had to be paid
by everyone who improved his machinery or location, and that would be refunded
Such a tax would
if the supposed improvement turned out to have been precipitate.
increase the national income and be a guarantee against overhasty development. As a
tax on location it would discourage removal without retarding progress.
62.

Hence

it

is

not at

without using them.

all

unreasonable for large firms

One might even imagine

a tax

Part Three.

346

Trade

(abnormal individual cases or mass phenomena) or in the general

(perhaps because of insufficient allowance for natural, aes-

interest

thetic, military, or future interests)

What

be done in the individual case cannot be stated in

advance. Politics must determine the order of importance for the
various aims.^ Like medicine, economics can only provide the
means. These can be classified according to the gravity of the interaccording to its
vention (restraints, prohibitions, lures, orders)
(an individual
its extent
cost (compulsion, payment, education)
or an inclusive plan, the latter of which may be for a locality, a
Here we distinguish with respect
district, a country, or an empire)
to the moment; that is, according to whether economic policy forms
the locational system from its very beginning or whether it interis

to

venes only later in an already existing system.

(aa)

Spatial Organization in

existing order to the ideal there

Old Countries. In adapting an

is a choice between altering it

abruptly and ruthlessly, or guiding it gradually toward the desired

form by influencing its further development. The supreme ideal is
the welfare of the country. This is hard to define, but there is a
series of generally accepted goals that serve this end, and in the
interest of brevity I have drawn up in tabular form a hierarchy of
means to these ends (Table 17) .^*'^^
for water by
communications (see Heiser,
Raumjorschung und Raumordnung, 1938, pp. 31-36) Final decisions must be made
by those who venture, not by those who balance one argument against another.
64. It was a difficult task, not only because different means serve the same goal,
but also because the same means may serve different goals. This would be clearly
shown by a large chart, but Table 17 seems to me to be the next best method of
presentation. It should be added in general that methods of the same rank often favor
one another, though this is not always indicated in the table. I have also included
certain methods about which I entertain grave doubts (followed by an asterisk)
if
they are in use. Unfortunately there was not space for either criticism or comments.
As the starting point is in reality the actual, not the ideal, pattern of a free economy,
methods discussed in 2 have been repeated in the table.
65. On planning in Germany within the 1938 borders, see, for example, H. Muhs,
" Die Raumordnung vor neuen Aufgaben," Raumjorschung und Raumordnung, 1938,
W. Fischer, " Die Organisation der Raumordnung,"
pp. 476-480 (programmatic)
ibid., 1938, pp. 225-229 (organization)
K. Briining, " tJber die Bearbeitung von Raumordnungsplanen," ibid., 1941, pp. 6-12 (working methods); F. Kann, " Grundsatze fiir
die Bereinigung des deutschen Dorfes," ibid., 1942, pp. 386-394 (rural reorganization)
G. Isenberg, " Der Umfang und die Auswirkungen der landlichen Neuordnung in
Deutschland," Deutsche Verwaltung, 1942 (planning the optimum size for a farm)
W. Puttkammer, " Forderungen der Raumordnung an die Standortauswahl," Raum63. It

balances special interests, for example,

the competition

in

households, agriculture, power stations, industry, and

.

jorschung und Raumordnung,

[1937],

358-364 (location policy)

Raumforschung und

"

..

Regulation from Without

Table
Method
for

77.

347

SYSTEM OF METHODS FOR REGIONAL PLANNING

Attained
bv

Goal

No.

More

healthful

I-IV

life

Higher earnings.
Fostering of Kultur
.

Military protection.

V-VII
uvwz

a r s

Method
for
a

Proper cost allocation (see p. 137*

footnote 000, and p. 238)
Closed regions'
Regions to be promoted
Graduated tariffs for coal and raw

a c n V
a y z

Methods

materials

Separate zoning of residential and

Life nearer to nature

Easier life

More secure life

More independent

dz

life

g ix

m-p

w
be
be

powers

Increase

industrial areas

Conservation of productive

n p-r
d f i-m

power.

Preference to local people and firms

9
10

Ownership of homes
Ownership of land^

11

Easy access to nature'

Forestration of remote land
Consolidation of agricultural land
Reversion of land to nature*
Interchange of migratory workers*
Consolidation of supply and market

12
13
14
15
16

of productive

Better utilization of produtive power

Auxiliary Methods

DI
I
I

areas'*

Decentralization^Intimate contact

17
18

1-7
8-10

Recreation

V VII

Avoidance of unneces-

4-7,9-11

19

VII
VII

sary roads
Avoidance of traffic jams
More assured basis for

12-19
52

20

business planning.
size of enter-

20-22

prises

23-26

II

III

III

IV
III

VII

VII

21

Adequate

Encouragement of small
enterprises
Elimination of unprofitable
nonagriclutural
enterprises
Encouragement of old
nonagricultural enter-

hkl
hkl
27/8, 30

Introduction
of
new
nonagricultural enter-

VVI
V
VVI
VI

More self-sufficiency*.
More protected settle-

Protection and planning

of labor
Preservation of nature.

AC
III

VII

Spatial communities
Diversification of busi-

VII

ness possibilities
Full use of public

CII

Encouragement of poor

31

provementsj
Test economic
tions

1
1
1

regions.

49/50
4,51
2,8,16,53
3

q
q

3, 5,

27

Methods

Encouragement of independence
Autonomy of units of manageable
size

(p.

239)

suitability

of loca-

Take over preliminary risks'

Compulsory locating of monopolies
Encourage enterprising persons'
Organize simultaneous and general
advance'"
Prpraote" woodlands and thickets*
Soil conservation'^
Soil improvement'^,

Increase

amount of land'*

41

Regulate supply and use of water'*

42
43
44

Influence precipitation'^
Influence warmth"
Utilize industrial gases*"

45
46
47

Education

48
49
50

Influence migration"
Protect national monuments
Foster pattern of settlement
General partial protection of nature^"
Separate local and through traffic^'
Encourage obvious central points

Rational basis for setting wages"

Influence natural increase of population^'

5,34

Individual

ah
w

33
34
35
36
37
38
39
40

stallations*

Increase sales^

Break up large enterprises

32

in-

Decrease costs*

47/8

Specialization
in
nonagricultural
enterprises*
Full-time employment* (see p. 164,
footnote 1)
Consolidation of landed property*
Obligatory licensing for new enterprises*
Merging of old enterprises*
Elimination of submarginal enterprises*
Discontinue subsidies

ment

26
27
28
29
30

Maintenance of adequate inventories

Consolidation of railway lines on
outskirts of towns
Remove large railway and industrial
installations outside towns

Improve quality
Survey possibilities of technical im-

D VI
D
D

27/8,31/5
36/7, 46
4, 37/40
37,41
37, 42/4
45/6

Prevention of damage.
Soil conservation
Water conservation
Control of climate
Increased productivity.
Regulation of size of
population
.

24
25

25/6

prises

VVII

22
23

1,3,27/29

prises

VII

Individual Methods
(continued)

No.

51

52
53

(1) Closed to new nonagricultural enterprises, building (urban parks, good farm land), cultiva(danger of wind erosion), alteration (preservation of wild life, etc.). Zoning is in general
an important measure in the organization of space. (2) For example, by free divisibility. (3) Thus
permit no factories, warehouses, squares, etc., to intrude on the edge of a town between the residential quarter and the open country. (4) By accurate calculation of the costs of distance (see pp.
ff.), organization of the market, protection of a region, exchange of customers; knowledge of
neighboring associates, and promoting the maintenance of inventories. (5) With small enterprises:
promote small-scale technique (small motor, for instance); tax adiantages. With old nonagricultural
enterprises: rationalization of the enterprise and the industry (standardization, regulating the working
up of national resources); foreign models; cheap raw materials (geological research, reclamation of
waste). With new nonagricultural enterprises: reduction of freight and taxes and other rewards for
an adaptable choice of location. (6) With small enterprises: development of a demand for quality,
public orders. With old enterprises: dissemination of knowledge of their existence (by common

vation

Trade

P^rt Three.

348

and their quality (by expositions). With new enterprises: public orders, curbs on
importation.
(7) Encourage research, publish the results; instruction, advice, study of foreign
achievements. (8) Infant industry tariffs, temporary tax exemption, establishment of public installations (roads, electricity, water, railway station).
(9) For example, admit political and religious
refugees (Huguenots). (10) Important in fighting many pests. (11) Protection against wind and
erosion, equalise precipitation, sanctuaries for insectivorous birds (A. Seifert, Die Heckenlandschaft
fOdal, 1942], pp. 323-333). (12) Protection against drifting and erosion (woods, hedges, protective
planting, and perhaps prohibition of plowing), against leaching (suitable fertilizers), and against
building on good arable land. (13) Irrigation and drainage. (14) By dikes, clearing, and improvement. (15) For example, requiring licenses for large consumers, equalization of peak demands for
various regions.
(16) Encourage rain: fnrestation, facilitate evaporation from open water (slow
and shallow flow), rainmaking by cannon fire and seeding clouds. Prevent rain: clear forests, rapidly
flowing or deep water, cause rain to fall over the sea, eliminate the rainy season (the plan to widen
the English Channel, which is supposed at the same time to moderate the climate of northeast
Europe. See A. Jaumann, " Gelenktes Klima," Deutscher Volkswirt., 1942, pp. 972-974), hail
rockets. (17) Locate industry to windward [sic\; keep exhaust gases (carbon dioxide, iodine) in the
(18) For
country with ventilators (Kaserer, Berichte iiber Landwirtschaftl, n. s.. Vol. XXVIII).
example, time rates, not piece rates, for the finishing of expensive products that are easily spoiled
indenturing,*
attract
by free
increase
immigration
instance,
by
For
(investigations of Refa)
(19)
land for settlement (United States), expectation of independence, tax exemption, supplying of public
protective
Protective
animals,
so
on.
service (dwellings), beautifying of landscapes, and
(20)
planting, protection of picturesque landscapes as distinct from protection of whole regions (closed
areas). (21) Also in urban traffic. Direct through traffic past center of town. (22) Parallel where
possible by the size of the locality and enterprise. The best relation of agglomeration and dispersion
from the standpoint of aerial defense varies. (23) See, for example, F. Reichert, Das Gleichgewicht
der Geschlechter im Heiratsalter (Berlin, 1942).
advertisinK)

Spatial

(bb)

Organization ab ovo.

young country were

left entirely to

If

the development of a

the play of free forces, the vivid

would be repeated in all its

unprecedented achievements and

pictures of unbridled land grabbing

magnitude and

cruelty, with all

its

Raumordnung; and many monographs. Valuable data for reorganization are provided
by the District Maps of the Reichs Bureau for Spatial Organization, which indicate
statistically

comparisons

and descriptively the economic structure of individual districts and permit

among them. (See Erlduterungen zu den Kreisubersichten fiir das Wirt-

schaftsgebiet Niedersachsen [Oldenburg, 1941].)

Kann (Raumforschung und Raumordnung,

1941, pp. 361-365)

organization of a village on the basis of an ideal.

illustrates

Furthermore, Bohnert

the re-

(ibid.,

1943,

pp. 79-84) has developed careful plans for a rural reorganization of Wiirttemberg
(for my objections see pp. 65, 66 f., 115, 195, 234, and elsewhere), though they are

much

too radical.

For an example of modification of an old industrial location system

that was established in the

first

place largely by planning, the reader

is

referred to

(Raumforschung und Raumordnung, II [1938], 13 ff.). Most of its proposals result directly from a comparison of
the real with the theoretical pattern; for instance, the plans for through highways,
consolidation of farms, and a more even distribution of population and industries.
For this purpose the regions where more, or fewer, or the already existing number of
inhabitants seemed desirable were outlined on maps. The most important preliminary
the plan for the spatial organization of Wiirttemberg

study consists, as theory indicates, in establishing gaps in production in regions that

were

to

be more thickly

War damage

settled.

facilitates reorganization.

In England especially the war gave a mighty

impetus to the order of spatial planning, and three commissions published reports:
Royal Commission on the Distribution of the Industrial Population (Barlow Commission)

Report,

tralization;

(Cmd

6153)

the Scott Report

which deals with industrial decenwhich considers the development of the

(London, 1940)

(Cmd

6378)

open country; and the Uthwatt Report (Cmd 6386)

unnecessarily radical, concerned

Town and Country

Planning was established. For a discussion of regional planning in other countries see
the Barlow Report, pp. 288

with the nationalization of building land.

flE.

special Ministry of

Regulation from Without

349

The

century of freedom thought that this wild

behavior was curbed by hidden laws; the century of order believes
that such laws must first be given.
In many respects it may be enough to establish the conditions
under which a free economy functions by an act of the state. However, problems arise in the first settlement of a country the solution
incalculable waste.

which is best undertaken from the first by more farsighted

planning rather than by the costly and often shortsighted play of
free forces. The practical solution still remains incredibly difficult.
It certainly does not suffice to create some sort of Utopia by force.
What has to be done is to organize the economy even more efficiently
in space than if it were left to itself.
of

First:

Influencing the Start.

If a

country

is

being newly, or more

thickly, or differently settled, the historical progress of its settle-

ment

influences the subsequent outcome.

How

can that short

first

period of stormy development be prevented from dominating unduly

the following period of quiet growth? Furthermore, how can the
possible neglect of extra-economic considerations be prevented when
land is being occupied for the first time?

The

[a]

Plan.

The

first

idea of the concrete goal.

and

greatest difficulty

We know

only

its

is

to get a clear

general outline:

The

but within these limits it

economy must be kept within
should be helped to attain its greatest efficiency. The concrete
problem now is to discover the economically ideal size, distribution,
and employment of the population of a given country, and what
corrections in this picture are demanded by national health and
its limits,

national defense. ^^

The

" investigators of space " school

(" Raumforscher ")

tend to devote their
and to distrust a priori the locational pattern that
results from economic principles. As soon as the emphasis is a little less extreme and
the theory of the economics of space is interpreted, as by H. Weigmann (" Standort-

66.

real interest to these corrections,

theorie

und Raumwirtschaft,"

in

Thilnen Festschrift [Rostock, 1933], pp. 137-157)

say

simply a general theory of positions, in which the corrections then

receive their rightful place, one can thoroughly agree with them. See F. Biilow,
in the

main

as

Gedanken zu einer volksorganischen Standortlehre," Raumforschung und Raum(Hamburg, 1937) H. WeigI, 385 ff.; G. Schmolders, Wirtschaft und Raum
mann, Politische Raumordnung. Gedanken zur Neugestaltung des deutschen Lebensraumes (Hamburg, 1935) and others. In our sense, also M. Pfannschmidt, Standort,
"

ordnung,

Landssplanung, Baupolitik (Berlin, 1932)

Actual knowledge of a real area is the mainspring of research. It is the best
guarantee that investigation will be directed toward actual possibilities instead of
losing itself in a mere play of the intellect. He who does not wish to pursue science
may content himself with this experience alone. But how, then, can he compare the

Part Three.

350

We

optimum

shall first eliminate the question of the

Trade

size of the

have shown elsewhere {Was ist vom

population of a country.^^
halten?
1932, No. 2, pp. 19-24) why it cannot
Geburtenruckgang zu
be determined within wide limits, either practically or even theoOn the other hand, it is not impossible, but merely
retically.
expensive, to estimate approximately how large a population must
be to permit a certain desired material standard of living. The facts
that must be known are the same as those required to determine
I

the best employment for and distribution of this population; that

is, the natural conditions of production and the traffic routes in the
various parts of a country; the cost curves for the most important
products (including the output of trade and transport) as well as

demand as a function of distance with various

population densities; and the range of foreign competition. With
this knowledge as a basis the most advantageous situations for central
the approximate

towns and the principal locations for their systems of satellites, as

well as the main lines of the traffic network, can be ascertained with
fair accuracy. Then a locational system is obtained that corresponds
more or less with our ideal (Figs. 28 and 29)
Though achieved by scientific means, the result is not absolutely
correct, but merely a sound presumption the best that can be done
toward deriving guiding principles for a policy. Nothing more is
to be expected, for the attempt has presumed, in fact, to solve the
general equations for location. But as these are insoluble even by
science itself, the practical man can only try to solve them with
.

" space

of experience " with

"

mathematical space

";

that

is,

the starting point of

approach of equal rank? For the practical significance of the theory of space see W. Christaller's excellent article, " Raumtheorie und
Raumordnung," Archiv fiir Wirtschaftsplanung, Vol. I (1941). Compare H. Meinhold's
review of the first edition of this book in Die Burg (Krakau, 1942) p. 360. He who
speaks about experience wants to convince those of like mind, but he who deals with
the measurable aims to convince all by his arguments. It is another matter when, at
research with

its

result, as a scientific

the completion of his work, an investigator's findings for which he has paid dearly
are

announced with passionate enthusiasm. Another matter,

too,

when he who

actually

shapes space blends the ponderable and the imponderable into one artistic whole.
67. In this case, advancement of a country, it would be determined not by the
highest per capita income but by the highest total income, which would presuppose
a somewhat larger population. From a military point of view one would even have
is, all income that is above the subsistence
and could therefore be used in case of war or renounced. The latter means that
the labor concerned would be freed for military service. In case of war the total
available excess income is augmented when capital goods are not replaced, and by
other possibilities which temporarily increase the efficiency of the war economy. A.
Losch, Was ist vom Geburtenruckgang zu halten? [Heidenheim, 1932], Heft 2, 7th

to say the highest surplus total income; that

level
.

Exkurs, pp. 67-72.)

Without

Regulatioti from

351

sound instinct, and rules of thumb that can be derived partly

from the conditions that these equations express and partly from
the special location theory and from our knowledge of the structure of economic areas. The resulting prototype for the economic
organization of space, obtained in this crude yet only possible
manner, must now be corrected by the policy maker if he wishes
to attach more importance to certain extra-economic principles.
In specific cases that are of practical importance today the
vision,

situation

when

is

so simple that

relatively easy to sketch out a plan;

it is

is to be settled anew,*
of
the
settlement
can be taken
the
structure
benchmarks
for
and
where
conditions
similar and
agricultural
region
are
from an old
play
of market
whose system of locations came about by the free
forces. Then it may be hoped that the copy also will stand the
crucial test of functioning by itself as soon as it is left alone. Exact

as

a predominantly agricultural country

neither possible nor desirable; every new

Larger farms can be laid out,*''^ the superstructure of nonagricultural enterprises changed,' a definite system
imitation, of course,

plan

68.

is

Or

is

a creative act.

is

to

be entirely reorganized, as in the planning of the newly acquired

For this see the important general directions of the Reichs Com-

eastern territories.

missioner

7/n

(rural

development)

in

Reichskommissar

fiir

die Festigung deutschen

und Aufbau im Osten (Berlin, 1942) pp. 68-70;

and 13/11 (planning and formation of towns) in Raumforschung und Raumordnung,
1942, pp. 68-73. See also the interesting instructions of March 25, 1942, on the treatment of special cases (which corresponds entirely with theoretical expectations) by J.
Umlauf, " Der Stand der Raumordnungsplanung fiir die eingegliederten Ostgebiete,"
Volkstums, Stabshauptamt, Planung

Neues Bauerntum, 1942, pp. 281-286, which contains an excellent survey; the compilations, Landvolk im Werden, edited by K. Meyer, 1941, and " Struktur und Gestaltung der zentralen Orte des deutschen Ostens," Reichsarb. fiir Raumforschung, 1941;
and the extensive bibliography in Raumforschung und Raumordnung and in Neues
Bauerntum.
69. It

is

safer to plan in such a

way

that

all

incomes shall be larger than in the

older country.
70.

In an old agricultural region almost every nonagricultural enterprise has

typical lowest-order location:

in the small village

(blacksmith)

its

in the large village

(dairy), in the small town (veterinarian), in the county seat (slaughter house), and so on.
Within the 1938 borders of Germany in 1933 there were 62,000 smiths, 12,000 dairies,
7,500 veterinarians, and 527 slaughter houses in about 50,000 communities, of which
46,000 had populations of less than 2,000. Depending on its nature, every pursuit,
therefore, requires a population of different average size. But these figures do not
necessarily provide benchmarks for a new settlement if the number of customers varies
greatly in consumption habits from region to region. In planning the start, moreover,
(especially upward) that a given
it is impossible to change the size of a population
nonagricultural enterprise ^vill need according to its development, desired income,
consumption standard, and so forth. In this case the typical location of a particular
business may be a community of higher function, unless all villages are planned to be

Part Three.

.2

of areas selected (see pp. 130

ff.)

distant needs can be planned.

Trade

or special industries providing for

The more one departs from tried
,

conditions, however, the less easily can the mutual repercussions be

grasped. Just as the interdependence of prices can be controlled
only as long as they are not too distant in fact and in time from

the freely developed world of prices, so it is with the interdependence

of locations. In the long run no planning is a match for thousandfold universal interdependence.'^^
But so far we have a concrete spatial plan in
only.

its

main

outlines

We

to arise,

know where we wish or expect towns and traffic routes

and how large and of what sort farms, enterprises, and

settlements will be or should be.

we proceed to put this plan into effect we must realize

great weaknesses: (1) Erroneous results: When the
three
has
that it
after its fashion to solve the equations for
attempts
actual economy
and error, and thus is able to take
trial
location by continuous
Before

much more

completely the interdependence of all

factors, our incomparably more superficially derived plan may prove
to be partly or wholly wrong.^^ j^ may happen, too, that the planned
cultural landscape upsets the equilibrium of the natural landscape and that this cannot be restored as planned; for example,
the water economy may become unbalanced. (2) Erroneous assumpinto account

Even when the plan was originally good it may become antiquated by unforeseen development. (3) Gradual putting into effect:
The plan shows the final goal, but settlement of a country seldom
takes place in a moment. During the state of transition the population distribution will differ entirely from its final distribution,

tions:

larger than in the older area.

of districts

may become

According to circumstances a wholly different system

A solution must be found that will keep enterprises

necessary.

alive in the interest of the producers,

and within

easy reach in the interest of the

The latter determines the largest size of the market area, the former the
minimum number of its inhabitants. (See J. Umlauf, " Der Stand der Raumordnungsplanung fiir die eingegliederten Ostgebiete," Neues, Bauerntum, 1942, p. 284.) The
consumers.

locating of nonagricultural enterprises whose necessary sales radii extend beyond the
planned area is a risky business. Unlike smaller ones, these cannot be guaranteed
survival by keeping competition out unless they are monopolies or enterprises supplying

the state.
71.

The same

where there

is

situation appears in the

as little

natural landscapes.
72.

Of course

it

modern formation

of artificial landscapes,

departure as possible from the condition of free equilibrium in

(See Schwenkel, Forschungsdienst, 1943, pp. 120-123.)

is

saved from this fate largely because a precise scientific choice

impossible in any case, considerable scope often remains for personal

opinion, and all locations are made obsolete sooner or later by development even
though the existing state of affairs is protected for a time by the law of inertia.

of location

is

Regulation from Without

353

and the problem now

and guide the country

is

to correct the inevitable initial anomalies

to the final condition as planned."

Two

important principles emerge from these three restrictions

As long as the desired condition
is neither attained nor tested, all installations should be regarded
as provisional and kept as mobile as possible. The log cabin, not
the stone house; light luggage, not complete household equipment;
the path, not the highway, are the signs of the pioneer, (b) As the
correctness of the plan can be only presumed, not proved, even in
the most favorable case, its realization in the sphere of economics
should not be attempted by force, but only by light pressure. If
the real economy resists the planned settlements despite their advantages, the plan should not be forced, but reconsidered; the more
so because force generally demands subsidies. But the desire is to
provide settlements that in time will be capable of independent
existence; everything else goes against the pride of the settlers.
Planners should never forget that some day their creations must
undergo the crucial test of independent existence.^*

on the

applicability of our plan: (a)

[b] Implementation. The methods by which the state can carry

out its plan may be divided into those through which it cannot
help influencing the organization of space, whether it has a plan or

not;

and those others that

it is

free to

employ or

not.

To

the

first

belong:

Laying out the administrative network: Administrative centers,

and particularly the capital, are points of crystallization for trade
73.

See

Isenberg for migrating developmental

Raumordnung, 1941, p.
74. Where this rigid
increased responsibility

150)
test
is

enterprises

(Raumforschung und

is

lacking

(extra-economic plans or points of view)

placed on the planner not to

an
power degenerate into
planning includes power
,

let his

despotism. For as freedom means freedom for the false also, so

do the senseless. Here is an example from my own experience that could hardly
have turned out worse if the settlement had grown entirely without plan. In a small
town where a few steps used to take one into extensive woodlands and fields of waving
grain, one must now pass through miles of ugly human projects before seeing the
beauties of nature spread out before him once again. The most beautiful spots have
to

been fenced in for particularistic or even extralocal purposes, or actually destroyed.

Forest glades gently inclining to form a noble amphitheater have been converted into
rubble pits and leveled off to make a concrete stadium. Edges of woodland have been
cleared to gain a few yards of space,
equally.

489-496)

(See
.

and are now a horror

to the eye

and the

forester

O. Feucht, Waldrand, Stadtrand, Strassenrand

[Schwaben, 1941], pp.

In short, a spot in the heart of nature that was once suited to residence

and the storing up of reserves of health is now so transformed as to waste them. If

man is surrounded by bungled instead of a few perfect things, if he does not keep
the symmetry of nature constantly before his eyes, he will be destroyed himself in
the end.

Part Three.

354

Trade

and industry. The situation and central point of a system of economic areas may even be first determined by a political actnamely,
the founding of the capital; our ideal case of a uniform plain is the
best example of this. There are many instances of the attraction
exerted by a capital. Thus Stuttgart, a capital, has far outstripped
Cannstadt, though the latter is more favorably situated from the
standpoint of traffic; and even after industrialization the towns in
Wiirttemberg that are seats of higher administrative units {Ober-

have generally remained the economic leaders of their

plays such a minor role as it does in
the United States, on the contrary, political central points have
seldom succeeded in rising to the position of economic central points
as well. The country is ruled from Washington, a city of officials.
Springfield, the capital of Illinois, is a village compared with Chicago,
the economic center, and the same disproportion exists between
Albany and New York. Where the administrative network really
does play a role as a nucleus of crystallization,^^ it may be important
not to choose a permanent capital in the beginning, since this would
have to be in the vicinity of the place first settled and would distort
the whole spatial arrangement. It would be better to move the
capital step by step toward the interior as opening up of the country

amtsstddte)
districts.

Where government

progressed.
traffic network: In our ideal economic region a
route had to be arbitrarily established in addition to
the capital, before the position of the system was unequivocally
determined. Indeed, an economic region owes it very origin to the
advantages of a capital and busy main traffic arteries. It is for this
reason that the laying out of administrative and traffic networks is
such a powerful means in the spatial policy of the state. As soon as
the main traffic arteries and their tariff schedules are given, the rest
of the economic region, the feeder lines and the rural towns, can

Laying out the

main

traffic

be established.
thus providing a framework of capitals and main highways
actual settlement the state has already exerted a powerful
before

By

75.

Points

colonization.

of

have almost always been extremely important in

the development of the United States was " a steady process of

crystallization

Thus

radiation outward from central points of settlement."

Sales Control,

New

A Marketing Atlas

York, 1931], p.

{The Trading Area System of

Company,

of the United States [International Magazine

vii.

1850

On maps showing the distribution of population by ten-year intervals since

(G. H. Smith, "The Population of Wisconsin," Geographic Review, 1928, pp. 402-

421)

it is

76.

easy to see

how

a few rather large villages without a hinterland arose at

in the wilderness of central Wisconsin,

in the course of tim.e.

from which the surrounding country was

first

settled

Regulation

influence

Without

fro>ri

355

on the spatial order of the country." In addition there is

and division of the country, which only appear to be

the surveying

purely technical mattersJ^ The state cannot escape these tasks. It

is at liberty to decide whether in addition it wishes to supervise the
completion of this framework by private initiative. In so doing it
would act on one of two principles: It would either encourage or
restrict private initiative.

of private initiative: The bolder resolve is to

decisions that have been freely arrived at. The result

Encouragement
facilitate

represents an approximate solution of our equations for location.

77.

Compare

the following description of the settling of western Canada, where of

course the railroads were built by private enterprise.

e. g.,

"

and the convenience of

direct relation to the railroads

Urban

centers were created in

elevators for grain shipment,

appioximately eight miles apart with loading platforms four miles. These centers

became distributing points

for

points located approximately

supplies."

110 to

"

Larger centers flourished at divisional

130 miles apart, depending on accessibility of

efficiency of engines, at which engines and crews were changed. The

were dependent on the location of branch lines and junction points, of
terminal points, and the stimulus to population afforded by government buildings,
educational facilities, and wholesale houses." (H. A. Innis, Problems of Staple Pro-

water and the

largest centers

duction in Canada [Toronto, 1933], pp. 96-97.)

For the economy of many colonies the railroad running from the chief port into
the interior was the backbone of development, which was essentially limited to the
this road. For an example see G. Lenschow, " Struktur und
Probleme afrikanischer Kolonialwirtschaften," Weltwirtschaftliches Archiv, LIII (1941)
571-626; and Kolonial Rundschau, Vol. XXXIII. Cross connections between these railroads to the interior were hardly profitable at first because of the small amount of
domestic trade. Later it often proved unfortunate that not even a uniform gauge had
been provided.

supply region tapped by

78.

The

rectangular division of land

arrangement of the

traffic

network. Yet

unrestricted seizure of land by the

and how widely government

prevailed; that

is,

when

first

in the United States favors a latticelike

do not understand clearly to what extent the
wave of settlers, the squatters, predominated,

sale of lots of regulation size

through the Land

later surveying simply confirmed the actual situation

Office

and when

it determined this in advance. According to the classic account of Friederici the actual
end result depended upon whether the squatters who occupied the land or buyers who
wished to get possession of it won in the end. Then, too, the tendency to give everyone
an equal amount of land, with or without payment, came into conflict with the enormous allotments to individuals or companies (not always with the condition of later
subdivision among settlers)
In New England complete new settlements were planned
with considerable success, in the South with but little; in the West everyone lived for
.

important that the organization of new states took place

Der Charakter der Entdeckung und Eroberung
Amerikas durch die Europder, III [Stuttgart, 1936], 187-191, 256-324, and especially
himself.

In any case,

according to plan.

is

Friederici,

Turner, TJie Frontier in American History [New York, 1921]. Meynen and
Lebensraumfragen Europdischer Volker, edited by K. Dietzel [Leipzig, 1941],
278-292. Pfeifer, Geographische Zeitschrift, 1935, pp. 138-158, 361-380.

301.

F. J.

Pfeifer in
II,

it

(G.

Part Three.

3^6

Trade

The entire plan of the state is thereby put to the test. As explained
in 2, encouragement consists in the promotion of all ordering and
especially of all liberating forces, but, in the settling of new counHere a preliminary
tries, above all in anticipating the result.
determination of possible locations for settlement and their opening
up through public installations (water, power, traffic connections)
facilitates choice by colonists and entrepreneurs.^^ Correction of
the preliminary rough plan by the introduction of finer details
occurs only with time, when free initiative no longer needs to be
encouraged.
Restriction of private initiative:

The

free choice of a location

subject to certain pressure from the beginning, since it cannot

simply ignore the existence of artificial traffic routes, administrative
is

and other

In order to protect
to provide
for necessary corrections in the results of a free organization of space,
the common will of the citizens is influenced also by measures of
the nature indicated in Table 17. When applied to a new country
they are appropriately changed, and they perfect the result in comparison with mere self-regulation.

centers,

locations already established.

the public interest with absolute certainty

and otherwise

Second: Influencing Later Movement. With the conclusion of

settlement the location system has grown less fluid. The stage of
experimentation is over, the best location seems to have been found,

and above all the settlers have

begun to be less foot-loose. The huts of the first arrivals give way
to permanent structures, and with roads the community spirit grows
stronger. Migration becomes less frequent, more difficult, and less
desirable. At the same time the tasks and possibilities of a public
location policy decrease, but the little that remains must now be
carried out even more energetically. Desirable migration encounters
more obstacles and therefore needs greater assistance. At the same
time, and partly for the same reasons, less migration is desirable.

at least for the settlement as such,

The

79.

settlement of whole regions at a time has the advantage that public installa-

Such a settlement may be established also by special

private settlement enterpreneurs like the " locator " for the settlement of the East in
tions are immediately profitable.

the Middle Ages,

who founded whole

villages according to plan

(D. Haenelt, "

Lokator

der mittelalterlichen Siedlung," Neiies Bniterntum, 1942, pp. 404-405)

by great
landholders, railroad companies, colonizing co-operatives, and land speculators in the
in

United
If

States;

by trading estates in England, which rent out whole

factories.

the agricultural advantages associated with a low population density do not out-

weigh the nonagricultural disadvantages, long-protracted settlement may even end in

incomplete settlement (Alaska?)

Regulation from Without

357

With

increasing capital investment the consideration that not every

apparent improvement in location will prove advantageous in the
end grows more important. As "workers become more deeply rooted
there is much to be said against their transplantation, which, moreover, generally

means urbanization.
y.

Encouragement

an Industry

of

Again the principal methods are education, payment, and comOnly through education can the whole economy be
promoted together with the particular industry concerned.^ Compulsion, as practiced by mercantilists, for instance, where the state
provided workers and customers to young industries, means disguised
payment, borne in this case by those who had to deal with the industry in question. Overt payment appears in the form of lost subsidies
(direct subsidy and protective tariffs) or of productive subsidies
The latter are designed to
(infant industry or temporary tariffs)
pulsion.^"

help out in a passing emergency. Thus the tariff to protect German

automobile and film production in the 1920's was economically
justified later, when they were actually able to hold out against
foreign competition with the introduction of the small automobile
and the sound film. After these changes in the structure of demand
the German market was no longer wide open to the cheap products
of American mass production, even without tariffs.^^

THE PRACTICAL VALUE OF ECONOMIC THEOR.Y

c.

We

have found economic theory valuable to economic policy in

It shows forth the assumptions, the functioning, and
the results of equilibrium for the model of the economy desired at
a given time. It is the business of policy to achieve the basic forms of
the model and make good the assumptions under which it operates.^^
In addition, it can intervene in the progress of the economy (and
three respects:

comprehensive systematization of the innumerable measures

one single branch of the economy: Marktregulieriing und Marktordnung

80. See also K. Schiller's

employed
in

in

der Weltagrarwirtschaft (Jena, 1940)

81.

The amazing

industry,

possibilities are

82. See A. Losch, Selbslkostcti-

dem Krieg

als

shown by the example

of the

Wurttemberg linen

from a decayed to a model industry.

und Standortverschiebungen von Genussgiitern nach

which Steinbeis developed

in the 1860's

Ursachen von Zolltendenzen

(Berlin,

1934), pp.

112-114

(Zwischen-

by H. von Beckerath, Heft 4)

83. Certainly the most important attribute of an economic system is not that it
shall function justly from every point of view, but that it shall function at all. The
equilibrium price is at first more important than the just price!
staatliche Wirtschajt, edited

Part Three.

958

Trade

here the quarrel between deists and theists will be recalled) though
the correct policy almost always begins at the roots, and not with
consequences. Finally, theory need not await the slow and inaccurate
operation of the economic mechanism, but can anticipate the results

by reasoning. We found an important example of this in the

planning of locations. Thus thought and action go hand in hand,
from first to last.
But and this is the most serious objection the theoretical model
of the economy is so simple that it does not fit the intricate conditions of reality at all. The answer must be divided into two parts.
First, when the purpose of theory is to show how the simple fundamental thoughts implied in the attitude of a period shape even its

economy, nothing further

is

required.

for practical affairs are derived

Second, however, with time (that

period)

science refines the

model

thought permits, and only with

fully to

life.

The

great rules of

from such simple

is

to say, with the aging of a

much

as

thumb

cases.

as the current state of

this elaboration

Finally the realistic refinement

does the idea come

under-

lost in details,

is

standing of the model as a whole is lost, and the period comes to

an end.^* For there is a limit to our understanding, and this is
where theory reaches the height of its development with its most
important achievement by deriving from conditions that can be
immediately understood propositions that, as dogmas, give a clue
to the mastery of

because

down

it

much more

simplifies;

it

is

intricate cases.

Theory

is

not useless

when it does not

more than necessary.

useless only

to the essentials, or simplifies

simplify

This is certainly true: What pure theory describes holds only

under its simple assumptions. For this reason it is so difficult to
explain by pure theory what has historically developed. Here descriptive ^^ theory helps out, to be sure, but it too has its limits. Yet
this be better shown than in the history of philosophy? The
Enlightenment were brought to a climax by Hegel, who made the last
great attempt to understand the world rationally. A comprehensive system based on a
simple idea! His system was the backbone of its time, the background against which
even belief in an economic or a political equilibrium must be viewed. As the individual
sciences broke away from the system and philosophy set them free and itself began to
specialize in logic and epistemology, so that no one remained who had a complete view
of the whole, the fate of the period was sealed.
84.

Where could

beliefs of the

85.

"

In the sense of A. Spiethoff, Die allgemeine Volkswirtschaftlehre als geschicht-

Festgabe fiir Sombart (Munich, 1933), pp. 79 ff. [The

auschauliche Theorie" as distinct from " reine Theorie." "Pure theory

liche

Theorie.

foundation and the validity of an ideal type,

validity of a picture of reality."

(Ibid., p. 82.)

'

descriptive

W. F. S.]

'

German

is

on the
theory on the basis and
rests

Regulation from Without

359

wherever something new is being created, and thus in settlement

spatial planning also, the laws revealed through theory are the
sole economic guide to what should take place. It is no different
in physics. The size of an irregular boulder cannot be determined
by the general laws of physics, though the stone must have originated
according to them. The strength of a wall, however, or the plan
for a machine, can be calculated in accordance with these laws.

and

Not
is

in explaining that

nature and

which has grown, but where man himself

the real sphere of applicability for the laws of

of economics that he has discovered.

the creator,

lies

PART FOUR. EXAMPLES

THEORY

may be compared with

reality

for various ends,

according to the sort of theory held. If it is to explain what

is, the examination attempts to discover whether it started
with a correct idea of its subject and arrived at an explanation that
not only seemed possible but also corresponded with reality. On
the other hand, if theory is to construct what is rational, its assumptions may still be tested by facts, but not its results. Its author can
discover from an examination of the facts whether he has built on
adequately broad experience; whether he has taken all objective
or subjective essentials into consideration. His procedure resembles
the preliminary work of an architect, who cannot lightly neglect
the characteristics of a site, the laws of nature, and the wishes of the
owner. But a comparison with existing structures will not show
whether his blueprints are accurate; in our case, that is, whether
the theoretical structure has been properly erected. For the existing
structure may be as faulty as the projected one. Whoever tries
nevertheless to do so, whoever anxiously submits the results of his
thinking to the judgment of the existent, that is, to tradition, shows
little confidence in his own reason.
No! Comparison now has to be drawn no longer to test the
theory, but to test reality! Now it must be determined whether
reality is rational. In any case this, and not verification of theory,
is the purpose of the following investigations. In undertaking them
I have attempted more to suggest how strong the forces of order
really are than to intensify, by enumerating contradictory case, the
discouraging impression of chaos under which we have suffered too
long. If we are unable to alter such cases, they arouse only bitterness
and despair. It is my desire to reinforce in my readers the conviction
that a rational economic order is not only conceivable, but realizable.
Long enough has our science considered indiscriminately ^ everything that is, even where the problem has been not to explain but
to construct. To be useful, of course, economics must investigate
the effects of typical attitudes as well as the possibilities for bold
ones. 2 But it would degenerate into a contemptible or even destructive science if it were to consider tolerable and degenerate mass
phenomena in the same way simply because both are common and
actually

1. Most radically, perhaps, through a widespread tendency in the United States, and
most dangerously through Keynes, whose General Theory of Employment, Interest,
and Money (London and New York, 1936) is really based on phenomena of decadence
in the economy.

365

^fl^^

364

Four.

Examples

For the lack of confidence in reason it must not choose

its judge. It should not, to its own destruction, maliciously
collect all those cases in which ivory-tower theorists have been wrong
without considering that, otherwise than in the natural sciences,
this sometimes speaks more against reality than against theory. In
a word, it must not become a science that describes chaos instead
of preaching order.
For reasons already alluded to in the preface to the first edition,
my investigations deal primarily with North America. The advantages offered by the United States as an area for observation need
be recalled only briefly.^ For extensive comparisons between theory
and reality we must, in the words of Haberler, break theory down
into theorems on the one hand, else it will exceed the energy and
means of one single investigator. On the other hand, we shall do
well to select clear and simple conditions even when dealing with
reality. The enormous area * of the United States, with a uniformity
of geographic, political, and economic conditions that seems extraordinary to European eyes, aids our purpose. Furthermore, tradition
has but little weight, and until recently there was a deeply rooted

actual.

reality for

and liberty.
As investigations on the economics of space are still relatively
few and scattered despite an awakening interest in all countries, it
was important to assemble as much material as possible, and I have
therefore drawn to a considerable degree upon foreign writings in

belief in reason

addition to

2.

"

The

my own

extensive studies.

Like that of Alfred Marshall, in his brilliant discourse on national socialism,

Social Possibilities of Economic Chivalry," Economic Journal, 1907, pp. 7-29

[reprinted (with

minor

alterations)

in.

Memorials

to

Alfred Marshall, edited by A. C.

Pigon, Macmillan, 1925, pp. 323-346.]

3. T. H. Engelbrecht has already acclaimed them

(Die geographische Verteilung

der Getreidepreise in den Vereinigten Staaten, 1S62-1900 [Berlin, 1903], p. 4)

4. It would be a mistake, however, to think that distance plays but a subordinate

compared with the United States, for the shorter distances there are
and a greater density of population. Between Berlin and Stuttgart
there are more things upon which the imagination can linger than there are between
New York and Kansas; and more people, with all their various characteristics, are
crowded in between the two German cities and withdraw the south from the immediate

role in
offset

Europe

by higher

as

costs

interest of Berlin,

A. Location

Chapter 21.

a.

1.

Locations of Production

UNIFORM DISTRIBUTION

N ON AGRICULTURAL ENTERPRISES

Where the assumptions underlying our theoretical derivation of

economic regions are more or less fulfilled, or variations are of
merely local significance, market areas for the same branches of
business should resemble even-meshed networks. Their centers, the
locations, would then be uniformly distributed over the earth. The
location problem for an enterprise that was about to be established
would then be simply to find a space in the existing arrangement
large enough to assure survival.^ On the whole the distribution of
most economic enterprises seems to correspond to this pattern,
despite all differences in detail.

A map

Iowa (Fig, 61) will serve as an example

Although the picture as a whole is doubtless

of the banks in

of such a distribution.

am

not sure that the locations of the banks within each

is accurately shown.
I have therefore introduced
Figure 62, an enlargement of the outlined northwest corner of
Figure 61. Here the distribution of the locations, including those
of nonmember banks, is accurately indicated. If one does not
emphasize individual cases, but is content with a general impression, the tendency to uniform distribution is clearly recognizable
in both figures."
Similar examples exist in the literature in large numbers. As a
correct, I

of the 99 counties

1.

See the description by

cement industry

up

W.

G.

Holmes

of the choice of locations by the

after discovery of the Portland process.

"

Cement

mills

began

American
to spring

which were advantageous distribution points. Each was

designed to serve a domain of its own.
During the years following, mills have
been built at vantage points between the older locations, further dividing the market,
until to-day there are but few holes
large enough to support a mill of economical
in a variety of places

2.

(Plant Location

[New York,

'

'

size."

1930], p. 17.)

See also the distribution of banks in the United States in

Wright, Historical Atlas of the United

States,

365

Map

154)

1910

(Paullin

and

Part Four.

366

final

example. Figure 63

is

map

of the great

own

are accustomed to regard the fair in our

European

Examples

fairs.

We

something
shows that

district as

unique and, in a way, without competition, but the map

it, too, has its rivals and that they endeavor to rub shoulders on

Fig. 61.

* '

:v

Member banks

Iowa, on January

in

-_*i.Vi>**

L*

1,

/. :. ;. :

m,

of the Federal Reserve

(University

1926.

Business Research, Bulletin 17, 1927,

V
^>v

Map

of

Bank

of Chicago,

Chicago, Bureau

of

5.)

-J
Fig. 62.

Bank

locations

in

counties of Iowa

the nine northwest

(From information contained

of Iowa [Rand McNally and Co., Chicago, 1935].)
outlined in Fig. 61.

every side with their neighbors.

Variations are

number

in

Maps

Pocket

much more

notice-

and the distribution of the more numerous cattle markets, shown on a map in the
same article,^ is more regular. The reader is referred also to maps
of the Russian tractor stations, dairies in Iowa,* American cotton
gins,^ and daily papers in Indiana.

able, of course, with such a small

3.

4.
5.

U.

S.

of cases,

"The Geography of Fairs," Geographic Rexiiew, 1922, pp. 532-569.

H. H. McCarty, Manufacturing Trends in Iowa (Iowa City, 1930) p. 28.
E. S. Moulton, " Cotton Production and Distribution in the Gulf Southwest,"

A. Allix,

Department

of

Commerce, Domestic Commerce

Series

No. 49 (Washington, 1931)

p. 56.
6.

U.

S.

Department

Retail Distribution, p. 69.

of

Commerce, Fifteenth Census, Census

of Distribution,

I,

3G7

f.acattons of Pioduclinn

further to the distribution of American branches of Ford,

of sawmills, cement and furniture factories, railway repair shops,
the building industry, abbatoirs, mills, bakeries, printing establishI refer

ments, ice cream plants, brickyards, breweries, and hotels; but above

and crafts, mechanics and artisans,

and finally to the basic network of farms. In all these cases and
despite all geographic differences the pattern is dominated not by
the concentration and overlapping of market areas, but by their
dispersion and separation.^ Still, it is more important to establish
the general significance of these locational types than to enumerate
all to

the distribution of trade

individual cases.

Fig. 63.

Principal

Geography of

Fairs,"

European

fairs,

1921.

(After A.

Geographic Reviexv, 1922,

Allix,

"The

p. 503.)

For this purpose I have investigated the distribution of selected

nonagricultural American enterprises (Table 18)
Branches with
more than 1,000 factories in 1929 furnished exactly one half by
value of the nonagricultural production. Its share in the production
.

and consumption of various nonagricultural products was established

for each state separately. The census [U. S. Department of Commerce, Fifteenth Census of Manufactures, 1929 [Washington, 1933])
provided the basis for determining production, but a cruder method
had to be used for consumption. As with few exceptions, such as
beverages, perhaps, the consumption of the goods investigated would
show only minor geographic differences, it was assumed that the
7.

Sometimes

this

holds oply for part of the locations.

Thus French sugar

refineries

are either distributed throughout the beet-growing district or, in so far as they refine

cane sugar, concentrated at three ports of entry. Similarly with gristmills. Some
German cement works are scattered throughout central and southern Germany, whereas
others concentrate near coal mines. Consider also the locations for natural

carbonated waters.

and

artificial

Table

SIGNIFICANCE OF REGIONAL PRODUCTION IN

THE UNITED STATES

18.

[ndustrics with

more than

1,000 plants.

Classification for 1929

Of

NumIndustry

Production
value

ber
of

added

plants

mil-

total

production
the following

percentage

was
produced

dollars

Consump-

in

regionsjregions
in per in per
cent of cent of

Self-

Sur- suf- Defiplus fici- cit

ent
States

their

Artificial stone

Ice

cream

Planing mills

Bakeries

Beverages

Artificial ice

Railway repair shops

Newspapers and periodicals
Foundries and machine shops

10

Furniture

11

Structural steel

12
13
14
15
16
17

Boxes
Abattoirs
Potteries

Confectionery
Printing and publishing.

Dyes

19

Natural stone
Canneries

20

Butter

21

Grist mills
Electrical

22

machinery

con-

duc-

sump-

tion

tion

52
59

740
235

54
72

135
288
111
180

61

12
17
14
18
12
12

1,347
1,753

1,881

2,997
3,527
4,022

Jewelry

31

Women's

clothing

8,082

32
33
34
35
36

Silk goods
Spinning and weaving mills
Furs

1,281

Shoes

Automobile parts
products
hats

Total

461
213
178

11,524
8,605
3,778
1,482
1,249
1,277
1,749
2,021
12,712
1,063

1,888
1,341
1,154
12,915
1,293
1,536

Turpentine

21

669

3,691

goods

Cigars and cigarettes

61

1,851

1,802
1,108

Book binderies
Men's clothing

Women's

49
45
50
42
28
42
33
28
25
25

172
258
789
167

23
24
25
26
27
28
29
30

Wood

32
39
37
40
57
47
43
48
66
59
68

59

2,438
3,150
4,849
20,785
5,154
4,110

171

522
232
134

69

56
78
62
60
35
56

19
16
13
18
15
11

24
24

51

61

16

51

54

25
18
36
24

57
51

40
46
54

17

49
57
41

24
19

28
16
27
27
24

44

78
66
74
79

13
14
17

20

13

58
53
48
83
56
34
48
52
26
36
46
38

54
43
35
47
32
44
17

41

53
36
25
33
15

18

23

and

apparatus

Woven

their

pro-

18

tion ofjtion of

Pro-

duc-

surplus deficit

in
lions of

Examples

Fart four.

3i)8

1,491

2,855
1,636
1,183

1,329

72
461
443
451
681

854
98
98
775
319
626
101

74
73
79
84

12

45
33
38
39
30
26
27
29
23
14
24

20

15

23
26
4
23

12
10
4

710
26

14

15

12
4

15,858

65

15

11

11

16

10

11

16
19

81

76
85
79
79
82
96

23

17

ca.

39

17
31

16
21

17
j

23
16

21

ca.

30

60

a. " Regionally " (that is, in the producing state) there was consumed (production
of the self-sufficient states -\- local production of the deficit states -j- local consumption
of the surplus states) in per cent of the total production. For the method of calcula-

tion

employed

see

Table

19.

Locations of Production

369

share of any single state in the consumption of individual goods

would in the case of all goods be equal to its share in the national

income.^ Samples showed that using the share in retail sales would
have given substantially the same result. If consumption was not
more than 20 per cent above or below production, the state concerned was placed in the self-sufficient group. If consumption was
more than 20 per cent below production, it appeared as a surplus
state; and if consumption was more than 20 per cent above production, the state was entered as a deficit state. The results for all
the investigated nonagricultural enterprises together are reproduced
in

Table

19.

Table 19
Regionally

Percentage share of total

Production*

Consumption

65
18
17

25
18"
57b

Surplus region

Regions of

self-sufficiency

Deficit regions

100
a.

b.
c.

cient

consumed
production as
per cent of total
production
25
18
17

100

eo"

From columns 4 to 6 of Table 18.

Approximate values.
The difference from 100, in this case 60, would correspond to Florence's " coefTiof localization." (PEP [Political and Economic Planning], Report on the Location

of Industry [London, 1939], p. 291.)

Thus 60 per
provided

cent of

all

production was consumed in the

state that

When

the nonagricultural enterprises presented at the

end of Table 18, which lower the average considerably, are omitted,
will be

it.^

found that enterprises

1
to 25, including 70 per cent of
70 per cent of it locally. This is
far more than might have been expected from the usual descriptions
of the concentration of industry. For example, 74 per cent of all

it

the production investigated,

shoes are
8.

made

in

Represented with

New

sell

England and Missouri,

sufficient

to

be sure, but

local

accuracy for our purpose by wages and salaries in

nonagricultural enterprises, and by agricultural cash income.

According to O. Schlier's enumeration something over 60 per cent of European

consumption orientedwhich is to be
understood merely as a description, not as an explanation. (Aufbau der europaischen
9.

industries also are wholly or in large degree

dem Krieg [Berhn, 1932], pp. 50 f.)

Isenberg estimates that in diversified regions 60 per cent of the income from nonagricultural enterprises is spent for the nonagricultural net output of the same economic
landscape. (" Zur Stadtplanung in den neuen deutschen Ostgebieten," Raumforschung
Industrie nach

und Raumordnung,

1941, pp. 136

f.)

Part Four.

370

Extmples

consumption in surplus regions and local production in deficit

regions should not be neglected. The New England states and
Missouri themselves buy nearly one third of their own product, so
that, together with the 26 per cent of shoes produced in the rest of
the United States, about half of all those manufactured are made
and sold in the same state after all. But as the share of regional
sales grows so does the share of the self-sufficient regions. Then not
only do the surplus in surplus regions and the deficit in deficit regions
grow smaller, but these tivo extreme groups lose significance in favor
of the intermediate group. Small market areas obviously begin to
predominate. The importance of these small market areas and the
portions of market areas lying near a factory respectively has been

We

greatly underestimated in the past.

and consumption

tion

of

conclude:

(I)

The produc-

most goods lie closer together^^

may be objected: (I) That it is neither

To this conclusion it
astonishing nor generally true, since in order to limit the
of nonagricultural industries investigated

we have

number

selected the half

and thus probably also with an

evident spatial distribution and the shortest sales distances. But in

of industry with most factories,

the

first

place

that there

is

it is

and the strength

number

immediately apparent from Table 18, column 2,

no relation between the number of factories

virtually

of regional connections.

Thus

the difference in the

of the widely dispersed factories producing artificial stone

and the number

turpentine

is

of closely concentrated plants producing oil of

relatively small.

many

Second, even in the case of the

hundred factories, perfect dispersion

according to our standard must still be technically possible. Third,
the significance of such enterprises with less than 49 factories, which
industries with only a few

technically prevents perfect dispersion since there are only 49 states

[counting the District of Columbia], is very small. Fourth, and more

still, our measure of dispersion can no longer be applied

important
10.

One

has only to realize

county town,

say,

how much

where conditions are

6 to 20 or 30 per cent according to

zahlen
tures

fiir

F.

of the

retail

workmen, beverages,

the inhabitants of a
is

spent there

(from

Rechenberg, Das Einmaleins der Siedlung. Richt-

das Siedlungswesen [Berlin, 1940])

for housing,

money spent by

relatively easy to survey,

or at least within the county. Expendi-

purchases, local government, newspapers, personal service,

electricity,

gas,

water,

fuel,

furniture,

and such agricultural

products as flowers, green vegetables, eggs, butter, milk, potatoes, meat, and so on,

make up more than half of the total. Even a world capital like Berlin with
enormous environs carries on more than half of its trade, calculated by weight,
with the province of Brandenburg. (Ausschuss zur Untersuchung der Erzeugungs- und
Absatzbedingungen der deutschen Wirtschaft. 1. Unter ausschuss. 2. Arbeitsgruppe.
Das Wirtschaftsleben der Stddte, Landkreise und Landgemeinden [Berlin, 1930], pp.
certainly
its

94

ff.)

Locations of Production

For even when a product

to them.

may be

these

of factories."

is

made

in only a few factories,

so regularly distributed in relation to the

that their dispersion

Thus our

371

Only

is

as perfect as in industries

their

demand

with thousands

market areas are relatively much

larger.

criterion includes only industries with short sales distances,

even dispersion of factories, and general distribution of products.

In addition there remain many industries that fulfill the last condition but not the first, and these too correspond completely with
our theoretical picture. We may therefore conclude: (II) The
production of most goods is rather evenly distributed in respect to
their sale.^^ Finally, there are many nonagricultural enterprises such
as cotton gins whose market network is both narrow-meshed and
regular, but even so they cannot pass our test because their spatial
distribution is limited. As these cases are exceptional our attention
(III) The market networks for most
is drawn to the following rule:
might be thought that nonagricultural enterprises with but few factories, and
supply the whole United States equally, would choose their locations near the population center or, better still, the center of consumption. According
to my calculation, based on the method of the United States Bureau of the Census,
the center of gravity of retail sales in 1929 was somewhat to the east of Indianapolis.
The more distant environs of this point, by which I mean the states of Illinois,
Indiana, Ohio, Michigan, and Kentucky, do indeed contain a number of unusual types
of factories. Of 45 industries with less than 25 factories, 11 were represented here in
disproportionate number, among them those making matches, cardboard, bicycles and
motorcycles, engraved articles, and other products. Yet this is not particularly impressive. It seems more important that an especially large number of firms with nationwide
sales are found in this area. An excellent example is offered by the great soap factories
in Cincinnati, which lies near the center of gravity of retail sales. From this point
they supply the whole country with certain kinds of soap. As freight is a highly
important item for the manufacturer of soap, and the sources of supply are favorably
situated, this location appears to have been especially well chosen. Other examples
from this region are the automobile industry in Detroit and the refineries of the
Standard Oil Company in Chicago. It must not be forgotten, however, that in calculating the center of gravity of retail sales, distance is expressed simply as an air line,
and traffic routes and freight rates are therefore overlooked. When these are taken
11. It

in general firms that

into account
traffic

it

seems very possible that Chicago, so favorably situated in respect to

is

the real beneficiary of the location at the center of gravity.

routes,

the Mississippi freight rates are

much

higher,

West of
and Canada has been omitted from our

two most important factors are considered, the gravitational center

would have to be shifted toward the Northwest, that is, toward Chicago.
If this is so, the gravitational center of consumption would exert extraordinary powers
in the development of locations. In fact, the states around Lake Michigan, with Chicago
as their central point, were the only ones in the northern part of the country in which
the number of places of employment increased instead of decreasing in 1919-1929
(T. E. Thompson, Location of Manufactures, 1899-1929 [Washington, 1933], pp. 50 ff.)
12. Not, however, in respect to mere area, since the population density is very
calculation.

If these

of retail trade

uneven.

Part Four.

p^2

Examples

"
nonagricultural enterprises are luidely spread out in space. " Belts
disdisturb our theoretical economic geometry much less than
" do, for example. This greatly strengthens the impression
tricts
that the spatial distribution of most nonagricultural enterprises
'

corresponds very

xuell,

after all, with

our theoretical model.

second objection might be that the Census of Manufactures, upon which our investigation is based, does not cover all
nonagricultural production. Enterprises with an annual production
of less than $5,000, auxiliary production of retail shops, the building
(2)

most handicrafts, small mills, and so on, are not included.

But presumably just these correspond especially well with the rule:
Small market areas, regular and wide distribution and dispersion.
trades,

When

it is considered further how well agriculture, trade, banking,

personal services, and a great part of public administration
fulfill at least the last two criteria, in addition to industry, there
remain to be mentioned, besides the exceptions found everywhere,

many

only such typically irregularly distributed branches of the economy

mining. Most locations of economic activity in general within
the individual branches of the economy in the United States fit well
into our simple theoretical picture.

as

(3) It might be urged in the third place that the fact that
production and consumption in a state are equal still does not
prove that a large part of its products is not exported and a large
part of its consumption imported. For instance, the two most
important wood-producing regions in the United States, the Northwest and the Southeast, supply one another because the former
produces only soft and the latter principally hard woods. Yet
experience shows that specialization and overlapping seldom go so
far. As a rule a whole scale of qualities is produced everywhere,
so that at most their ranking differs from place to place. And even
though the sales radii are often very long, those regions near a
market are nevertheless of most importance because of the thinning
out of markets with distance, which will be discussed later. On the
other hand, a difference between production and consumption may
be only apparent and due to the fact that, though income or retail
sales may be good average measure of consumption, they may not
always be so in the individual case. On the basis of such a calculation the South would have a surplus of artificial ice and the North
would have to bring it in, whereas it is perfectly clear in this case
that the requirements of the South are above, and those of the North
below, the average. Accordingly this third objection should lose
much of its significance when everything is taken into consideration.

LocaOons

of

Production

373

In the fourth place

(4)

it

might be objected that the proportion

consumed in the home area depends essentially upon its

One hundred per cent of the world's products is consumed

of products
size.

" domestically,"

95 per cent of the production of the United States

consumed, and 60 per cent ^^ of that of the individual states,
whereas virtually none of the production of an individual worker
is consumed by this worker himself. A percentage of 60 is not high
in itself, therefore, but only when it is recalled that in the United
States almost a whole continent lies open to every producer, at low
freight rates and without the encumbrance of tariffs or cultural or
language barriers, and that most of his sales are restricted neveris

so

theless to such a

comparatively small area

as a single state.

Although none of the four objections discussed has proved decisive, it cannot be denied, of course, that despite its extent our
investigation of half of American nonagricultural production is after
all only an incomplete means of determining the site of every single
location and its market an impossible task for one investigator
alone.
Consequently this study provides a strong presumption
rather than a rigid proof of an agreement between reality and the
essential features of the theoretical outline.

Table 20.

EMPLOYMENT PER
;

'

Building industry
Other local requirements
Supplying district needs

berg

Ruhr

Reich
38
32

31

24

86

94

96

94

126

21

147
150

39

12
13

165

92
113

98

261

207

Supplying distant needs

All nonagricultural enterprises

Wuerttem-

26
39

Dependent on raw materials

.

East
Prussia

32
32
30

Nonagricultural substructure ....

INHABITANTS

30
30
26

Nonagricultural superstructure

1,000

244

This holds true for Germany also. According to the valuable

enumeration of Isenberg " the number of employed in crafts and
13.

size

In the individual states, which differ considerably in

and

size,

the relation between

nonagricultural production

is concerned, is
upset especially by the fact that the large states are mainly agricultural whereas the
small ones, where a real need for outside products would be expected, have many

self-sufficiency, at least as far as

different industries.
14.

To

be found in part in

schafilicher

"

Die Tragfahigkeit des deutschen Ostens an landwirtin Struktur und Gestaltung der zentralen

und gewerblicher Bevolkerung,"

Orte dcs deutschen Ostens (Leipzig, 1941)

p. 29.

Pari Four.

y^

Examples

industry required to supply the needs of their landscapes is large,

but in single regions differs surprisingly little (Table 20) Together
with inns and retail trade (in the Reich 13 and 29, respectively,
per 1,000 population) they represent the greater part of the regional
nonagricultural substructure (see p. 219). The importance of the
.

Wiirttemberg export industry and the attraction of the Ruhr coal

fields is clearly shown in the table, whereas in East Prussia hardly
a nonagricultural enterprise exists with the exception of the regional
substructure.

Agriculture

2.

the distribution of North American farms seems

not highly irregular. In the Northeast industry preponderates decisively, whereas the rest of the country is usually
described as largely or predominantly agricultural. Thus in 1930
the proportion of farmers in Rhode Island made up 2 per cent of
the population, but in Mississippi 68 per cent. For the whole United
States the average was 25 per cent. If an even distribution of agricultural and nonagricultural enterprises were desired throughout,
23 per cent would have to desert other
25 per cent 2 per cent
pursuits for agriculture in Rhode Island, for example, whereas the
remaining 77 per cent could remain at their former occupations. In
most of the states, however, a much smaller fraction of the population would be affected by the change; in 10 states less than 5 per
cent, in 29 less than 15 per cent, and more than a quarter in 5.^^
Hence, with but few exceptions, deviations from the normal ratio
between the agricultural substructure and the nonagricultural superstructure would not concern nearly so large a part of the population

At

first

sisrht

very uneven,

if

as appears at first sight.

The
still

basic agricultural

more important.

Its

network

itself is still

farming population to the land, not to the

East of the Mississippi River, at
is

more uniform and

density results from the ratio of the

least,

to

be found, these differences are

15.

Highest in Mississippi (43 per cent)

rest of the population.^^

where most of the population

much

Arkansas

smaller than with the

(35

per cent)

and the Dakotas

(32 per cent)

16.

by the

On

the other hand, the value of agricultural land seems to be influenced

more

farming population to the total population than by the density of

the former. Values rise with proximity to large cities and reach their highest level
over a wide area in the industrial regions of the Northeast, and its westerly continuaratio of the

and about Iowa. Individual variations depend mainly on

See the very detailed map in U. S. Department
Farm Land and Buildings per Acre, Based on 1930 Census.

tion in the fertile lands in

differences in the quality of the soil.

of Agriculture, Value of

Locations of Produclion

37f

ratio of agriculture

to

economy

the

in general.

The

difference

between Rhode Island and the state of Missouri, for instance, shrinks
from 1 34 to 1:2. Above all, the transitions are much more
crradual and reorular, so that differences within single economic landscapes can often be neglected. On the whole, the agricultural
population thins out from East to West on the one hand, and from
the center toward the North and South on the other (Fig. 64) .^^
:

Fig. 64.
States,

Agricultural population per square mile in North America (United

1930;

Canada,

Dominion Bureau

1931).

Statistical Abstract

of the

United States and

of Statistics, 7, Census of Canada, 1931, Census of Agri-

culture.

As

found toward the east

North Carolina.
Many causes work together in detail, ^^ but by and large the effects
of two fundamental influences are clearly apparent: climate and
proximity to a market. Toward the North the cold, toward the
South the heat, and toward the West a dry climate are unfavorable
a consequence,

the highest density

is

central part of the country, in the tobacco state of

17.

But

in the industrial area

states in the arid region of the

its

distribution

is

far

it is still

of farmers to total population there

West have
is,

Conversely, almost all the

a farming population above the average, but

For

exceptionally sparse.

of the population are farmers that

above the average, though the proportion

particularly small.

is

all states

in

which

less

than 40 per cent

for three quarters of the states, the rule holds

that the density of the rural population

is

less

the higher

its

proportion of the

state's

population.
18.

In the comparatively thickly settled .South, for example, the slight inclination to

many children; low wages, which hinder the replacement of

men by machinery; and many other factors. However, we cannot go into details here.
migrate; families with

to

Examples

Part Four.

376

more

Similarly, distance

intensive agriculture.

from the most

important inland market increases in all three directions.^^

Finally, the typical size of a farm east of the Mississippi River
does not vary too greatly, so that this important region
regularly studded with farms. ^

b.

1.

When

is

rather

UNEVEN DISTRIBUTION

NON AGRICULTURAL ENTERPRISES

nonagricultural enterprises occur in only a few irregularly

distributed places, the question arises

just this or that location

was chosen.

more

An

readily, of course,

answer, too,

is

more

why

readily

found. There is almost always a strikingly important factor that

is frequently raised to the sole determining cause or, conversely,
watered down by over-careful writers through the addition of every
other conceivable locational influence. No wonder, then, that there
exists an abundant literature on the location of the iron, steel,
chemical, machine, glass, clock, mining, shipbuilding, and other
Whereas only the density of American agriculture has been derived here from
(" Der Standort der Landwirtschaftszweige in Nordamerika," Landwirtscha^tliche Jahrbilcher, XII [1883], 459-509)
made an almost neglected attempt to explain its nature by them in accord with
Thiinen. Indeed, certain connections are unmistakable. Theoretically, a crop must be
grown nearer its market the higher its natural yield per hectare. In the industrial
Northeast (the New England, Middle Atlantic, and East North Central States) which
in 1930 included 57 per cent of the population, the ratio of important crops grown
there to the total American production in that year was higher the larger their yield
19.

climate and proximity to a market, H. Engelbrecht

per hectare.
Relation of physical yield of various crops to the proportion of total production of the
U. S. supplied by New England, Middle Atlantic, and East North Central States

Yield per
HECTARE
100 KG

Share of the
Northeast

Cotton

1.7

Rye
Wheat

8.0

21

9.4

27
37
39

Oats

11.5

Corn

12.8
32.0

,May
Potatoes ....

73.8

41

47

O. E. Baker's map: "A Graphic Summary of the Number, Size and Type
and Value of Products," U. S. Department of Agriculture, Miscellaneous
Publication No. 266 (Washington, 1937) p. 6.
20. See

of Farm,

Locations of Production

377

has been written on scattered mills,

breweries, cigar factories, lime kilns, brickyards, and even banks and
handicrafts. The significance of regular and irregular distribution

whereas but

industries,^!

is

little

exactly the reverse, in the literature, of

what

it is

in reality.

Concepts like production orientation or transport orientation

merely describe a location; they do not explain it. The reasons
that actually motivate an entrepreneur explain, to be sure, though
they do not always convince; an exact calculation of the most important possibilities would be convincing but extraordinarily difficult
and, strictly speaking, impossible.

To these two circumstances, that uneven distribution has been

overemphasized in the past and that its true reason demands special
study in each case, there is added a third: Generalizations can hardly
be made, because the situation varies from industry to industry. For
all three reasons we abandon any idea of presenting the subject and
refer to the extensive literature, of which T. Palander ^^ gives an
excellent review.^^

Changes of location offer a striking and important problem for

nonagricultural enterprises with irregular agglomeration. It corresponds with shifts between town and country or large and small
cities in

the case of evenly distributed nonagricultural enterprises.

It is easier to

discuss such migrations of industry than to give reasons

more

for their original locations, because as a rule they are

clearly

and rationally motivated. Furthermore, one can rely upon exact

calculations in comparing the new with the old locations. In recent
decades there have been several such migrations on a large scale;
for example, the mass migration of the American cotton industry to
the South, the slower shifting of iron and steel production in the
United States and in Germany toward ore deposits, the decided
preference of English industries for central and southern England,
and others.-* In the first case many old enterprises were actually
21. Incidentally,

even the metal, machine,

glass,

paper, and leather industries of

Central Europe are on the whole rather widely dispersed.

maps

See the

in Meyer's

For the iron industry, see Buchmann in

Die Standorte der Eisen- und Stahlindustrien der Welt (Berlin, 1927) p. 17.
great Hausatlas

(Leipzig,

1938)

pp. 26

fF.

Tord Palander, Beitrage zur

Standortsthcorie

(Uppsala, 1935) pp. 408-416; see

also " Literatur iiber Standortfragen," Arbeitshefte zur Reichsplanung, Heft 5 (pub22.

lished by

Amt

des Siedlungsbeauftragten, 1935)

For a lucid description of the locations of larger groups of nonagricultural enterprises see M. Pfannschmidt, Raumordnungs- und Siedlungsfragen. Handworterbuch der
23.

Betriebswirtschaft

(2d ed., Stuttgart, 1939), pp. 1270

ff.

Another American example is the partial migration of the shoe industry from
New England toward the Middle West, so well described by E. M. Hoover in Location
Theory and the Shoe and Leather Industries (Cambridge, Mass., 1937)
An unpub24.

Part Four.

3^8

closed down. In the two others, the

the

new

location.

In the

first

two

new

savings in sales costs.

American

Civil

War

were attracted to
most important direct

factories

cases the

causes were economies in production;

Examples

in the third,

apparently,

Deeper causes were the aftereffects of the

or

World War

or, in the case of the iron

industry, the exhaustion of better ores or the discovery of

suitable

methods that made profitable the

utilization

more

even of poorer

ones.

The freeing of the slaves and the prostration of the entrepreneurial spirit in the defeated and ruined South after the Civil War
created an army of cheap labor that became still more attractive
power of the trade unions in New England, the
former center of the cotton goods industry. In addition, some freight
costs were saved in so far as the finished product remained in the
South. 2^ In addition there were lower taxes and building costs and
cheaper power, and in general a relative price drop in the South
due to the tariff. Finally, the invention of air conditioning made the
South independent of the New England climate, whose humidity
after the increase in

Many old established

is so particularly suited to cotton spinning.
spinning and weaving mills therefore closed down, in Massachusetts
especially, to reopen in the South after new enterprises had proved
their ability to survive there. The share of the cotton states east of
the Mississippi in the total production rose almost uninterruptedly,
from 6 per cent in 1880 to 56 per cent in 1929. Conversely, the
share of Massachusetts fell from 38 per cent to 15 per cent.^^
The North American iron and steel industry advanced slowly
from eastern Pennsylvania through western Pennsylvania and Ohio
to Chicago. But of course the shift was not nearly so violent as in
the case of cotton mills. The share of Pennsylvania fell only from
58 per cent in 1890 to 35 per cent in 1929.
place slowly because the ores from

The

migration took
so cheap

Lake Superior were

by M. Peelers (Das Standortbild der belgischen Wirtschaft und

contains an interesting chapter on the
possibility of a migration of industry from the center of Belgium to newly opened
coal fields in its northern part. In so far as that country exports, it would then have
a large market directly across the street, as it were, thanks to the southward migration
lished Kiel dissertation

die Moglichkeiten einer Raumordnungspolitik)

of English industry.
25.

Even though the actual saving

all

additional costs such as insurance, interest,

three times as

much.

26. See also A.

trie."

may have amounted to but 5 per

[New York, 1909], p. 54) together with
and so on, it may have run to two or

in freight costs

cent (L. G. MacPherson, Railroad Freight Rates

Predohl, " Die Siidwanderung der amerikanischen BaumwollindusXXIX (1929) 106-159; 66*-80.

Weltwirtschaftliches Archiv,

Locations of Production

379

paid to transport them more than

But with a decrease in
their iron content, with the increasing importance of scrap metal
(abundant in Chicago) ever since the discovery of the SiemensMartin process, and with fuller utilization of coal, the advantages
of production in the Middle West, and especially in Chicago, became
more and more evident. To this was added the advantage of close
proximity to a growing market a decisive factor in the opinion of
Predohl.-^ Thus coal approached ore, partly at the beginning and
partly at the end of the water route. For good maps see Wirtschaft
to ship

and

so rich at

that

first

it

1,200 miles to the coal of Pennsylvania. ^^

und

Statistik, 1942, p. 306.

movement was toward ore before World

Thomas process ^^ made the rather low-grade

In Germany, too, the

War

I,

when

the

minettes from Lorraine usable,^ and more recently because it

became necessary to move toward sources of even lower-grade ores
like those of central and southern Germany. As in Gary, near
Chicago, so in Hennigsdorf, near Berlin, proximity to a large scrap
metal and sales market was eventually turned to good account.^^
As for the movement of English industry toward the South
(except Wales)
and especially toward the London area, several
reasons in addition to climate and landscape have been advanced
to explain it.
On the one hand, the importance of the great
southern centers of consumption and of the placing of government orders has increased even further with the decline in foreign
trade. On the other hand, electrification has facilitated separation
from the coal fields of southern Wales and northern England.
Besides this there is the movement of the iron industry away from
,

coal

and toward

27. Before the

ore.

war

3 tons of

Lorraine ore were required per ton of pig iron, but

only 1^ tons of American ore.

Die ortliche Verteilung der amerikanischen Eisen- und Stahlindustrie," WeltXXVII (1928) 286 f.
Technical developments have caused changes in location again and again,

28. "

wirtschaftliches Archiv,
29.

In the Middle Ages it sought a combination of ore,

and water power, and moved on when forests or ore deposits had

particularly in the iron industry.

wood

(charcoal)

been exhausted.
30. The advantage of the Lorraine iron foundries over those of the Ruhr lay in
lower production costs and closer proximity to the markets of southern and western

Germany.
31. See F. S. Hall, " The Localization of Industries," U. S. Department of Commerce,
Twelfth Census of Manfactures, 1900, Pt. I, pp. 190-214; H. Schumacher, " Die Wanderung der Grossindustrie in Deutschland und in den Vereinigten Staaten," Schmollers

Jahrbuch, 1910, pp. 451-482; and Buchmann

Stahlindustrien der Welt (Berlin, 1927)

et

al..

Die Standorte der Eisen- und

Part Four.

gSo

Examples

These migrations away from coal and the seacoast together with
the long-run decline in coal exports,^^ and in part the exhaustion
of good fields,^^ did more than the great depression to create the
distressed areas of

Scqtland,^*

South Wales, Durham, West Cumberland, and

and the doctrinaire rejection

London

In the

tion delayed recovery.

wage reducon the contrary, the

of a regional
area,

labor unions were not so strong. In addition, the distressed areas,

adapted until then to export, had very poor traffic connections with
the markets of the interior.^^ Since 1939 the greater danger to the
southeast from the air has reversed the direction of migration.

Agriculture

2.

Agriculture, too, shows many cases of striking unevenness in the

geographical distribution of production. I mention only the formation of belts and of Thiinen rings, which spread around northwest

Europe throughout the entire world on a large scale,^ around many

and in rudimentary form around villages and individual

cities,^^

32. Prestige

exports went to half of the world, but each coal district supplied

Thus the coal of South

Wales competed in Italy to the South, and that of Newcastle in Scandinavia to the
North with diminishing results against German coal, especially after the general strike
[1926]. Furthermore, the growing importance of oil and water power affected the export
of British coal, which was of fundamental importance for the lowering of import
mostly that part of Europe lying nearest in respect to freight.

freights

on bulk goods.

deep as American on
and to have longer galleries. (J. Lubin and H. Everett, The British Coal
Dilemma [New York, 1927], p. 130.)
34. See H. J. von Schumann, Standortsdnderungen der Industrien in Grossbritannien
33.

British mines, for example, are said to be three times as

the average,

seit

dem

Kriege [Langensalza, 1936];

J.

Wirtschaftskitrve, 1938, pp. 63-80; the

tribution

Uhlig, " Die Notstandsgebiete Grossbritanniens,"

Barlow Report, Royal Commission on the Dis(Barlow Commission)

Report (Cmd 6153)

of the Industrial Population

(London, 1940)

and

others.

35. Thus the commissioner for the distressed areas was right in advising that they
produce mainly for their own needs, and buy domestic products whenever possible.
(First Report of the Commissioner for the Special Areas [London, 1935], p. 80.)
Though it is difficult for countries to shift part of their burden of unemployment to
other countries because of doubtful methods and foreign reactions, the attempt may

succeed within a country.

C.

(See

Hasenclever, Arbeitslosigkeit

und Aussenhandel.

Eine theoretische Studie, insbesondere iiber die Wirkung von Zollen auf die Arbeitsand especially G. von Haberler, Der internationale
losigkeit, Kiel dissertation, 1935)
;

Handel
36.

[Berlin. 1933], pp. 190

H. Backe,

Um

ff.;

English edition [1936], pp. 259

die Nahrungsfreiheit Europas

ft.)

(Leipzig, 1942)

p. 57.

Decken has shown for the supply area of Hamburg, from an examination
of which Thiinen had derived his theory, that on the whole his theory is still valid,
though natural and human differences are more strongly in evidence today because of
37.

H.

v. d.

3^'

Locations of Production

farms as well.^^ I have borrowed an excellent example of this from

a painstaking investigation by Muller-Wille (Die Ackerfluren im
He points
Landesteil Birkenjeld, Bonn dissertation [Bonn, 1936])
fields
of a
out first that in the eighteenth century the common
.

were clearly still cultivated more and more extensively outward from the village (manured land, open pastures, open wood" With increasing distance from the economic
lands, and woods)
center, the village, the constructive force that developed a cultivated
landscape from a natural landscape lost its intensity " (p. 63). Today

village

the increasing degree of intensiveness has further blurred the differences. But where distances are considerable, as in the Birkenfeld
area, arable land is still divided in two: the inner field /, with a
three-year rotation of crops

manure, and the

less

six-year rotation, in

and more frequent application of

often fertilized outer field A, with a

which the heavy beet

is

stable

five- to

omitted entirely and

oats, with a smaller natural yield per hectare, or clover, with a

smaller outlay, are substituted.^^ Miiller-Wille was able to show

clearly for the village of

Georg-Weierbach the role played by

dis-

tance, in addition to certain differences in the quality of the soil.

On a map he connected all those fields to which the farmers said

These lines
it required the same time to haul a load of manure.
The longest time to a
he called " manure-isochrones " (Fig. 65)
field within the area / was 50 minutes, to a field within area A,
2 hours. Thus twice as many loads could be carted daily to /, and
heavier loads as well, since / was lower, as could be carted to the
more distant A. In addition to the time required for hauling, the
.

lower freight

rates.

zur

Vierteljahrshefte

("

Die Thiinenschen Kreise und Wagemanns Alternationsgesetz,"

XVI

Wirtschaftsforchung,

The

(1941-42), 220-232.)

physical

with distance, partly because cultivation becomes less intensive

and partly because high yields (potatoes) achieved through the large-scale employment of cheap labor, are diminished by increased investment to reduce potatoes to
return per acre

falls

schnapps.

Thus

may be

intensiveness

great or small irrespective of distance, or

may

even differ at the same distance (extensive cultivation of grain and intensive production of butter in the fourth ring lie beside, not behind,

ness should fall in regular waves

(Wagemann's

"

one another)

law of alterations

")

That
is

intensive-

therefore not

convincing.
38. "

There

is

much

greater compulsion

to

organize fields in rings around a

than around a consumption site." (H. Miiller-Miny, Die linksrheinischen

Gartenbaufluren der siidlichen Kolner Bucht [Leipzig, 1940], p. 58.) See also H. v.

production

site

isolirte Staat in Beziehung auf Landwirtschaft und Nationalokonomie

(Waentig edition, Jena, 1921) pp. 98 ff.
39. Otherwise than with the location of production rings around a town outlay

Thiinen, Der

plays a role

when

they encircle a village, because the fraction of the same total expense

represented by the cost of hauling varies with the distance of the fields from the village.

Part Four.

982

Examples

was greater for A, because the ascent put more strain

carts. These considerable differences resulted in /
being cultivated by three-field rotation and A by five-field, which

relative cost

on animals and

Hence E. Seyfried {Versuch einer planless fertilizing.

mdssigen Wirtschaft und Siedlung in Wilrttemberg [Heidelberg,
1936], p. 58) correctly proposes that where less can be raised on
outlying land because of its distance, the establishment of new settlements in the form of hamlets betiueen the existing villages be considered. For disadvantages see the end of note 12, page 115.
requires

Roads

Combined

Ihree-field rotation

to the fields

Lines o! equal time (in minutes')

for carting one load of

Area

Fig. 65.

Rotation of crops as a function of distance from a village.

(After Miiller-Wille, Die Ackerfluren

sertation,

manure

of five-field rotation

Bonn, 1936,

im Landesteil Birkenfeld,

dis-

p. 89.)

book contains numerous maps also (Figs. 2, 6, and 8)

clearly how with distance from Stuttgart, the undisvery
that show
puted center of an economic landscape, population density falls on
on the whole, the proportion of persons engaged in agriculture rises,
and the size of agricultural enterprises increases, just as theory would
Seyfried's

lead one to expect. Villages

less

c.

common, and

grow smaller on the average, or at

become individual farms.

least

in remote areas

NATIONAL BOUNDARIES AS FACTORS IN LOCATION

Max Weh has published an interesting investigation of industry

on the German-Swiss

frontier (Die Landesgrenze als Standortfaktor,

Locations of Production

383

untersucht an der oberbadisch-schweizerischen Grenzindustrie , Basle

He distinguished propitiously between
the reasons that led Swiss entrepreneurs to move their enterprises
dissertation [Bonn, 1932])

or branches to Germany, and the reasons for establishing them precisely in the border region. During the past century the decisive
factor in most cases was the saving of German customs duties. This
was shown, for example, after the entrance of Baden into the German
Zollverein, and after Germany's adoption of a protective tariff in
the late 1870's, by a blossoming-out of industry in Upper Baden;

and shown

World War I, when

moved from Upper Alsace to the

less strikingly after

branch plants were

several Swiss

frontier zone

of Baden. In a few instances (Wybert, for example) the German

patent laws also resulted in removal. All these were defensive

measures, intended not to expand production but to retain a market.

(E. Waldschiitz, Die Schweizerischen Industrieunternehmungen im

deutschen Grenzgebiet, Frankfort dissertation, 1928, p. 24.)

An additional advantage, in earlier days perhaps the most
important, constituting even a temptation to " aggressive establishment of new firms," was the cheap labor of the Black Forest. It
remains an open question, however, whether some of these workers,
as migrants across the border, would not have been available on
the Swiss side as well. It is worthy of note that whereas since the
end of the nineteenth century factories were usually moved to
Germany, the enterprises themselves remained in Switzerland. For
this there are two groups of reasons.
First, there was a saving in taxes, since the tax burden was

This saving amounted to about 5 per cent

Weh even mentions a case where the Swiss
tax amounted to 20 per cent and the German tax to 63 per cent of
the net profit.*" Consequently even the management of a few enterprises that were originally German was moved to Swiss soil.*^
lighter in Switzerland.

of the sales in 1926-27;

40. Incidentally,

the tax burden, an important factor in location, varies greatly

even within Germany. In 1930-31 the extra charges on land taxes

in Prussian municipalities fluctuated between 100 per cent and 600 per cent, and on
capital taxes on nonagricultural enterprises between 200 per cent and 3200 per cent

from place

("

Beitrag

to place

zum

des Deutschen

interlokalen Steuerbelastungsvergleich,"

No.

Vierteljahrshefte zur Statistik

Other examples are provided by K.

Briining, " Beispiele iiber Auswirkungen der Landergrenzen auf Verwaltung und Wirtschaft," Niedersachsen im Rahmen der Neugliederung des Reiches, II (Hanover, 1931)
44-59. His book is a mine of information on the effect of internal German boundaries

upon

Reichs,

1932,

4,

p.

123)

location.

Weh mentions only one German branch enterprise in the

Apparently the Swiss market is too small for most branches of
industry, or the protective tariff is not high enough to make its evasion advantageous.
41.

On

the other hand,

Swiss frontier zone.

Part Four.

384

Examples

second group of reasons gives at the same time an explanation

for the establishment of branch enterprises in the frontier zone,
which is so unfavorable from the standpoint of freight charges. In
this case a branch could be managed from the home office, Swiss
key personnel employed, and contact with Swiss financial backers
maintained. In addition there was the lower wage on the frontier
in earlier days, while direct dealings with local administrative officials
might prove advantageous also. Names like Maggi, Wybert, Suchard,
Villiger, and those of many important textile, chemical, and metal
enterprises in particular show that these frontier industries were by
no means negligible exceptions (see also Chap. 25)
Studies on the importance of the Canadian-American border in
the choice of a location strengthen this impression.*- American
investments in Canada amounted to four billion dollars in 1933;
more than half the Canadian production of motor vehicles, rubber
goods, electrical appliances, and other products was in American
hands. But of course many of these American branches would have
been established in Canada even if it had been a part of the United
States.

large

number

of the firms questioned declared that

the proximity of the market that

By

made them

it

was

decide to go to Canada.

meant not only

savings in freight and time, but also

development
with
the
of the market and a greater
closer contact
Canadian
taste. There is hardly a doubt
possibility of conforming to
that still other American firms would move northward today if tariff
barriers were to be abolished, to take advantage of the lower wages
and lower prices of raw materials and land in some parts of Canada.
For it must be realized that although the cost of nonagricultural
production is higher today as a rule in Canada than in the United
States, this is chiefly a result of artificial restriction of the market.
On the other hand, however, many of the branch enterprises
would never have been established in the absence of a political
frontier. In the first place, Canadian tariffs were raised partly for
the express purpose of attracting American branches (Marshall et ah,
Conversely, Canadian industry resisted higher tariffs
op. cit., p. 201)
for the same reason, because they feared that for which the lawmakers hoped. The importance of the frontier is further shown by
the fact that of more than 1,000 American-owned Canadian factories,
approximately 9 per cent are in border towns and 32 per cent in
Toronto, which is virtually on the line. Why, for example, should
this they

42. The statements in this and the following paragraph are from H. Marshall et al.,
Canadian and American Industry, a Study in International Investment (New Haven,

1936).

Locations of Production

385

American automobile manufacturers have branches in Windsor, only

a few miles from Detroit, if it were not for the international boundary? Seventy per cent of the firms questioned replied, quite superfluously, that the tariff had influenced their decision to establish
But more than the
branch factories in Canada {ibid., p. 199)
.

Canadian duties are involved here. In addition, Canadian branches

enjoy tariff preferences within the British Empire. Forty per cent
make use of this and supply the Empire from Canada, the Australian
market in particular. Finally, branch factories escape not only
paying tribute to the Treasury, but national feeling as well. Once
the border is behind them they enjoy the protection of the Canadian
tariff, and profit also by the advertising of native products in general
[" Buy Canadian! "]. Of course the American invasion is not equally
active in all fields. In the textile industry, for example, it is of little
importance, partly because of English superiority but partly, too,
because the individual enterprise in the industry is relatively small.
Unlike the case of Switzerland and Germany, it is less common
for enterprises that would be located in the smaller country to be
moved to the larger one because of the border. No doubt the reason
is that Canada is still too undeveloped and dependent to excel
the United States in many nonagricultural pursuits, whereas the

Canadian market

ment

to attract

enough and susceptible enough of developthe superior American industries and the great
is

large

stream of capital that seeks investment. Nevertheless, there are converse cases. One is the dairies on the American side of the border.
As the American ad valorem duty on butter was much higher than
that on milk, especially in the 1920's, whereas with milk the freight
was more important, the farmer on the Canadian side found it more
profitable to send his milk to the United States, where it was made
into butter near the line. Only at a certain distance from the border
did Canada ship butter rather than milk.

When

the great influence of the Canadian-American border on

the choice of locations for nonagricultural enterprises

is borne in
mind, the opposition of economic interests to a union with the
United States is easy to understand. In 1937, to be sure, the
Canadian Prairie Provinces examined the question whether a customs union with the United States would be advantageous for them.
The industrial center of the Middle West, especially Chicago and
Minneapolis, lies nearer to them and therefore, because of its greater
market, could supply many goods more cheaply than could the factories of Ontario or Quebec. So far the calculation is certainly
accurate. In the absence of a boundary line most of Alberta, Sas-

Part Four.

o85

Examples

katchewan, and Manitoba would be partly included in the market

areas of neighboring American centers, although the tariff on important products is not very high in any case; only 7.5 per cent on
agricultural machinery, for example. Furthermore, the advocates
of union with the United States can point to Nova Scotia. If the
international boundary cuts off the Prairie Provinces from their

Nova

from the best

Boston,
namely
market for its chief exports, wood, fish, and coal
Quebec.*^
which is very much nearer to it than either Montreal or

cheapest source of supply,

it

also separates

Scotia

The

extensive migration of industry is attributed to this artificial

limitation of the market area by the American tariff, and the increase
in living costs brought about by the Canadian tariff. Assurance of
a Canadian market does not compensate for the loss of an

American

market.**

Yet an examination of maps of the market areas for Canadian

and American wheat (p. 421) shows immediately that the Prairie
Provinces would gain a cheaper source of supply at the price of a
poorer sales market. The Canadian wheat belt would risk its preferential position in respect to British imports for the difficulties of

which no longer dominate any significant

importing market. The same reasons that induced the agricultural
West to consider union would necessarily cause the industrial East
to reject it. As we have already seen, a great many of its industries

American wheat

the

owe

areas,

their very existence to the frontier.*^

Canadian-American border seems to be the

The American tariff laws
permit each American " tourist," that is, one who has been abroad
for at least two days, to bring in free of duty each month for personal
use goods to a total value of $100. Canada also has now a similarly
generous and reasonable arrangement, by which certain specified
peculiarity of the

locational pattern of the frontier cities.

43.

American

coal

44. See Gras, "

467; also

is

cheaper between Winnipeg and Montreal.

Regionalism and Nationalism," Foreign

The Jones Report on Nova

Scotia's

Affairs,

VII (1928-29)

454-

Economic Welfare within Confederation

(Halifax, 1936?)
45. There is much talk, too, of a cultural similarity between the two countries.
But the European observer who arrives in Victoria from Seattle, say, or in Ottawa
from Washington, or in Montreal from New York, is impressed by the different
atmosphere. Life suddenly seems more placid, more orderly, more like that in Europe.
And that the United States would defend the Dominion in case of need is the exact
opposite of a reason for their union. This would lose Canada the help of England
without this being necessary to secure that of the United States. In short, we should
do better to compare the relation between the two countries not with that between
Germany and Austria, but with that between Germany and Switzerland: a good yet

reserved neighborliness.

Locations of Production

387

goods to the value of $100 may be brought in duty free every three
months. At the time to which the following statistics refer this was
not yet in effect, but because of the extensive traffic across the border
it was relatively easy to smuggle in small things like clothing or
tobacco. It might therefore be assumed that certain articles known
by everyone to be substantially cheaper in the neighboring country
would appear with unusual frequency in the retail trade of places
along the border. This is actually the case. Anyone strolling through
the streets of a small Canadian border town is amazed at the number
of fur and china shops, of tailors and jewelers. Signs in show windows explain: " Canadian prices are lower on blankets, furs, knitted
ware, English china, linens." The stroller will be struck, also, by
the many hotels, where Americans pass their forty-eight hours if they
must. Other kinds of business he will miss entirely.
In order to get an exact picture of retail trade along the border
I compared sales in the large Canadian town of Windsor just opposite
Detroit with those in near-by London, Ontario, which is about as
large, though farther inland. The retail sales per capita in Windsor
in 1930 were as follows, expressed as percentages of the corresponding

London

sales in

(calculated

from Dominion Bureau of

Seventh Census of Canada^, 1931, Vol. X, Retail Trade)

Statistics,

Dry goods
Tobacco

55 per cent
65 per cent

Millinery
Shoes
Metal Goods

70 per cent v Cheaper in the United States

73 per cent
81 per cent

Total

96 per cent

sales

Jewelry

132 per cent^

Custom-made clothing

160 per cent L Cheaper in Canada

355 per cent J

Furs

The

differences are

still

more

striking

between Niagara

Falls,

Ontario, and Guelph, which is about as large but some 60 miles

from the frontier. The per capita sales for the former, expressed as
percentages of those for the latter, were: tobacco, 33; shoes, 51;

women's clothing, 43; men's clothing, 131. The same difference

between women's and men's clothing appears when the border town
Sarnia, Ontario, is compared with Stratford, which is exactly equal
in size but situated about 60 miles inland: women's clothing, 55;
men's clothing, 230.

The

explanation

is

that cotton

is

largely

em-

388

Part Four.

Examples

ployed for women's wear and wool for men's, and that the latter
Thus a
is cheaper in Canada and the former in the United States.
sell
in
Windsor
for
say,
would
English
cloth
that
$55,
coat made of
FurtherDetroit,
across
the
river.
in
just
might cost as much as $85
more, northern Canada provides very cheap furs; and Canadian
duties on diamonds and English porcelain are not so high as the
American. This explains the extensive purchases in Canada by

Americans.
Conversely, Canadian women prefer to buy their clothing, shoes,
and hats in the United States for the additional reason that they
regard English fashions as outmoded. The men, on the other hand,
bring in mainly American cigarettes, since they cost one fourth less
though normally subject to very high duty. If such conditions are
peculiar in degree to the Canadian-American border, they are more
or less typical in kind of all frontiers.

Chapter 22.

The Location

of

Towns

The ordering forces of the economy operate everywhere, but only

when they work relatively alone is it possible to see whether reality
corresponds in some measure to our theoretical results. The assumption that we are dealing with a landscape of natural uniformity
in which settlements are established more in accordance with economic than with political viewpoints, more in conformity with
the needs of the modern economic system and unhampered by
the past, is perhaps nowhere so
American Middle West. Especially

perfectly
is

realized

as

in

the

this true of the rich agri-

50/an
Fig. 66.

Distribution of towns in Iowa, 1930,

by size and distance from one another

Table 21)

(see

Fig. 67.

Distrubtion of towns in

England, 1910, by
from one another

size

(see

and distance
Table 23)

cultural state of Iowa, which

is about the size of England.

There
are a few mineral deposits in Iowa, to be sure; the terrain is not
perfectly fiat everywhere, but often somewhat undulating and in

some

places even hilly; the quality of the soil varies

the value of land, the size of farms,

and with it
and the kind of crop raised.

Yet all these differences are unusually small. Nature's impressive

uniformity is reflected not only in agriculture, but indirectly also in
the dispersion of industry, which in the

main

supplies the neigh-

boring farmer or processes what he produces (H, H. McCarty,

389

Manu-

Part Four.

390

Examples

It might therefore be
City, 1930])
our most general findings on the distribution
of settlements would be confirmed in lowa.^
If one measures in Figure 32 the minimum distances ^ separating
the common centers of a given number of areas, for example those
between the points upon which from three to five regions center,^
an especially frequent [modal] value will be obtained about which
the less common ones are grouped. Thus for every size of town
there is a typical, though not even theoretical unequivocal, distance.

facturing Trends in

expected that at

Fig. 68.

Iowa [Iowa

least

Increase in distance between towns west of Chicago, a) Distance

from Chicago

in millimeters

(1

mm = 4.95 km)

b)

Distance separating

towns of 1,000-4,000 inhabitants, in millimeters.

But even if the maximum distance were, theoretically, uniquely

determined, nothing more than a frequency curve could be obtained
statistically, since the theoretical assumptions are only approximately
realized. It is to be further expected that the dispersion will increase
with the size of towns, because the number of observations grows
smaller with increasing
I have measured the
1.

Though

it

is

true that

size.

minimum

distance separating towns in Iowa

many towns

in the

Middle West were planned by the

companies that opened up the country, sharp competition has eliminated

all

the

unfavorable locations.
the distance in each case to the next point of equal value.

2.

That

3.

Because the section represented in the figure

examples

if

is,

is

small, there

would be too few

the centers of three, four, or five regions were each measured separately.

The Location

of

Towns

3'J'

Table 21

FREQUENCY DISTRIBUTION OF TOWNS

IN IOWA, 1930
map

Airline distance from next equally large or larger town on the

Pocket Maps of Iowa (Chicago, Rand McNally, 1935)

Distance

mm.
mm. =

in
1

0.85 km.)

0-

of Places with
300-1,000 11,000-4,000
Inhabitants

1- 2

3- 4

4- 5

5- 6

6- 7

13

7- 8
8- 9

23
32
65
53
54
45
24

11-12
12-13
13-14
14-15
15-16
16-17
17-18
18-19
19-20
20-21
21-22
22-23
23-24
24-25
25-26
26-27
27-28
28-29
29-30
30-31
31-32
32-33
33-34
34-35
35-36
36-37
37-38
38-39
39-40

of Places

0- 5

2- 3

10-11

Number

with 4,000-20,000
Inhabitants

9-10

mm.
mm. =

in
(1

0.85 km.)
2

Distance

Number

1
1

2
6

19

11

6
7
9
13
15

13
7
5

5-10
10-15
15-20
20-25
25-30
30-35
35-40
40-45
45-50
50-55
55-60
60-65
65-70
70-75
75-80

11

11

4
8

6
9

3
3

39

8
1

4
10
9
5

2
5

2
2
2
2
2
2

Distance

Number

of Places

cm.
(1 cm. =
8.5 km.)

with 20,000-100,000
Inhabitants

in

0- 5

5-10
10-15
15-20
20-25

415

15

4
2

11

392

Part Four.

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The Location

of

Towns

393

and have obtained clear-cut frequency curves

66 and Table 21)
The results are very good, too,
for a group of other prairie states, Illinois, Indiana, and Ohio, even
though here the irregularities are greater (Table 22) Comparison
of this group with the two states lying just west of them, Iowa and
Missouri, shows how the decrease in population density westward
of different size-classes,*
for

them

(Fig.

an increase of the

This
have assembled the places
with 1,000 to 4,000 inhabitants^ in a strip running westward from
Chicago for some 400 miles, that is, about to the western boundary
of Iowa, and about 80 miles wide, its northern edge being a prolongation of the northern boundary of Illinois and its southern edge
lying an equal distance south of Chicago. These places were arranged
in groups according to their distance from Chicago, and the average
minimum distance from places of equal or larger size was then
calculated for each group. It is manifest that this increases with distance from Chicago. But it can be further seen that in Iowa, about
50 to 140 millimeters on the map from Chicago, the average distance
is at the same time the typical one when this state is considered by
itself further proof for the uniformity of conditions there.
Variations in the typical distance between towns in two neighboring districts suggest differences in fertility. Thus the curve for
the small towns in the Texas cotton area had two peaks. This is
because a strip of fertile soil, the Black Belt, runs across the state,
and the towns on it lie twice as close together as elsewhere. English
towns are separated by typical distances of their own (Fig. 67 and
results in
is still

more

clearly

shown

typical distances separating towns.

in Fig. 68.

Table 23)
Here only the table is given; its interpretation will come later.
Several other examples are to be found in the literature, though to
the best of my knowledge none have been statistically verified.
According to K. Biicher (Die Entstehung der Volksiuirtschajt [1st
ed., 1893], p. 49) there were in Germany at the close of the Middle
Ages a round 3,000 places with city privileges, which in the south
and west were separated by four to five hours' travel, and in the
north and east by seven to eight. ^ All in all, a regular distribution
of towns throughout the world is extraordinarily common.
4.

For the method of defining the

5.

According to the

map

of

M.

class limits see p. 434,

Jefferson, "

note

7.

Some Considerations on

the Geographic
Provinces of the USA," Annals of the Association of Arnerican Geoaraphers, VII, 3-15.
6. For the distribution of large villages in Hungary see L. deLagger, " La plaine
hongroise," Annates de Geographic,

(1901)

44.

See also Neupert's beautiful

map

of

Mecklenburg (Raumforschung und Raumordnung, 1941, p. 64) and the honeycomb

dispersion of markets in Westphalia (W. Christaller, Die Idndliche Siedlungsweise im
,

deutschen Reich [Stuttgart, 1937], p. 169)

Part Four.

394

DISTANCES SEPARATING ENGLISH TOWNS,

Table 23.

Airline distance from the next equally large or larger town on the
M. Jefferson, loc. cit. See also Fig. 67.

Number

Distance

mm.
mm. =

in
(1

"10,000""

20,000100,000

4.35 km.)

1910

map.

of Places with

100,000500,000

500,0002,500,000

Inhabitants
2

2- 3

79
38
20

13
4
4

3- 4

4- 5

92
58
33
13
16

5- 6

6- 7
7- 8

7
2
4
2

0-

Examples

1- 2

8- 9

9-10
10-11
11-12

2
1

Total

Average distance

162

233

39b

2.1

2.6

6.5

40

14.5

Unfortunately the size-class of the towns in column 2 is not clearly indicated on

Because of its small scale, not all the places of this class in the industrial
areas were clearly recognizable.
6. Three of these were separated by distances of 16-17 mm., 20-21 mm., and 33a.

the map.

34

mm.
Among
c.

these there was

distance of 24-25

mm.

one place with a distance of 12-13

mm. and one

with a

B. Economic Areas

Chapter 23.

The United

States

is

Simple Market Areas

particularly well suited to

an examination

There they can be observed under a lens, as it were,

for distance means less than in Europe whether measured psychologically or in terms of money. Again, the spirit of its people is

of market areas.

market areas are

especially favorable to mass production, so that

generally larger than in Europe.

There

is

a whole series of useful

mainly by the Department of Commerce, schools of business, individual scholars, economic institutes,
and planning boards.^ Their methods differ. The most useful seems
to me the utilization of business books and of statistics of freight
traffic, as well as the direct questioning of consumers in areas of
retail trade. On the other hand, the atlases produced at great expense
by a few advertising firms among others, but in one case even by
the NRA itself, which are supposed to indicate the " natural trading
areas " of the United States, are hard to employ scientifically.^ The
principles for such a partitioning (traffic conditions, the region in
which newspapers circulate, sales radii for retail businesses, turnover,
number of inhabitants, income levels, and so on) and the products
for which it is supposed to hold true (groceries, or even retail goods
in general) are too numerous for such " market areas " to have any
precise meaning.
investigations

on

this subject,

1.

At the federal

level:

Resources Committee)
2. The
Company

National Resources Planning Board (formerly the National

regional atlas published for great department stores by the

J.

W. Thompson

Shopping Areas [New York, 1927]) is still fairly useful. The towns
in which large department stores are situated are shown on a map, and boundaries
between them drawn in such a way that the distances from them to each of the
neighboring centers is the same. But this procedure considers only transport costs,
not differences in price or variety, or competition by smaller department stores.
(Retail

395

Part Four.

3g6

Examples

THE SIGNIFICANCE OF DISTANCE FOR THE

INDIVIDUAL ENTERPRISE

a.

1.

Erroneous Estimation

What is the result of these investigations? All

Many manufacturers as well as wholesale and

agree

on one

point:

retail dealers

They ship

have

too jar at a

loss.
market areas excessively.
"
Many
marginal
revenue,
The geographic marginal cost exceeds the
manufacturers permit field sales operations to penetrate too far into
unprofitable territory." ^ " Many small manufacturers have made the
error of seeking national distribution at great expense only to find
that a greater volume of business at much smaller cost could be
secured within a few miles of the plant." * " Too much territory is
being covered. It seems practically certain that a greater profit could
be made within a restricted territory." ^ " The broad generality, that
distributors should warehouse a reserve stock for retailers within a
radius of economical distribution and convenience of service is
generally followed. In the striving for sales volume it has been easy
to lose sight of the sales expense attaching to sales made beyond the
economical radius of distribution." In Germany, "A calculation of
individual cost items
showed that many beer storehouses that
been
established
lengthen
the sales radius did not repay their
had
to

expanded

their

high

because of their small turnover."

cost,

What causes the loss in sales to too distant buyers? First, too
high shipping costs. ^ Williamson investigated a grocery store in a
metropolis that delivered to homes free within a radius of almost
seven miles. The yearly turnover of a quarter of a million dollars
just about corresponded to the demand of families living within
3.

Company, The Trading Area System of Sales Control.

(New York, 1931) iv or v.
Williamson, The Retail Grocer's Problems, U. S. Department of Commerce,

International Magazine

A Marketing
4.

W.

F.

Atlas of the United States

Distribution Cost Studies, No. 5

5.

This

(Washington, 1929)

in the wholesale dry-goods trade,

p. 14.

where freight

ordinate rolel Problems of Dry Goods Distribution, U.

Distribution Cost Studies, No. 7
6. J.

W.

S.

is

supposed to play a sub-

Department

(Washington, 1930) p. 2.
Millard, Analyzing Wholesale Distribution Costs, U.

Commerce, Distribution Cost

of

Commerce,

Studies, No.

(Washington, 1928)

S.

Department

p. 2.

of

(This refers

also to wholesale trade.)

7.

H. Fezer,

"

Brauereien

als

Rationalisierungsexempel," Deutscher Volkswirt, 1942,

pp. 1038-1040.
8.

Freight costs are

more apt

to be disregarded:

Wirtschaftsheft

8, p. 8), it

{a)

the lower the average total

According to Mellerowicz {Frankfurter Zeitung,

amounted in the United States to 4 per cent for textiles, 10

freight in relation to the factory price.

Simple Market Areas

397

approximately half a mile, which shows the disproportionately long

distances traveled by the delivery car. More than a third of the
trips were made to deliver a single order. The average value of an
order was hardly three dollars, and out of this an average of twentyone cents went for the cost of delivery. At the periphery of the
area these costs must have been considerably higher, since several
deliveries could less frequently be combined because of the smaller
number and greater dispersion of customers. For three quarters of
the sales were made within about two miles of the store, whereas
only one quarter of the demand came from the rest of the market
area, which was six times larger.
But not only shipping costs rise with distance; the selling costs
proper rise as well. Thus in a typical grocery house the costs
dependent on distance were found to be as follows:
Selling Cost

Dependent on Distance

Car and traveling saleman's expenses

6.2

Advertising
Postage, telephone, telegrams

0.2

10.1

Packer
Packing material

3.1

0.1

1.5

Yd

~uJ
a.

J.

W.

Millard,

The Wholesale

Distribution Cost Studies, No. 4

Grocer's Problems, U.

(Washington, 1928)

S.

Department

and

51 per cent for natural stone,

to the factory price

(see

column

{b)

The

c of the following table for

Building stone (Brandenburg)

Lignite (Rhenish briquettes)
coal

(Rhenish-Westphalian

egg

limestone (Ruedersdorf)

Pordand cement

(Berlin)

Potatoes (yellow)g

Potash fertilizer (40% loose)8

Pig iron (cast III, Oberhausen)
Rye (German loading station)
Wheat (German loading station)

Lead

(f.

o. b.

German

source)

Cotton (standard middling, Bremen)

Electrolytic copper (Hamburg)
Cotton yarn (No. 20, Augsburg)
Tin (Banka, Hamburg)

salt,

42 per cent for

Germany)

7.90
12.85

16.80
12.50

213
103

20
10

8.1

3.9

17.

12.50
16.80
16.80
13.10
4.10
16.80
25.60
25.60
25.60
27.40
36.20
40.30
40.30

74
78
53

3.4

6B1

5.2

F
F

31

10
20
20
20

0.9

27
15
13

20
30
30
30
30
40
50
50

2.5

F
B

bri-

quettes)

Lump

Commerce,

lower the freight per ton-mile relative

Soft

of

p. II.

per cent for shoes, 24 per cent for grain, 34 per cent for coke and
milk,

Percentage of Total Cost

Other Selling Costs

Shipping Costs
Freight

as

21.50
31.80
42.70
51.80
63.00
175.50
201.10
299.20
738.10
762.70

1,970.
3,216.70

4
5

2
1

4.1

3.6
11

B
F

0.9

D
D
D

0.4

21 S

1.5

1.3

0.5

0.2

A
A

0.2

(a) Shipping price in reichsmarks per ton

{Statistisches Jahrbuch fiir das
deutsche Reich [Berlin, 1938], pp. 322-329)
(&) Railway freight per ton per
.

Examples

Part Four.

398

From

this it follows that

it is

the worst possible business policy

and to absorb the freight to

pay the freight on orders received
from them even without canvassing, and best of all not to solicit

to canvass outlying areas intensively

them.

It is

somewhat better

to

and

business in these areas at all

An

to the customer.

business

showed how

to charge at least half the freight

investigation of costs in the confectionery

earned by distant

little is

sales.

SELLING COST AND DISTANCE

Table 24.

(All figures: percentage of total sales)

Selling Cost

Saies According to

Distance of

Distance Zones

in Miles

II

direct selhng cost

To

500
500-1000
1000-1500

G A

80
16

71

94

18

95
5

1500-

II

which

of

Total

Customer

II

D G A

D G A

Ib

73

18

31

41

27 11
36
8
32
50'

10

19

24
25
32
25

14
21

77
16
2

21

26
29

24
27
29
27

20
19

C D
4
5
11
!

13
16
13
19

Selling Cost
Profit

of which

Distance of

Customer

(Estimate")

Freight

in Miles

II

II

G
To 500
500-1000
1000-1500
1500a.

11

7
12
12

Weighted average

3
3

C
2
4
4
4

c
- 2
- 3

-1

-1

-20"

18

-11

3"

D
7
3
5

-11

for almost all firms in the industry.

Table 24 are divided into two groups,

been omitted because it delivered to but one
distance zone. Group I evidently operated on the principle of only
accepting distant sales without soliciting them. Their selling costs
hardly increased with distance, and what slight rise there was
depended entirely upon a steep rise in freight costs, while, with

The

six factories listed in

a seventh (E) having

500 kilometers (15-ton cars), (c) b as percentage of a. (d) Freight for each
additional 10 kilometers in pfennigs per ton. (e) d as pro mille of the price at
500 kilometers. (/) Class of freight rate or special rate respectively (1943)
(g) Calculated from the average delivered price.
9. Distribution Cost Problem of Manufacturing Confectioners, U. S. Department of
Commerce, Distribution Cost Studies, No. 10 (Washington, 1931) p. 12.
,

simple Market Areas

399

was spent on advertising. To make up for

this, B charged all freight beyond the first zone to its customers.
Group II went after distant sales vigorously, as may be seen from
the exception of B,

less

A calculation of profits showed that the

group was the correct one.
Analysis of the selling costs of an important dry-goods factory
and wholesale house in Kansas City showed again that the ratio of
its

direct selling costs.

policy of the

first

selling costs to sales generally increases with distance.^"

The

expenses

from
be canvassed, or the nearer

of traveling salesmen in particular paid off less the farther

from the home plant was the

Table 25.

district to

RELATION OF SALES RADIUS TO COST

CERTAIN WHOLESALE TRADES

IN

Cost as percentage of sales'

Dyes6

Hardware''

Radiol

Groceries^

in Miles2

All costs

All costs

75
75-150
150-250
250-500

15.1

8.3

4.4

9.2

4.3

5.1

16.0

11.7

5.6

4.6

10.0

7.3

4.4

13.0

9.1

4.9

Sales

Radius

V
/

Expenses

for

salesmen

500-3

18.6

U.

19.3

7.1

5.9

21.7

4.2

4.2

A.
W^orld
S.

1.

Weighted average of almost

2.

Every zone contains

all

all

firms

4.6

firms in the industry.

whose

farthest shipping distance falls within the

particular zone.
3. Firms that deliver within a radius of more than 500 miles but do not deliver
over the entire United States.
4. Source: U. S. Department of Commerce, 15th Census of U. S. Wholesale Distribution, Radio Sets, Parts and Accessories (Washington, 1932) p. 25.
5. Source: Idem, Wholesale Distribution, Groceries and Food Specialties (Washington, 1933)
(Wholesale houses with annual sales of between $100,000 and
p. 77.
,

$300,000.)
6.

Source: Idem, Wholesale Trade in Paints

7.

Source: Idem,

and Varnishes (Washington,

The Wholesale Hardware Trade (Washington.

1932), p. 32.

1933), p. 50 (No.

1).

was to competition. As a rule both these factors coincide in

Table 25 gives additional examples, taken from the
fifteenth census. It may happen occasionally, of course, that with
extension of a market area fixed costs decrease faster than direct
costs increase, but obviously this is not the rule.
The dry-goods firm in Kansas City provided some highly
interesting information also on the increased business risk that
accompanies distance {ibid., p. 33)
Although it was more strict
it

distant areas.

10.

Problems of Dry Goods Distribution, U. S. Department of Commerce, Distribu(Washington. 1930) p. 32.

tion Cost Studies, No. 7

Part Four.

4(K>

Examples

about extending credit to distant customers, the proportion of

number outstanding was greatest in

accounts overdue to the total

the outlying areas.

The

underestimation of distance,

far-reaching effects of this

even under the more

restricted spatial conditions in

Germany, are

graphically shown in Figure 69. In a certain region where an

absurd interpretation of free divisibility permits every child to

^^^

JLT

/_

g^

,^__

-J

""

/^*

J.

>

/I

.^

....

tarn
II

.M

-^

-1

^*

ikm
'i

'

'''-

'--

Fig. 69. Parceling of fields on a farm in the Administrative District of

Herrenberg. Thirty hectares divided into 162 parcels, with a total distance

from the farm of 206 km. Buildings are on the largest parcel. (After MunHdusern [Berlin, 1934], p. 9.)

zinger, Bduerliche Maschinengenossenschaft

inherit his share of every parcel of land, "

more than one-third

of

simply to
the working day of the peasant is spent uselessly
overcome the distance to individual places of work " ^^and this
.

much time uselessly spent on the farm itself. (A. MiinDer Arbeitsertrag der bduerlichen Familienwirtschajt [Berlin,

included
zinger,

1929], p. 826.)

Nor
11.

will

planning ensure that the costs of distance are not neg-

Even with rounding

They correspond

to the

off of the land, these

ways would not disappear completely:

time spent by factory workers in going to and from work.

This should have been considered by Miinzinger in his comparison in Raumforschung

und Raumordnung,

home and

1940, pp. 395

f.,

work in their own

and have traveling expenses.

as well as the fact that they

gardens, lose earnings during a depression,

Simple Market Areas

4^1

small mills, handicraft enterprises, and factories

are supposed to have been closed down in Russia in 1928 in favor
of a few large plants with overextended supply and market areas.
The villages often seem to be too large, and the distance to the

Thus many

lected.

unnecessarily long in consequence.

All these examples indicate that the economic significance of

fields

distance has often been underestimated in the past, even by business-

men

themselves.^-

Consolidation of Areas

2.

When

distance

is

neglected, economic areas overlap; that

is,

they

on the one hand, and shot through with holes

on the other. Consolidation reduces them to a smaller and more
compact but more profitable whole." Such an experiment to restrict
the sales area was made in the United States by a wholesale hardware house. It decreased its market area (and from our standpoint
unfortunately, its assortment also) each by one third. The area
thereupon formed a compact whole, in which this firm was superior
to its outside competitors. As a consequence of this voluntary
restriction sales dropped off, but profits increased by one third! ^*
During World War II the consolidation of areas was facilitated
in Germany on a large scale partly through the influence of this book.
are too far extended

An

exchange of customers or even simple shortening of sales radii

was imposed on breweries and other nonagricultural enterprises
not, of course, in order to increase private profits, but to lessen the
demands on transportation, which after all is but the economic side
12.

much

So

so,

indeed, that two leading entrepreneurs in hardwares expressed

me on

completely contradictory views to

One

held that

freight,

it

played no role at

all in

the influence of distance

upon

their business.

the choice of a location; that he absorbed the

amounted on the average to only 2 per cent of his sales, and

on equal terms in any part of the United States. He
export merely as a matter of convenience and to keep his business within

which

after all

therefore was able to compete

declined to
limits

where

it

could be supervised.

The

other entrepreneur,

the same articles, found freight so important that

of his enterprise
13. Strictly

(6)

and the extent of

off

more,

(c)

To

center

who produced

exactly

wholly determined the location

his business connections.

speaking, three objectives are sought:

To round them

it

(a)

See also p. 157, note 34.

To make

them on

their

more compact.
centers. Of
farmlands when

areas

economic

course the last aim cannot always be achieved; for example, not for
the village is the center of settlement. Remaining exclaves are improved, at least in

shape and

size.

There

is

much

to

be said against a complete rounding

off of lands.

See, for instance, p. 115, note 12.

14. J.

W.

Commerce

Millard, Analyzing Wholesale Distribution Costs, U.

Distribution Cost Studies, No.

S.

Department

(Washington, 1928), pp. llf.

of

P^^t Four.

402

Examples

Only with insurance companies were costs

supposed to be lowered at the same time.^^
Cartels have long been familiar with " protection of an area."
An excellent example of the improvement of supply areas is provided by milk deliveries to Berlin, which formerly were made from
of private advantage.

The

distances as great as 457 miles.^^

idea of consolidating areas of

Thiinen" over 120 years

and grew with Miinzinger's proposal of co-operative agriculture"
through the change in use caused by the war to a difficult change
in ownership. The consolidation of regions inhabited by commuters
is most difficult and doubtful, because it causes many hardships
and is often equivalent to an encouragement of migration into

agricultural production originated with

ago,

towns."
b.

DESCRIPTION OF MARKET AREAS 20

Size

1.

Since most theorists are even

of space than the practical

man,

less
it

accustomed to think in terms

be superfluous to offer

will not

Though

the German insurance centers are scattered, all the companies insure
which resulted in an excess of representatives, agencies, and regional offices
(Rath, " Der Raum als Kostenfaktor in der europaischen Privatversicherung," Wirtschaftsdienst, 1942, pp. 938 f.)
but had the advantage that the risk was distributed.
During the war this scattering proved to be advantageous, especially in the case of
mortgage credit, since otherwise one single bombing attack might have wiped out a
good part of the collateral. To this extent the nature of insurance differs widely from
15.

everyivhere,

that of businesses that deal in tangible goods.

factors that favor areal consolidation,

Rath

takes into account only those

but his material would be well worthy of con-

sideration for such a purpose provided

it

is

really typical.

Wirtschaftlichkeit im Versicherungswesen [Leipzig, 1942].)

(Organisationsform

So far as

am

und

aware, no

practical measures have as yet been taken.

16.
17.

H. Backe, Um die Nahrungsfreiheit Europas (Leipzig, 1942) maps, p. 207.

Der isolirte Staat in Beziehung auf Landwirtschaft und Nationalokonomie
;

(Waentig edition, Jena, 1921), pp. 108-113.

18. Bduerliche Maschinengenossenschaft Hdusern (Berlin, 1934)
19. For its possibilities and difficulties see M. Eckardt (or Landesplanungsgemeinschaft Sachsen) Die Hauptstrome der Pendelwanderung in der sdchsischen Industrie,
,

pp. 15-17.
1942. pp. 235-241.
1940, Pt.

I,

For a thoughtful discussion see Siebrecht, Wirts'chajtskurve,

20. Enterprises without market areas are very uncommon. In the main they are
businesses that are " oriented toward passers-by " (R. Schmidt-Friedlander, Grundziige

einer Lehre

vom

and live off passing

do not include here those businesses that supply
larger recurrent necessities such as furniture, better clothing, and so on, and would
have to occupy a central location in any case.
traffic

Standorte des Handels [Prague, 1933], p. 101)

rather than the vicinity.

Simple Market Areas

some

403

illustrations

on the

size

and shape

of

market areas

for various

kinds of enterprise.^^ First, as to their size.

In the Fifteenth Census of the United States the sales radius
also is given in part. Table 26 and Figure 70 reproduce some of
the interesting results. First, the extraordinary difference in size
within the same line is striking. Theoretical reasons for such varia-

been advanced in Part

tions have already

differences in popu-

II:

lation density, natural features, the characters of entrepreneurs,

and

In judging the present data it is to be borne in mind also

that the inquiry distinguished only between classes of goods, not
between individual goods. Thus when firms said they supplied the
whole United States the statement was by no mean true of all
articles, but often of a few specialties only for which they had the
so on.

exclusive selling rights.^^

21.

Adequate investigations on

this subject are

none too numerous.

Nevertheless

only a few selections can be mentioned here. At least the work of F. A. Fetter (The

Masquerade of Monopoly [New York, 1931], pp. 287 ff.) on the influence of freight
upon the market areas of the American steel industry may be cited, as well as A.
Predohl's excellent

made

in "

map

Die ortliche Verteilung der amerikanischen Eisen- und

Weltwirtschajtliches Archiv,

Stahlindustrie,"

Regul

also to R.

("

XXVII

(1928)

285

Reference

may be

Die Wettbewerbslage der Steinkohle," Vierteljahrshefte zur

Konjunkturforschung, Sonderheft 34 [Berlin, 1933]) who calculated the theoretical

limits for competition by British, Westphalian, and Upper Silesian coal in Germany
,

on a

basis of price at the

in quality;

bezirke, 1928, p. 53)

1926], p. 933)

mine and

E. Scheu's

to

who

map

freight rates,

though without considering differences

(Deutschlands Wirtschaftsprovinzen und Wirtschafts-

to J. D. Black (Introduction to

Production Economics [New York,

published an entire scale of supply areas for Minneapolis of

all

approximate form; and to H. M. Kendall's painstaking study of supply

areas for markets and fairs in southern France (" Fairs and Markets in the Department
His method of deterof Gers, France," Economic Geography, XII [1936], 351-358.)
mining approximate limits by fares, and exact limits by personal inquiry along the

sizes

and

in

the highways,
finds

among

good.

is

He

and smaller markets, and

describes a hierarchy of larger

other things that supply areas for large markets overlapped more than

those for small ones.

For another discussion of

Geography of Fairs," Geographic Review,

on areas that supply German towns there
the hinterland of

Kamenz

[Dresden, 1937])

which proves,

(Die Stadt

this

subject see A.

1922, pp. 532-569)

is

Allix

("

The

In the growing literature

G. Kiihne's comprehensive investigation of

Kamenz

in

den Beziehungen zu ihrem Hinterland

for example, that the patients of specialists are

drawn

from a considerably larger area than those of other physicians (Map 11). Finally,
R. E. Dickinson (" Markets and Market Areas in East Anglia," Economic Geography,
April, 1934, pp. 173-182) has written on agricultural markets in the English counties
of Norfolk and Suffolk. The widening of the areas, and the dying out of superfluous
centers, are interestingly shown.
22. U. S. Department of Commerce, Fifteenth Census of the United States, Wholesale Trade in Paints and Varnishes [Washington, 1932], p. 18. According to a questionnaire sent to 3,000 wholesale grocers, market areas increased in the following order:
(I) widely known trademarked articles, (2) specialties, (3) brands of the wholesalers

Part Four.

404

Examples

For one and the same product the variation in areal size is
On the other hand, this variation is often more
significant than it might seem if only the number of firms is considered, and not their volume of business as well. The number of
firms naturally decreases with an increase in the size of the market
area, but their importance often increases. An example of this is the
therefore less."

WOO

500

75 1S9 250

/li!es

1V0S

Fig. 70. Size of wholesale market areas by goods, 1929. For legend
and sources see Table 26. For areas smaller than the United States,
but more than 500 miles in radius, the highest value for the radius
was assumed to be 1,000 miles. For wholesalers who supplied the
entire United States the radius of the market area was estimated at

1,500 miles.

wholesale paint business.

Firms with a

sales radius of less

than 75

miles have an average yearly turnover of $109,000, whereas for those

market also the average is |9,000,000.-* An

opposite example is furnished by the wholesale radio business, where
the corresponding figures are $395,000 and $368,000.
Secondly, differences in the size of market areas appear among
that supply the world

concerned.

No.

7,

(J.

W.

Millard, U. S.

Department

Atlas of Wholesale Grocery

lapping of areas

markets,

Commerce, Domestic Commerce

Series

The

over-

1927], vi.)

manifestly greatest in the third case, because the qualities are most

compare.

difficult to

23. It

is

of

Territories [Washington,

happens,
(t/.

S.

also, that

Department

sell are thrown on distant

Dry Goods Distribution, Dis-

only commodities that will not

of

Commerce, Problems

of

tribution Cost Studies, No. 7 [Washington, 1930], p. 13.)

24. U. S.
sale

Trade

Department of Commerce, Hfteenth Census of the United

and Varnishes [Washington, 1932], p. 32.

in Paints

States,

Whole-

Simple Market Areas

4"5

different lines of business,^^ especially in the illustration.^ Small

areas predominate for groceries, medium-sized ones for wholesale

dealers in radio, paints, or hardware,

and

large areas for the sales

These variations
are explained not only by the different importance of freight and
selling costs but also by the height of the fixed costs and, on the
offices

of the manufacturers of paints or hardware.

26. SIZE OF MARKET AREAS FOR WHOLESALE TRADE IN

THE UNITED STATES ACCORDING TO GOODS, 1929

Table

Percentage of firms with at most the regular sales radii given in the table
Sales radius
in Miles

75
-150
-250
-500
500
-

U.

S.

A.

World

The

area has a

74
87
93

49
67
82
93
96
99
100

97
99
100
100

maximum

radius of

62
71

83
90
94
99
100

46
66
79
89
97
98
100

21
36
58

37
48

more than 500

74
93

73
84
94

98
100

99
100

miles, but does not include the

entire United States.

(t/. S.
a. Wholesale grocery businesses with $100,000-$4,000,000 yearly turnover
Dept. of Commerce, 15th Census of U. S. Wholesale Distribution, Groceries and Food

Specialties, p. 77)
b.
c.

Wholesale radio (idem. Radio Sets, Parts, and Accessories, p. 25)

Independent paint wholesalers (idem, Wholesale Trade in Paints and Varnishes,

p. 32)
d.

Independent hardware wholesalers, miscellaneous stock

Hardware Trade [Washington,

e.
/.

(idem.

The Wholesale

1933], p. 50)

Wholesale trade of hardware producers (loc. cit., p. 50)

Wholesale trade of paint producers (loc. cit. under c, p. 32)

M. Hoover (" The Measurement of Industrial Localization," Review of

Statistics, XVIII [1936]) has shown the dispersion of industrial locations in
a similar manner.
26. There are simpler methods than direct investigation for determining differences
in the size of market areas according to the business, but none is wholly reliable. It is
not enough to know the typical number of customers since, though the number might
be much larger for a baker, say, than for a dealer in automobiles, his market area is
certainly smaller. Nor are market areas necessarily smaller, the larger the number of
enterprises. In the United States there are about as many newspapers as cotton gins,
25. E.

Economic

but the areas of the latter are

much

smaller because they are restricted to the cotton

and fairly useful method is to find out through a questionnaire

the distances of consumers from their usual source of supply, and then to calculate the
average. For one county in the state of New York such an inquiry showed that the
average distance of a farmer from a church was a little over 3 miles, from a bank about
5 miles, from a motion picture theater about 7* miles, from a clothier nearly lA^ miles,
and so on. (H. C. Hoffsommer, Relation of Cities and Larger Villages to Changes in
Rural Trade and Social Areas in Wayne County, New York. Cornell University Agricultural Experiment Station Bulletin 582 [Ithaca, 1934], p. 36.)
belt.

relatively simple

Part Four.

Ao6

size of the

Other side, the

established,

it is

demand. As has already been

Examples

theoretically

simply not true that heavy and cheap goods have

the smallest market areas.^^

Naturally this does not exclude an actual restricting effect by

high freight rates if the advantages of giant enterprises are too small
in proportion to them. The furniture trade provides an example
of this. In the " New South," that is, Texas and the adjoining states,
only 9 out of 30 furniture factories sold their products throughout
the entire United States, and only one of these made a profit. The

may be

about
500 miles.^^ For wholesale furniture dealers it would probably be
It is given as embracing 50 to 200 counties
less than 200 miles.
The retail dealer's market area includes 5 to 65
{ibid., p. 25)
counties, according to the size of the towns {ibid., p. 47)
Besides market areas for different goods, a comparison of the
market areas of different cities for the same goods is instructive
Here again we find considerable differences in size,
(Table 27)
which may depend partly upon differences in market structure, but
probably in part also upon a varying power of individual centers
to attract qualified entrepreneurs. Even where the size is apparently
about the same (both national and frontier centers often do considerable exporting) the underlying causes may be very different.

normal

sales radius for

[furniture] factories

set at

Centers on the frontier export because of their geographic position,

national centers because of their importance. The inland market
of the one includes the entire United States and it is not surprising,
therefore, that sales should extend beyond it, whereas the inland
market of the other group is restricted and its market area obviously
is international only because its members are near a political
frontier.

Even among regional

first owe their long

The

centers two groups

must be distinguished.

sales radii chiefly to natural conditions in

economic landscapes: Centers in California to the enormous

(more than 1,250 miles) and narrow width of the more
densely populated coastal strip west of the Rocky Mountains. If
their

length

Weight is obviously more important for the wholesale dealer, with his lower
and longer average distances, than for the retailer, for whom the cost of shipping
by freight to the customer is less both absolutely and in relation to the price. For
corresponding observations in the hardware business see W. A. Bowers, U. S. Department of Commerce, Domestic Commerce Series No. 52, Hardware Distribution in the
27.

prices

Gulf Southwest (Washington, 1932)

p. 32.

In

fact,

with quality differences markets

expand farther by overlapping when the freight rate is low in relation to the price.
28. W. A. Bowers, U. S. Department of Commerce, Domestic Commerce Series No.
76,

Furniture Distribution in the Gulf Southwest (Washington, 1933)

p. 3.

Simple Market Areas

SIZE OF

Table 27.

whose

Businesses

407

WHOLESALE MARKET AREAS BY

CITIES, 1929

had the following share (per cent)

sales radii are in the given class sizes

in the entire turnover of their cities in the specified line of business

Radio2

Groceries^

Over

Over
500

500

<

<
Sales Radii in Miles
1;

a
u

in

in

in

IT)

Centers on
boundary

Buffalo

National

New

centers

Seattle

York.
Chicago

40

47
28

12
5

13
19

28
24

11

51

San Francisco

regional

Denver

centers

Atlanta

100

Compressed

Boston

regional

Pittsburg

47
69

Los Angeles

26
52

17

10

24

54
4

1a

in
(M

in

in

446

in

in
CM

in

<

16
17

47

30
49

34

23
20

2
19

18

26

7
12

67
12
26

34
18
76
24

53
2
12
49

36
22

13
54

14

15

44

20

41

22
33

36

34
12

10

22
22 28
4 21
49 47

67
30
75

21

26
27

34
23

40

23

13

38

26
5

51

23

c
3

p.,

42

10
60

Far
reaching

en

in
CM

in

<

*-

a
P

in

65
12

centers

Hardware*

PaintsS

Centers on

Seattle

boundary

Buffalo

24
28

National

New York

centers

Chicago

18
13

8
3

8
7

25
23

Far

San Francisco

reaching

Los Angeles

regional

Denver

centers

Atlanta

32

20

2
17

Compressed

Boston

regional

Pittsburg

24
25

2
40

57
7

10

6
33

21

21

44
24

17

70
25

33

10

15

10
28

14
16

4
45

31
5

65

18

16

21

11

18
29

2
35

2
7

centers

Department of Commerce, 15th Census of the United States, Wholesale

and Food Specialties, p. 52.
2. Idem, Radio Sets, Parts, and Accessories, p. 17.
3. Idem, Wholesale Trade in Paints and Varnishes, p. 18.
4. Idem, The Wholesale Hardware Trade, p. 29.
5. Market areas that extend beyond the United States, even though they may not
include all countries, even though their radii may remain less that 500 miles.
6. Much of this to Alaska and the Orient. Loc. cit. under n. L
1.

U.

S.

Distribution, Groceries

4oB

Part Four.

Examples

the strip were wider the sales radius would probably shrink. The
ideal location of San Francisco, almost in the middle of the strip,
is clearly apparent; its sales radii considerably exceed those of Los
Angeles, which is pushed into the corner, as it were. Denver has
no rivals for a long distance because the market on the broad plateau
of the Rocky Mountains, with their natural resources hardly yet
is still more restricted than that on the half-desert of
the western prairie, which forms the other half of Denver's market

opened up,
area.

Atlanta,

on the other hand,

is

the center for a thickly settled

though partly very poor region, and has near-by competitors. It falls
in the group with large market areas only because Florida, the
southern tip of its market area, is of such great length. The second
group is hemmed in by large adjacent centers. An extensive local
demand and the demand from a vicinity that is similar in many
respects predominate here.
Some data on Germany also are available. Before the war the
average, not the maximum, shipping distance by rail for carload
lots was, in miles:

potatoes,

137^.

(b)

Entering: milk,

(a)

grain and meal, 68|;

18|; natural stone, 75;

3^;

Distribution: bricks,

pumice

stone, 212^^; building clinker, up to 312|; peat, 43|; oil cake,

1061; fertilizers, 175; peat dust, 250; newsprint, 93|; rayon staple,
218f; linoleum, 237|; wine, 200; and salt-water fish, 28Ii.29 For
similar goods and similar conditions (otherwise see p. 405, note 26)
the average population per nonagricultural enterprise (method 1)
or, conversely, the number of such enterprises or of those engaged

therein per 1,000 inhabitants, the so-called occupation index [" Besatzziffer "] (method 2)
is a clue to the relative extent of a market.
For relative sizes in new settlements see F. Rechenberg, Das Ein,

maleins der Siedlung (Richtzahlen fiir das Siedlungswesen) (Berlin,

1940), pp. 29-33. The data are derived by method 2 from cities
with 20,000 inhabitants and corrected by experience and comparison with the ideal. 3 For size relationships in rural districts see

W.

Christaller, "

Die Verteilung der nichtlandwirtschaftlichen Bevolkerung im Hauptdorfbereich," Neues Bauerntum, 1942, pp. 139145; and "Die Verteilung der landwirtschaftlichen Bevolkerung im
Landkreis," Neues Bauerntum, 1942, pp. 169-176. [According to
his page 169, Christaller used method 1.] For size relationships
29. Methods of preservation such as the deep-freezing of fish and the pasteurizing
of milk have greatly extended the markets for quickly perishable goods, potentially
and often also in practice.
30.

The

be found in

actual occupation indices

Statistik des

(" Besatzziffern ") by administrative

Deutschen Reichs, 446, pp. 158-163.

districts will

4^9

Simple Market Areas

within the Reich, see G. Isenberg, " Die Tragfahigkeit des deutschen
Ostens an landwirtschaftlicher und gewerblicher Bevolkerung," in
Struktur und Gestaltung der zentralen Orte des deutschen Ostens
(Leipzig, 1941), pp. 21-28 (longer lists in each case). Christaller
classifies nonagricultural enterprises according to the following market areas: village, environs of a main village, environs of a country
town, and county. Isenberg includes all these together as providing
for local requirements, in addition to

that

which he distinguishes those

provide for district and distant requirements, inclusive of

upon raw materials. His criterion for classification

whether a nonagricultural enterprise occurs regularly in every
county, or at least in every province. The remainder, and a few
unusually large parts of the nonagricultural enterprises first named,
are classified as providing for distant requirements (method 3)
those dependent
is

Structure of Market Areas

2.

An

investigation

of

wholesale

trade

in

appliances

electrical

and another of a wholesale poultry and egg house in

Louisville (J. R. Bromell, U. S. Department of Commerce, Dis(Table 28)

DISTANCE AND SIZE OF DEMAND

WHOLESALE TRADE, BY COUNTIESi

Table 28.

0- 50

5.8

0.8-16

50-100
100-150
150-200
200-250

2.7

0.4-9.7

1.6

0.1-7.1

1.6

0.0-7.1

0.4

0.0-1.1

IN

I. Calculated from U. S. Department of Commerce, Distribution Cost Studies, No.

Problems of Wholesale Electrical Goods Distribution (1931) pp. 23 ff.
a. Average distance of territories of wholesalers, in kilometers.
b. Turnover of the wholesaler per wage earner in the territory concerned,
dollars (unweighted average)

9,

in

c.

The

range of

its

variations, in dollars.

tribution Cost Studies No. 14, Wholesale Grocery Operations, Louisville

provide
show that the concen-

Grocery Survey, Part 4 [Washington, 1932], pp. 40

f.)

data on the structure of market areas. They

tration of buyers, the total demand of each, and the number of his
orders all decrease with distance. On the other hand, the average

order increases. Detailed investigations in Iowa

show for retail trade also a definite fall in demand with distance,
which may not be continuous but is nevertheless very clear on the
whole when the population of the various places is taken into

size of the single

Part Four.

410

account.

few examples are given in Table

distance only the well-to-do

still

come

29.

With

Examples

increasing

to larger towns for their

purchases.^^ Thus it may be said that the richer one is the more
does one buy in larger and more distant centers, whence it follows
that the extent of a place's retail market areas increases with the
size of the place.
(See Iowa State Planning Board, Retail Trading
Areas, Series I [Des Moines, 1936], No. 7, 7a)
On the other hand,
.

the larger

outside

is

one's place of residence the less often does one purchase

it.

DISTANCE AND SIZE OF DEMAND IN

RETAIL TRADE FOR SIMILAR PLAGES
IN THREE COUNTIES IN IOWA

Table 29.

53

12
15
38
49

11

100
53
82
54
25

100
94
82
75
58

Montrose
Donnellson
Mediapolis
Winfield

Wayland

11

The inhabitants of these villages with a population of 500-1,000 made the given
percentages of their purchases in the nearest town (Burlington, pop. 27,000 or Fort
Madison, pop. 14,000)
Iowa State Planning Board, Retail Trading Areas, Series
(Des Moines, 1936) No. 7, pp. 5b, 5c.
.

a.

b.

Distance to nearest town, in miles.

Kitchen utensils.

c.

d.

Furniture.

Men's clothing.

But of course

this practice varies with the good to be bought.

higher the value of the purchase and the wider the choice, the
more likely an article is to be obtained in a large center. Hence the
strength of a rural business lies in neither specialties nor goods in
whose variety the customer is interested, but in staples and cheap
fashionable articles.

The

The investigations in Iowa, of which more will be said later,

provide unique statistical material on all this. The fact that the
market uniformly thins out, as it were, in respect to both size of
demand and number
especially

from a

city,

of goods with distance

of supply areas for cities

would

W.

from any town, and

The overlapping
important than its extent

has an additional result.

is

much

less

suggest.
J.

Reilly believes that he can perceive regularities in the

relative strength of rival

towns within a disputed area, which he

For two thirds of those questioned, distance decided the place in which to buy
less than one fifth
were influenced by widely assorted stocks {Iowa State Planning Board, Retail Trading
31.

when

the state of the roads was taken into consideration, whereas

Areas, Series I [Des Moines, 1936], No.

6, 7a,

and No.

7,

4a)

Simple Market Areas

4)1

law of retail gravitation " (The Law of Retail

Gravitation [New York, 1931])
This law holds only for retail trade,
only for two towns at any given time, and only in the neighborhood
of the line on which both towns are equally strong; which assumes
that each town is large enough to exclude the other from its local
market. That is to say, the pair must not be too unequal.^^ With
" Two towns supply a
these limitations the law reads (ibid., p. 9)
smaller place in proportion to their population, and in inverse proportion to the square of the distance." ^^
In the derivation it is assumed that the " law " has the general
"

summarizes in a

Ui = /B
i \

form

^ IE

\ "

where

t/i is

the sales of

town

in the

intermediate place, E^ the distance between both, B^ the population

town I; and C/o. E-,, and B. are the corresponding values for town

of

2.

and n are

still

undetermined. They are supposed to define

what, in its general form, no one will deny: that purchases by

country people in a town depend essentially upon its size and dis-

N=

Reilly states that according to his field studies

tance.
is

aproximately

2.

He offers

and n

figures for the latter only, which, indeed,

invariably give for n an actual value between 1.5 and 2.4. In so

far as the investigations in Iowa {loc. cit., Nos. 6 and 7) permit
32. If

they are too unequal, the market area of the smaller town will be encircled

or entirely absorbed by that of the larger.

traveling the short distance to the small

longer distance to the large one.

It

Encirclement assumes that the cost of

town

probably

is

is,

relatively higher

are the same for travel over a short or a long distance.

same

effect.

See Figure 71, where

BO>AC

than that for the

as a rule, for certain inconveniences

Sliding-scale tariffs

limited choice in the small town and the curves represent travel costs.

it

is

more advantageous to purchase

B and go to ^4.

have the

represents the higher prices or the

in B,

whereas to the right of

Between

it

is

more

E and

better to

pass through

A
Fig. 71.

33.

According to

Encirclement of a small town (B) by a large one (A)

W. Krzyzanowski

Industries," Journal of Political

(" Review of the Literature of the Location of

Economy, 1927, pp. 278-291) Schaffle had already
,

established a similar law, but I could not find the passage in question.
that great systematizer developed

many

ideas

In any case,
on the settlement system of a country

and related matters, that are stimulating even today. See,

Leben des sozialen Korpers, III (Tubingen, 1878), 112-122.

for example, his

Bau und

Examples

Part Four.

412

n is very much greater.

cannot regard Reilly's formula as having been verified there.
Nevertheless it is a serious attempt to express quantitatively the
co-operation of the most important factors.^*
The final examples of the thinning out of markets with distance
are drawn from a book by R. D. MacKenzie {The Metropolitan
Community, 1933, pp. 76 f.) on metropolitan economic landscapes.
Columns 1 and 2 of Table 30 show the proportion of retailers who
bought from Chicago wholesalers in 1930, arranged in order of their
testing of the " law," however, the range of

Thus

Columns 3 and 4 give bank localities, simiand for every group the percentage of localities in
one bank had business relations with the great

distance from that city.

larly arranged,

which

least

at

DISTANCE AND SIZE OF DEMAND

Table 30.
Retailers Dealing with

Chicago Wholesalers,
1930, by Distance

Sales of Detroit

Bank Locations

Distance from Chicago

Per Cent

Miles

Per Cent

400
400- 800
800-1200
1200-1600

55
25
10
30

1600-

40

61

200-400
400-600

14
13
12

600-

tants in Detroit Area,

as function of Distance

Miles

-200

News-

paper per 100 Inhabi-

by-

100

Per Cent

Miles
5

25
25- 50
50- 75
75-100

40
24

11
8

The

higher proportion in the most distant areas

groups the cities of the Mountain
States and of California play the chief role, and the business relations among metropolitan banks is especially close. On the other
hand, the percentage of banks having deposits with New York banks
rises with distance westward from Chicago
{Comptroller of the
Currency, Annual Report for 1935 [Washington, 1936], p. 10) The
area from which money flows into Chicago is thus surrounded by
that of New York, as theory leads us to expect, and the difference

Chicago banks.
from the

results

fact that in these

in distance from Chicago

and

New

the greater the distance west of

YorJc

is less

Columns

it.^^

in favor of Chicago

and 6

of

Table 30

34. E. Scheu's " law " (" Der Einfluss des Raumes auf die Giiterverteilung. Ein
wirtschafts-geographisches Gesetz! " Mitteilungen des Vereins der Geographen an der

Universitat Leipzig, No. VII, 1927, pp. 31-37) according to which the sale of goods
from a producing area decreases as the cube of the distance, is much more primitive
,

in comparison.
35. See

also

Districts in the

map

United

of banks with

deposits

in

States, Sixty-third Congress,

485 [Washington, 1914], p. 305)

Richmond (Location of Reserve

Second Session, Senate Document

Simple Market Areas

413

show how many Detroit newspapers are

sold per 100 inhabitants

McKenzie delimits
p. 83)
in the Detroit area. (McKenzie, op.
city economic landscapes according to the center from which most
cit.,

metropolitan newspapers were ordered, and his book contains a map

of American economic landscapes drawn by this method (p. 107)
.

Market area of a house in Kansas City (X) for (a) fine woolen
and work clothes. (U. S. Department of Commerce,
Distribution Cost Studies No. 7, Problems of Dry Goods Distribution
[Washington 1930], pp. 16 and 21.) Counties with negligible sales are left
Fig. 72.

clothing, (b) overalls

out of consideration.

In conclusion

present the results of a study on a particularly

thinly settled region in the

The

mountainous Northwest of the United

only fairly large town there

is Bend, in eastern Oregon,

with about 9,000 inhabitants. The nearest competing town lies
about 125 miles distant, and as a consequence businesses in Bend
have enormous market areas, of up to 7,800 square miles. But
demand is slight, partly because of the sparse population and partly
because of the long distances. Goods with a small possible sales
radius and in particular quickly perishable foods such as bread,

States.^"

36. E. Bates, U. S. Department of Commerce, Domestic Commerce Series No.

Commercial Survey of the Pacific North West (Washington, 1932), pp. 107 fE.

51,

Part Four.

^1^

Examples

green vegetables, and ice cream are stocked hardly at all, and
and articles of high quality are not profitable. In theoretical terms, their supply and demand curves do not intersect. Thus
there remain only a few popular articles that are produced in
quantities and have long possible shipping distances. But even these
cannot be carried by special establishments because sales would not
be large enough, so a sort of " mixed " business prevails. As even
fruit,

specialties

wholesale houses are not self-supporting by themselves, they are

combined with retail shops.
The lower demand in wartime is analogous to that resulting

from small populations, and peddlers flourished during the Middle

Ages for corresponding reasons (W. Sombart, Der moderne Kapitalismus II [1919], SOIL).
3.

The Shape

of

Market Areas

Various facts concerning the shape of market areas may be

gathered from Fio^ure 72. It shows the markets of the wholesale
textile firm in Kansas City, already frequently mentioned, for woolen
clothing distributed by middlemen, and for the overalls manufactured by the wholesale house itself. The gaps in markets, for

which we have given theoretical reasons, are obvious. Furthermore,

it is remarkable that this particular firm should be situated almost
on the eastern border of the market area instead of at its center.

We

have met with such an eccentric placing in the theoretical part

also (Fig. 46, p. 167)

has several reasons.

In the present instance this eccentric position

the next competitor toward the west,

First,

Denver, is two and a half times as far from Kansas City as is St.
Louis to the east. Secondly, the West is more thinly populated. In
the third place, it is naturally more expensive for a place halfway
between St. Louis and Kansas City to buy clothing from the East
through Kansas City than through St. Louis. The border of the
market area therefore lies nearer to the former. It is established by
the fact that here the longer but cheap long-distance haul from
New York, say, to Kansas City plus the shorter but expensive local
transport from Kansas City costs as much as the shorter long-distance
haul to St. Louis plus the longer local transportation from St. Louis."
37.

The

effect of these three factors is still

more evident

in western Kansas.

There

the smaller market areas resemble narrow strips that stretch far toward the west along

the transcontinental railroads; there are no lines running north and south. But the
center that supplies these areas lies near the eastern border. See a map of the market
areas for department stores in Salina or Great

Shipping Areas [New York, 1927],

p. 67)

Bend

(J.

W. Thompson

Co., Retail

4*5

Simple Market Areas

is to be seen in Figure 73, though here the boundary lines are only approximately accurate. Goods for centers 3 to
5 come from the northeast in carload lots, and are distributed in

Something similar

small lots from these centers to their market areas,^^ which have
their greatest extension toward the southwest. The coastal points 1
(Houston) and 2 (New Orleans) on the other hand, receive their
,

Market areas of the following wholesale hardware trade centers:

2. New Orleans; 3. Memphis; 4. St. Louis; 5. Kansas City.
(Redrawn after W. A. Bowers, U. S. Department of Commerce, Domestic
Commerce Series No. 52, Hardware Distribution in the Gulf Southwest.
Fig. 73.

1.

Houston;

Washington,

1932.)

goods more cheaply by water, and as a consequence their market

areas reach comparatively far toward the northeast. The areas established for the Federal Reserve Banks with reference to already
existing banking

and business conditions

also

fit

well into this

38. The pattern of the movements of goods is reminiscent of a nest of rockets. First
the emissions of production centers, which from wholesale centers divide anew {in a
backward direction also!) to " burst " finally in the retail centers. Whether or not
,

middlemen are profitable depends very much upon whether the carload freight rate
is far enough below the rate per unit unless it is purely a commercial agency. Domestic
transportation does not differ in principle from international transportation, which
my research group and I have begun to investigate at the Institut fiir Weltivirtschaft.
In the meantime see H. Lofke, " Ursachen und Umfang des Transits," Weltwirtschaftliches Archiv,

LV

(1942)

Part Four.

4i6

pattern.

Minneapolis, Kansas City, and

of their territory that

The

fact that it

is

St.

Louis

lie

Examples

on the edge

nearest to predominant Chicago.

may be advantageous

to go

around the North

American continent instead of across

up of market areas.^^ Some industries that are situated on the
Atlantic Coast and have rivals in Mississippi can no longer compete
in the Middle West because of high railway freights, yet are enabled
to do so in California, still farther west, by the lower ocean freight.
For instance, the market area for New York pianos extends inland
about 500 miles from the East Coast and about 1,000 miles from the
Pacific Coast, where the pianos arrive by way of the Panama Canal.
Between these two sections of the New York market area lies that
it

of

St.

has led to a strange splitting

Louis, compressed within the Mississippi Valley.

for the

Panama Canal

the entire

Were

it

West would be the hinterland

not
for

an industry that flourished vigorously in the upper Mississippi Valley

before the Canal was constructed, just as the Mississippi Valley and
New Orleans together were of greater importance and showed
promise of a more brilliant future before the Civil War and the
building of the Panama Canal than afterward.*'* The Civil War,
the Canal, and the artificial maintenance of high freight rates on
the Mississippi River *^ have hindered, if not entirely prevented,
the development of this area.
The corn market furnishes another example of the influence of
differences between land and ocean freights upon the shape of market
areas. On both the East and West Coasts corn from Argentina is
able to compete with American corn shipped from the interior.
(A. Riihl, " Zur Frage der internationalen Arbeitsteilung. Eine
an impressive example of how extraordinary the difmay be. " It costs less to ship coal from Cardiff
send
miles)
than
to
it from South Wales to London
to Port Said (3,072
(170 miles) ."
{Foreign Trade and Shipping [New York, 1918], p. 257.) Thus the market areas for
goods that are very sensitive to freight charges may extend similarly to the most distant
countries if only they are accessible by ship. According to my calculation, for example,
39. E.

W. Zimmermann

ference between land

cites

and ocean

English food imports in

1937

freight

came an average distance

of 6,250 miles.

From

the

opposite viewpoint, water routes are of vital importance to places that are far from

Hence the greater part of the foreign trade of the Balkan countries, even
is carried on by sea.
40. A hundred years ago New York and New Orleans exported equally large
amounts of good's. The enormous supply area of the Mississippi would provide an

a market.

with Germany,

important natural advantage for the latter, if only it were controlled. (See S. A
The New Orleans Trade Area, University Bulletin, Louisiana State University,

Caldwell,

XXVIII, No. 10 [Baton Rouge, 1936].)

41. These are regulated politically, and are but
about 20 per cent below in 1937.

slightly

below railway freight rates

Simple Market Areas

statistische Studie

417

auf

Grund der Einfuhr der Vereinigten

Staaten

von Amerika," Vierteljahrshefte zur Konjunkturforschung, Sonderheft 25 [Berlin, 1932], pp. 10, 26.)
It is also very important that the cheap water route through

the Suez Canal connects Europe and eastern Asia much more closely
than does the Trans-Siberian Railway. In an instance cited by E.
Steinhagen *- the railway was eleven times more expensive than the
Canal. Thus Russian markets, like those of the American Middle
West, are caught in the pincers.
The methodologically admirable investigations of Cornell University and of the Iowa State Planning Board are well worth attention.
The books of sellers, upon which all investigations hitherto mentioned have been based, are inadequate for the delimitations of retail
trade areas. The Cornell method of interrogating almost every
farmer is ideal, but expensive. The results are entered on maps and
boundary lines drawn in such a way that contested areas are excluded.
This gives a celarer picture than that obtained when the overlapping
of market areas is taken into consideration. See Figure 74 (after D.
Sanderson, Rural Social and Economic Areas in Central New York,
Cornell University Agricultural Experiment Station, Ithaca, Bulletin
614, 1934, p. 9)

In Iowa thousands of the unemployed were sent out upon the

highways to ask in the homes situated along them where certain
important articles were purchased. One household in every mile
was questioned (Iowa State Planning Board, Retail Trading Areas,
Series I [Des Moines, 1936], No. 6, p. 3)
The rather infrequent
overlaps were unfortunately disregarded in drawing the boundary
lines, areas being assigned exclusively to those centers from which
most was bought. The highway system in Iowa is mainly lattice-like,
only the through routes being radial. An example of the former
is provided by the region about Tipton (Fig. 75)
of the latter, by
that about Muscatine (Fig. 76)
In the one case, therefore, one
would necessarily expect market areas to be approximately rectangular,*^ and in the other to approach a circular shape. As the regions
.

42.

Der

Einfluss der Transportkosten auf Standort

und Absatzreichweite der Betriebe,

Berlin dissertation, 1937, p. 44.

43.

Because the rectangular or even square shape

The

tants are jokingly called square-minded.

recognizable today.

The

typical county

is

and an area of 160

16 townships, to every 144 farms.

of a fixed shape (square)

The

and the
acres.

first settlers

and area (160

so prevalent in

Iowa
is

its

inhabi-

still

clearly

a square with sides 24 miles in length, the

typical township another with 6-mile sides,

sides half a mile long

is

original state planning

acres)

typical

Thus

there

farm

still

another with

would be

received lots from the

county, or

Government

Part Four.

4j8

Examples

concerned are undulating or often hilly, to be sure, the assumptions

for regular shapes are by no means fulfilled, but unfortunately no

on the

investigations

o
*/

.^<^^

i 0/

,V-

+
+

jf oo

^'

"-:

++

-_.

of determining retail

most of their groceries

The

dots.

in

Town

"

+ +

Method

typical of

Fig. 74.

much more

level areas that are so

market

areas.

All farms that

buy

(Marion) are indicated by heavy black

are represented
boundaries of the uncontested sales area of
line, those of neighboring competition by broken lines.

by a continuous

Fig. 75.

Sales area for building

lumber and cement, Cedar County, Iowa.

(Iowa State Planning Board, Retail Trading Areas, Series

Des Moines,

I,

No.

6, Fig. 4.

1936.)

Iowa were available to me. Yet even so, characteristic differences in

the shape of market areas are still evident in the vicinity of Tipton
and Muscatine. In the latter case, furthermore, projecting tongues
of market areas are noteworthy, partially enclosing smaller places
and jutting out into the market of the considerably larger Muscatine
There theoretical explanation is given in Fig. 46 (p. 167)
(Fig. 76)
.

Simple Market Areas

and

its

419

accompanying

text.

Besides differences in size

among

retail

trade areas for various goods. Figure 76 shows also, on the one hand,
the connection between the agricultural areas that supply the town
with eggs, poultry, milk, and so on; and, on the other, the market
areas for its retail dealers. This is easily explained. The farmer
who takes his agricultural products into town for sale makes small
purchases at the same time. It is different with cattle for slaughter,
which go directly to Chicago as a rule, unaccompanied by the farmer;
thus there is no return flow of retail buying in Chicago.

..^P-

Wood and cement

Groceries

Women's clothes

Eggs and poultry

..Missiscippi, which is
also the slate boundary

where the investigation

stops

Main transport lines

(rail

and highways) to

the limit of the

Fig. 76.

first

Supply and market areas for Muscatine, Iowa.

area

(Ibid.)

We have now passed from the market areas of producers to the

supply areas of consumers. Here the literature is more abundant,
probably because it is not necessary to pry into the business secrets
Innumerable small producers are concerned,
and anything worth knowing about their business connections is
contained in the published statistics on trade. Hence numerous
supply areas for milk, livestock, grain, and other agricultural products have been well investigated in part. As compared with what
has already been discussed, they offer nothing essentially new, and
so, except for presenting an admirable system of supply areas (Fig.
77) we shall limit ourselves to one last example of a more important
of individual firms.

Part Four.

420

subject.

That

to

market areas that

Fig. 77.

which we now turn

the nesting of supply and

world trade goods.

is

typical of so-called

is

Examples

oil. Larger oil mill centers

A Collecting stations (
courses).
B Export ports

Hierarchy of supply areas for tung

(their small

supply areas not indicated).

supply areas determined by river

boundary between the supply areas for Shanghai and Hong Kong). (After
Deasy, Economic Geography, 1940, p. 265.) For English coal see K. Dietzel,
ed., Lebensraumfragen europdischer Volker (Leipzig, 1941), p. 285.

4.

The "World Market"

The wheat markets are a good example of a complicated overlapping of regions, on the one hand, and of regions naturally
important in themselves on the other. At first glance the statistics
create an impression of inextricable confusion. Every exporting
country seems to send wheat everywhere, and every importing
country to buy everywhere. In speaking of a " world market " for
wheat, should we have nothing more in mind than this universal
and closely knit fabric? Figure 78 shows the farthest boundaries of
their market areas for the four great exporting countries in the
harvest year 1928-29, the last before the extensive transformation
of markets through

government interference began.^* Only countries

that an exporting country provided with less than

1 per cent of their

market
lie
outside
its
area. In a
considered
to
imports
are
wheat
especially,
the
boundaries
Belgian
Congo
are not
the
few cases,

44.

Russia and India, too, occasionally throw considerable amounts of wheat on

the market, but are not to be regarded as regularly exporting countries.

Balkan

states

export

much

in 1928.

Nor did the

421

Simple Market Areas

Furthermore, only for Brazil could it be approximately

considered that sometimes not the whole couiitry, but only parts of
it, belong within any given market area.^''
What does Figure 78 show? Though it is still confusing enough.
certain.

Figs. 78

and

79.

The

great world wheat markets

of Canadian market areas are continuous lines; those of the American,

and those of Argentina, crosshatched lines; while Australian market areas
Figure 78 shows the farthest boundaries in 1928-29.
are dotted (after Table 31)
Regions importing from the principal exporting ports, which are indicated by rings,

The boundaries

hatched

lines;

are represented by

Figure 79:
superiority)

45.

broken

Dominant
.

areas

lines.

(those

uncontested market areas are dotted.

which an exporting country enjoys definite

Practically
in

Consolidated areas are outlined, exclaves designated by crosses.

South of Bahia the importation of wheat from the United States was negligible.

Part Four.

422

one can

may

see that all sales markets are limited,

and

Examples

that certain regions

therefore be supplied by only one single surplus country.

These

uncontested areas are dotted. Figure 79 shows in addition all those

regions in which an exporting country is obviously predominant.
This is assumed to be the case only when it supplies more than half
of the amount imported, and no single competitor provides even
approximately as large an amount.
Now the picture suddenly clears. The dominating regions are
grouped in a fairly rational manner about the great exporting ports,
constituting closed forms with but few exceptions. The exceptions
are marked in the figure by crosses. They absorb hardly 3 per cent
of the world's exports of wheat, and in many cases (Alaska, the
British West Indies, and others) are politically conditioned. More
important quantitatively are the contested areas, in which no exporting country enjoys unquestioned predominance and to which
Germany, too, belonged in the period under discussion. But most
important of all is the fact that beneath the apparent confusion a
definite spatial arrangement can be distinguished when the situation
is reduced to its essentials.
Of course these predominant areas are not of equal importance.
At that time they received more than two thirds of the Canadian,
one half of the Argentine and Australian, but only one sixth of the

American wheat exported. The

difficulties of

many American wheat

growers are thus not surprising, since they are forced to such a great
extent to fight for a place in the contested areas or even in the
unquestioned markets of other surplus countries. Boundaries are
constantly shifting, to be sure, depending on the result of the harvest,
the changing structure of ocean freights, and changes in consumption
and recently, above all, in trade policies. But this is more true for
the boundaries of the whole area than for those of its uncontested
core.

We

turn

now from

and
do they arise? First, through
Although shipments from the four supply areas
the core regions to the contested ones,

to regional overlaps in general.

seasonal factors.

How

continue throughout the year, they vary in amount with the season.

They

is, in the fall, from regions

Northern and in the spring from those in the Southern
Hemisphere. Tn so far as seasonal factors are at work, we do not
strictly deal with overlaps at all because the shipments follow one

are largest after the harvest, that

in the

another chronologically.
is

due

may

get

second variety of apparent overlapping

breakdown of the statistics by countries. A country

wheat from t^vo sources, yet closer examination will often

to the

simple Market Areas

Table 31.

423

SOURCE OF WHEAT IMPORTS,

Source of Imports in Per Cent

Imports,
Million
Bushels

Importing Country

1928-1929

Canada

United

Argentina

States

Australia

Area of Canadian Predominance

England

Denmark
Norway

347
,.

Portugal

Greece

15

Jamaica
British West indies
China
Japan

2
1

37
34

64
52
66
78
53
87
95
67
66

24

19

29

16

18

11

11

18

29
13

Area of Argentine Predominance

Paraguay

Uruguay

Spanish Guinea
French Africa
Spain
France

Belgium

A rea
Ireland
Gibraltar

West Africa

61

62

25
31

14
29
54

15

19

15

of United States
5

38

11

Predominance

62
97

91

Cuba

97

Haiti

British

Netherlands West Indies

Venezuela
Ecuador

Bolivia

Panama

Nicaragua
Costa Rica
San Salvador

Guatemala
Mexico

28

20

13

15

Alaska
Philippine Islands

Area of Australian Predominance

Turkey
Egypt
Sudan
South Africa
New Zealand
Netherlands East Indies

10
19

27
42

26

16

100
100
89
85
90
66

35

Brazil

25
17

91

95
72
100
80
98
100
97
100
100
72
100
87

10

12

90
87
100
60
58
100
100

31

20

43

17
12
56
15
50
55
13
16

Contested Areas

Germany
Holland

Sweden
Finland
Italy

43
37
38
44
33
50
45

39
63
7
3

48

Honduras
Colombia

Peru

Chile

British

38

'

40

49
41

12

12

38

44

Part Four.

424

Examples

Calculated from G. J. Carr, U. S. Department of Commerce, Trade Promotion

No. 130, International Marketing of Surplus Wheat (Washington, 1932) pp. 12The
24. For Germany, from Statistisches Jahrbuch fiir das Deutsche Reich (Berlin)
figures give only an approximate idea, since the data refer in part to the calendar and
in part to the harvest year. The statistics for importing and exporting countries do
not agree. Colonies are often lumped together, and the percentages for French Africa
are therefore especially unreliable. Flour has been converted to its wheat equivalent.
a.

Series

show

that, especially in large countries, the centers of the

areas are in different sections.

The example

two market

of Brazil has already

been mentioned. In the third place, there is an artificial overlapping.

Canadian wheat would hardly penetrate as far as South Africa and,
on the other hand, Argentina would sell more there if South Africa,
Canada, and Australia did not belong to the same empire.
Finally, there remain two instances of real overlapping. Different
kinds and qualities of wheat are grown in different regions, and it is
advantageous to mix them. The kind of mixture varies with the
country and the sort of bread to be made, but also with relative
prices. But the last reason for overlapping, already discussed on
pages 188 ff., is certainly the most important. It is apparent from
Figure 78 that all market areas include northwestern Europe, at
least by a tip. This border region is no small marginal buyer, howIts
ever, but the foremost wheat-importing area in the world.
demand could not be met at all by one single surplus region without
considerably raising the price. It is the center for a purchasing area
that embraces all the great surplus countries, including the wheat
belt of eastern Europe, which does not appear in the figure. Thus
an unusual situation arises: Europe lies within the market area of
all surplus countries, so that these represent in turn only portions
of the

European purchasing

The

area.*^

world-wide supply area of the European consumer

ganized into a hierarchy of smaller sources.

46.

The same

thing

is

true of most world trade goods.

The
Thus

is

or-

largest are the

95 per cent of the

world's imports of peanuts in 1937 went to Europe; 87 per cent of the copper; 79 per

cent of the hides; 78 per cent of the corn; 76 per cent of the wool; 73 per cent of the

and 66 per cent of the cotton. On the other

rice, 29 per cent; and silk, 19 per cent.
World trade reflects this exceptional position of Europe, and of England in particular
Another such " corner market " is Berlin, where coal from England, Upper
(Fig. 80)
Silesia, and the Ruhr compete with one another. According to R. Regul's calculation
this three-country " corner " should be about 125 miles west-southwest of Berlin. That
coal from the Ruhr should nevertheless compete in the Berlin market he attributes
partly to quality differences, partly to dumping, and partly to an import quota for the
English coal (" Die Wettbewerbslage der Steinkohle," Vierteljahrshefte zur Konjunkturtobacco; 68 per cent of the petroleum;

hand,

it

is

not true of rubber, 31 per cent;

forschung, Sonderheft 34 [Berlin, 1933], p. 83.)

4*5

Simple Market Areas

supply regions about the great export ports, enclosed by broken

lines in Figure 78.''^ Difficulties in drawing the regional borders
really occur only in North America. The area for hard winter
wheat in Nebraska, Kansas, and Oklahoma, which is fairly Avell
separated from the northern wheat belt, exports chiefly through
Galveston and New Orleans, where the heavier wheat serves as
ballast for cotton, which would be too light for shipment without it.
'^W^M

Fig. 80.

England

as a corner

market

at the center of

world trade routes.

Tons on March 7,
Empire Shipping, 1936, Admiralty BR 84, London 1936.) The map
the same time the main routes for world trade. On the other hand, the
on the corresponding map for November, 1937 (BR 135) is curiously wide.

Position at sea of every British ship over 3,000 Brutto Registered

1936.

(After British

shows

at

scattering

All small islands that might be mistaken for ships have been omitted.

Railway freight to the two ports, and the ocean freight from both
of them to Europe, are the same,*^ so that on the whole, their supply
and market areas are probably identical. This holds also for the
two ports on the northwest coast, Seattle and Portland. But as the
wheat belt here lies closer to the ports, its nearest parts divide into
distinct supply areas for the two ports.
The great dividing line between the Atlantic and the Pacific
ports, which in Canada runs aproximately between Alberta and
Saskatchewan and continues in the United States between Idaho and
Wyoming, is more important. It must not be thought of as rigid,
47.

Not every port

is

shown. Most of the

circles

stand for a

number

of practically

equivalent ports.

According to Bureau of Railway Economics, Commodity Prices in Their Relation

Transportation Costs, Bulletin 40, Wheat (Washington, 1930) p. 4, and to a map
in U. S. Department of Agriculture, Freight Rates on Wheat (Washington, 1928)
48.

to

Part Four.

^26

Examples

however. Though railway freights change but little over the years,
ocean freights change all the more.*^ Hence there are wide areas
on either side of the approximate line from which grain is shipped
now to the west and now to the east. Price differentials of only a
fraction of a cent may decide the direction, even when the destination is the same: Liverpool. True, the westward route by way of
Vancouver and then through the Panama Canal is almost twice as
long as the direct eastward one, but most of the former is a cheap
ocean route whereas in the second case three quarters of the total
freight cost goes merely to transport the wheat over expensive rail-

way and

inland' water routes to the

much more

(See the calculation of comparative costs in

Statistics,

distant East Coast.^"

Dominion Bureau

of

Report on the Grain Trade of Canada, 1933 [Ottawa,

1936], p. 175.)

a large part of the Canadian wheat crop, generally one

one third, goes by way of Vancouver, even when it is bound
for England. Fort Churchill, on Hudson Bay, is most favorably
situated in respect to freight, and has a large supply area in northern
Saskatchewan and Manitoba, as well as far to the south (see the
Dominion Bureau of Statistics Report just cited, pp. 175-183) Yet
only a small percentage of Canadian wheat passes through Fort
Churchill. Here we encounter a new factor in the formation of
regions the season. Because of a northerly situation the harvest is
late in the possible supply area of Fort Churchill, and the harbor
must be closed as early as the end of October. Consequently wheat

Hence

fifth to

49. In July, 1935, for example, the freight on wheat shipped from Vancouver to
England was hardly higher than that from Montreal, whereas often it is twice as high.
But because the freight from the West Coast to Europe remains higher than that from
the East Coast throughout all fluctuations, the price of wheat on the West Coast must
always be lower than that on the East Coast.
50.

The

fact

that land

formerly caused eastern

routes are so

Germany

to sell

its

much more

expensive than ocean routes

surplus grain in Scandinavia while western

and southern Germany were importing wheat from overseas, which could be sent by
ship as far as Mannheim. (See A. Kuhner, Die wirtschaftlichen Beziehungen zwischen
Wilrttemberg und dem Reich, Munich dissertation, 1926, pp. 26 f.) The German tariffs
could shift the central dividing zone between east German and foreign wheat; but they
were not high enough to force the east German surplus and the west German deficit
together. Indeed, the system of import certificates worked rather in the opposite
direction. Only with the recent market organization has inland transportation increased
in importance, though governmental price regulation provided for regional price
differences only up to 12 per cent in the economic year 1938-39, for example. The two
extremes were parts of Silesia on the one hand, and the Saar District on the other.
See Reichsgesetzblatt I for July
certificates

-W. F.

S.]

may be found

1,

1938.

in Haberler,

[A discussion of the

The Theory

German system

of import

of International Trade, pp. 318

ff.

Simple Market Areas

4^7

can be exported for a few weeks only, but during this short period
Fort Churchill is numbered among the chief export harbors.
The supply areas for New York and the neighboring American
ports on the one hand, and for Montreal and other Atlantic ports
in Canada on the other, cannot be separated, since almost all wheat
follows the same route at first through the Great Lakes, and usually
not until it reaches Buffalo is the final decision made as to whether
to ship it on to New York through the Erie Canal, or through the
Welland Canal to Montreal. This depends mainly upon the differences in ocean freights at the moment. A great deal of American
wheat is shipped through Canadian ports, and much Canadian
wheat, generally one fifth to one third, through American ports.
Buffalo, therefore, is a gateway, one level above the ports in the
hierarchy. In contradistinction to the eastern ports, the supply area
is sharply divided between Canadian and American ports on the
West Coast, partly because these draw from widely separated wheatgrowing districts, partly because these districts lie relatively near
them, and partly, too, because cross-connections are less numerous.
As wheat shipments from a supply area stream into a port from
many directions as though into a narrow gateway, so they divide
again in the wide market area of the port as soon as they have passed
through.
Both areas show in turn a definite structure. A hierarchy
'^^

of smaller

and

same
This has already

larger collecting or distributing centers play the

role for their submarkets as the port for the whole. '^^

been discussed. Thus even in the case of the single product alone,
wheat, there are many kinds of area: growing, supply, and market
areas together with their subdivisions; areas for the cultivation of

summer

or winter wheat; supply areas for individual ports; smaller

way down to the local elevators or even

the single farm; and correspondingly, in market areas, down to the

collecting stations all the

We have been able to sketch only a

an example, but even this short account
permits recognition of the order that lies behind the apparent chaos.
area of the individual baker.

few of these markets

c.

as

THE ECONOMIC IMPORTANCE OF DISTANCE

1.

For the Domestic Economy

In 1930 the cost of transportation on German railways amounted

goods at their destination; in Europe

to 4.6 per cent of the value of

would have been more correct to determine the market areas for Montreal,
New Orleans, and so on, but the necessary time was lacking.
52. See also L. B. Zapoleon, U. S. Department of Agriculture, Bulletin 594, Geography of Wheat Prices (Washington, 1918) pp. 14 f.
51. It

New

York,

Part Four.

428

Examples

and in the United States

in the same year 4.5 per
cent of the employed labor force was employed in public transportation, and in the United States 7.9 per cent. Those indirectly active
to 5 to 7 per cent, according to Pirath;

(1928, rail)

to 7.1 per cent.

In

Germany

therein are included in the gross receipts of the public transportation systems, which in Germany were 11.8 per cent and in the

United States 13 per cent of the national income. To this there is

be added the cost of private transportation (automobiles, bicycles),
or about 1.5 per cent in the United States and 9 per cent in Germany;
so that the total outlay for transportation makes up in round
to

numbers

13 per cent or 22 per cent respectively of the national

income, and all costs of distance together account for 20 per cent
and 30 per cent.
Obviously their wide expanse destroys a large part of the advantages that the United States (and Russia) enjoy by virtue of their
natural abundance. Single examples show this vividly. In 1930 long
hauls in the United States transported about 5| times as many tonmiles as in Germany. The enormous cost of quickly overcoming
the vast distances in the United States is shown by the proceeds

from telephone, telegraph, and radio communication: in 1931

billion reichsmarks in the United States as compared with

5.8

0.9

billion in Germany.^^

2.

A Consequence for Foreign Trade s*

An

important conclusion must be drawn from the preceding

on tlie differing size of market areas, and their " thinning
"
out
toward the periphery. The volume of foreign trade decreases
with distance. German statistics on foreign trade confirm this statement. For proof, the last year of flourishing and unrestricted foreign
trade has been chosen and only Russia excluded, because the foreign
findings

trade

monopoly there made

it

possible to neglect distance.

Further-

more, it differs too much in size from the other countries. Even so,
however, enough discrepancies in size still remain to disturb the
comparison, which is upset further by the facts that distances between countries are expressed as air-line miles between their capitals
and that the difference between land and ocean freights has not been
53.

Raiunforscrmnfr

Verkehrswirtschaft
the present author.

Landwirtschaft.
54.

und Raiimordming,

366.

I,

C.

Pirath, Die

Grundlagen der

pp. 7, 8, 78, 85, 90, 99. Other figures calculated by

See also G. Pavlovsky, Zur Frage der rdumlichen Ordnung der

(Berlin, 1934)

Internationale Landiuirtschaftliche

For the especially important

costs

Schwenzner, Exportbetriebslehre (Berlin, 1935)

Rundschau

distance

of
,

in

pp. 249-273.

I,

XXXIII

exporting see

(1942)

363.

Kapferer-

Simple Market Areas

considered.
is

On

429

the whole, the relation between trade and distance

clearly seen nevertheless particularly in the figure:

Germany

The

share of

and exports of European countries decreased

Table
See
32 and Figure 81.^^ This holds for the

in the imports

with distance.

trend, for although the individual deviations are considerable they

do not

really disturb the comparison, except in

Fig. 81.

two

cases.

The two

Distance and foreign trade.

Germany's share in the imports [b) and exports (c) of

European countries (cf. Table 32). These are arranged from
left to right in the order of their distance from Germany.

exceptions are the share of

Germany

in Bulgarian

and Greek exports.

Despite the distance of these countries this share was very large,
most probably because of shipments of tobacco, which made up
about half of these exports to Germany. What is true of single
European countries ^^ is also true of Europe as a whole. In 1928
55.

Germany's immediate neighbors bought 46 per cent of her exports

in 1928,

and

provided 30 per cent of her imports.

46 per cent of France's foreign trade went to immediately neighboring
and 39 per cent came from them. For Holland the figures were 55 per cent

56. In 1932

countries,

Part Four.

430

Table 32.

Examples

GERMANY'S SHARE IN THE FOREIGN TRADE OF

EUROPEAN COUNTRIES, 1928

Czechoslovakia

Denmark
Austria

Poland and Danzig

Netherlands
Belgium and Luxemburg

Hungary
Lithuania
Switzerland

Sweden
Norway
Latvia

France

175
225
331
381

25
33
20
27
27
13

22
22

'?n

T'

51

394
406
438
475

18

34
24
14

481
519
531

23

544
550

41

58
18
13
14
26

11

31

21

England

581
638

Yugoslavia
Estonia
Finland

656
688
750
838
850
900
1150
1181
1456
1500

Italy

Ireland
Bulgaria

Albania
Greece
Spain
Portugal
Iceland

14
30
37
10

12
26
16
12

71

?R

4
9

10
13
13

27
7

n
'

Distance from Berlin to the capital of the country in question in air-line miles.
Germany's share in imports, as per cent of total imports of the country in
question (Statistisches Jahrbuch filr das Deutsche Reich, 1931 (Berlin) pp. 90* f.)
c.
Germany's share in exports, as per cent of total exports of the country concerned
a.

b.

(sources as in b)

75 per cent of German exports went to Europe, and 51 per cent of

her imports came from there (ibid., p. 214)
For the same reason
inland European
foreign
trade exceeds the overseas trade. In 1928
i
O
.

65 per cent of the exports of European countries went to other

European

countries, and 55 per cent of imports were provided by

In 1909 the corresponding figures were as high as 70 per cent
and 62 per cent (ibid., p. 95*) Thus it is for very goods reasons that
the political interests of the great continental powers are concenthese.

trated

and

on neighboring

51 per cent.

areas.

They were much lower

for countries with

mainly ocean

frontiers, for

reasons that are easily explained: Italy, 24 per cent and 18 per cent. Great Britain,

23 per cent and 19 per cent.

reality

is

Conversely, they were very high for Canada, which in

only a border zone along the United States; 61 per cent of her exports went

United States in 1932, and 41 per cent of her imports came from there.
Weltwirtschaftliches Archiv in which I developed theoretically the
importance of distance in international trade contains an analysis of France's trade
with her colonies that conclusively supports my theory. About 75 per cent of exports
from Algeria go to France, but only 20 per cent of those from Indo-China. " Distance,
to the

The numberoOf

more than any other fact, decides in what measure colonies will contribute to the riches
of the mother country." (R. Maunier, Weltwirtschaftliches Archiv, L [1939], 272.)

Chapter 24.

Regional Systems

NUMBER, SPACING, AND SIZE OF TOWNS

a.

The

study of an actual regional system is an extensive and

undertaking. Fortunately we can refer to an admirable
monograph by Walter Christaller, Die zentralen Orte in Siiddeutschland (Jena, 1933) .^ On pages 130-132 we described regions with the
same structure; that is, regions that in every size class embrace a
constant number k of next smaller regions. Christaller has endeavdifficult

ored to explain the size and distribution of most settlements in

southern Germany on the assumption that ^ is 3 or, in a few cases,
3 the total number of settlealso 7. According to our Table 8, ^
3^, or 1,3729.ments per region in size-classes 0-6 is 3, 3^
The number of regions in size-classes 6-0 is equally large, but the

number

of regional centers in the corresponding size-classes

is

smaller.

Table 33

Number

Size-class

of Regions

of

Settlements
per Region

Number

of

Regions of
This Class
for k

Size-class

Number

of Places

This Class

729
243

2
3
4

81

486
162
54

27

27

18

81

243
729

5
6

of

Places of

The largest region, which includes all 729 places, has one center
and the three next smaller, with 243 each, also have one center
apiece, though one of these is identical with the center for the
largest region. Consequently the number of towns in size classes
1. A rather good but much shorter presentation by O. Schlier
("Die Landschaften
Deutschlands," Allgemeines Statistisches Archiv,
[1930], 24-41) should be mentioned
also. He shows how the influence of great cities affects the various levels of life and

XX

branches of the economy to a different degree with increasing distance.

2.

Class

includes the original settlements without their

431

own market

area.

Part Four.

432

Examples

6-0 is equal to the difference between regions of the same and the
486 (see Table 33) The
next higher size-class: that is, to 1, 2
actual number agrees well with this theoretical number over wide
areas, as Christaller has shown. ^ Thus in the regional system of

Nuremberg

(Christaller, op.

cit., p.

Size-class of place
Theoretical number of places
Actual number of places

The

199)

18

10

23

54
60

162
105

486
462

measure of agreement is shown only in the accomto be sure, which explains any deviations with
geographical, political, and other pecularities individually, at least
for all places in the higher size-classes. The virtue of the book lies
chiefly in this penetrating examination of single cases. Consequently
full

panying

text,

In regions
with the same structure, at least in those whose regional networks
(as with ^ == 0) cannot be " rotated," the centers of equally large
market areas are themselves equally large if one assigns each center
to the largest area supplied by it. Otherwise than in complete
systems, every center always coincides with the same combination
of smaller centers (Fig. 34, p. 128)
Hence the regional centers can

certain methodological objections lose in importance.

3.

Assume

argument that this predominance of regional systems,

and proved for Nuremberg, is universally valid. And suppose,

for the sake of

characterized by A

=3

further, that the average distance separating the smallest settlements

Since in

the

Germany within

the

is

about 2\ miles.

1938 borders there were 51,000 communities

to

would have on the average a region with a radius of something over 1.06 miles, which would mean a separation of 2.2 miles. Then, according to
Table 8, the theoretical distance separating the various types of places would be as
183,200 square miles, each

follows:

Theoretical

Type

Size- Distance,
class

Miles

Example

of

Place

2.5^
1

4.4

Village

7.5

Rural town

13.1?
22.5 \

38.8

Many

local

examples

County town
Provincial capital

Munich-Augsburg 38.8 miles

117.5

Regional capital

Munich-Nuremburg 124.4

203.1

Munich-Zurich 223.1 miles

350.0
595.0

State capital
Sectional capital

10

67.5^

National capital

miles

Berlin-Cologne 367.5 miles

Berlin-Paris 675 miles

There are important actual examples for every type. But obviously they are adequate neither for a comprehensive explanation of European reality nor for verification
of the theory. They illustrate only orders of magnitude in what may be an important
special case.

Regional Systems

433

be divided into
those regions

size-classes that

and contain

correspond with the

size-classes of

places with typically similar

economic

functions.*

From

concluded that in such cases there

sizes that should be statistically
maxima of a frequency curve representing the

this Christaller rightly

must be a number of

town

typical

determinable as
number of towns as a function of their size.^ He announced his
classification of towns by this method in Die zentralen Orte in
Siiddeutschland (Jena, 1933) p. 65. But I cannot see that he really
succeeded, except in two classes of places that he called A and K
places, and that actually correspond with certain agglomerations
shown on the curves on his page 326. The classification developed
on pages 150-155 was not further explained. He may have arrived
at it by arranging a number of places according to their functions
and then finding that most places in a group fell in a definite sizeclass, which was thereupon regarded as typical for places with this
function. But one can hardly speak of a clustering of the places
about any representative central value within the size-class, save for
the two exceptions mentioned. Such agglomerations, if they exist
at all, would be concealed by the fact that the number of places
falls rapidly with increasing size. As long as we do not know the
law governing this decline I do not see how one could eliminate
it in order to disclose possible hidden agglomerations.
As a classification of towns cannot be achieved statistically, only
three courses remain open. To classify them by direct observation
of towns with different functions, as Christaller apparently did; to
derive the classification from a regularity that is independent of
what is to be proved (Pareto's distribution formula, perhaps) or,
finally, to obtain it by trial and error. In the last case we have one
of the theoretically derived regional systems only if the actual
pattern corresponds with the theoretical in more than one respect.
Then, in the absence of other reasons, towns can always be so
classified, of course, that their real number is equal to the theoretical
number in every size-class. But only when it appears further, per,

4.

In the general system, on the contrary, a place need not be larger, the greater

the size of

its

largest area.

Here the central point of the larger region is not always

number of regions at the same time, as is the case

the central point for the larger

with regions having a similar structure.

5.

He measured

computed

size

" centrality,"

not by the

based on the

number of inhabitants, but in units

number of telephones installed. For

of a specially
cities Schlier's

method, which, using statistics of occupation, counts the " central stratum," is probably
(" Die zentralen Orte des deutschen Reichs," Zeitschrift der Gesellschaft fur
better.

Erdkunde zu

Berlin, 1937, pp. 162

ff.)

Part Four.

4g^

Examples

haps, that the actual distance separating these town types from one
another is the same as the theoretical distance can it be assumed that

the classification was meaningful.

By such a method I shall now demonstrate the existence in Iowa

of one of our theoretical regional systems. The statement to be
proved is, that the structure of settlements there follows the rules
same structure when k has the value 4
Suppose the settlements to be collected in

that hold for regions with the

Table

(see

131)

8, p.

11) that their theoretical and

same (columns 2 and 3) .^ And
suppose we find that their theoretical and actual distances from each
other also prove to be about the same; the hypothesis would then
be justified that the market areas in Iowa in all size-classes are
similarly constructed and always include four areas of the next
smaller size. This is actually true. The real distances deviate by
only about 5 to 10 per cent ^ from the theoretical ones.
A second proof starts with Pareto's law of distribution. H. W.
Singer ^ investigated the question of whether the connection discovered by Pareto between the number and size of incomes is valid
also for the number and size of towns. ^ Does it correspond with
A a log x? In this formula x is the size of a
the formula log y
population (or of incomes) y the number of towns with more than
X inhabitants (or the number of persons with incomes greater than
X marks) a and A are constants for a given country in a given period
of time for a given value of x and y. The formula states that the
ratio of a change in y (that is, a percentage change in y) is equal,

such

size-classes

(Table 34, column

numbers

in each class are the

actual

6.

The

hexagons
7.

On

value

ft

:= 4 has nothing to do with the shape of a region.

classified first

counted

all

the places in

distances

4.

who grew up in Iowa,

same function according to population,
accordance with this classification, and measured their mini-

those places with the

Only

The

apart.

frequencies

in

the

what would be expected

surprisingly well with

ft

holds for

the advice of Professor Sisam, of Colorado Springs,

I really

mum

It

as well as for squares.

individual size-classes
theoretically

corresponded

on the assumption that

were required to make the corresponhave made these in order to provide a perfectly clear starting

slight changes in the classification

dence complete, and

point.
8. The deviations would be still less if the the theoretical value of each size-class
had been derived from the actual value of every preceding one, instead of always from

the highest
9. "

class.

The Courbes
'

des Populations.'

June, 1936, pp. 254-263.

10. See also R. Gibrat

Parallel to Pareto's

Law," Economic Journal,

(Les inegalites economiques [Paris,

1931])

who added

to

Laplace's law of absolutely equal effect a similar law of proportionately equal effect.

For differences between Gibrat's and Pareto's methods see Arbeitsw.

II.

(1939)

pp. 203-227.

Institut.

Jahrbuch,

Regional Systems

435

Table 34.

REGIONAL SYSTEMS

IN IOWA.

THEORY AND REALITY"

Correspondence with Theoretical System

Centers

Size-class

Number

of
regions

Theory^

Distance apart*^

Reality

Theory'^

Reality'

5.6

61 5

154

153

11.2

10.3

39

22.4

23.6

44.8

5'

39
10
2-3

89.6

49.6
94.0

6e

0-1

4d

179.2

Corresponc ence with Pareto's

regions

Law

for

Places

Size-

Theory*"
7

Reality

Theory"*

1,800
7,200
28,800

size''

Reality*

10

44 7

8 19

205

204

3
4d

51

51

13

12

5<J

6"

= 1

Lowest

Minimum

Number

class of

for k

115,000
460,000

1,950
7,500
34,800
94,000

size-

class*

11

180-1,000
1,000-4,000
4,000-20,000
20,000-60,000
60,000-200,000
200,000-800,000

a.

For sources see Table 2L

b.

In miles.
Population.
Because of the small number of settlements in these size-classes, greater deviations
are to be expected. If Davenport is placed in class 4 instead of in class 5, in class
4, column 10, 34,800 must be replaced by 37,600; in column 11, 20,000-60,000 must
be replaced by 20,000-75,000; in class 5, column 5, 94 by 102.5; in column 8,
3 by 2; and in column 10, 94,000 by 111,000.
Iowa has no city of this size-class, but it lies between Minneapolis, Kansas City,
Omaha, and Chicago, the first three of which fall in this class. Their average
population is 490,000 and their minimum distance apart 236 miles.
Modal value; average value for class 5 only (because of the small number of
cases). Class 1: The distances, which incidentally correspond to size 2a in Table 8,
p. 131, were measured first (see p. 434, note 7) for settlements with 300-1,000
inhabitants, and the values so found were entered above in the table. A new
calculation, with the inclusion of places having 180-300 inhabitants, would have
taken much time, but random sampling showed that the result would not have

c.

d.

e.

/.

g.

h.

been greatly altered.

Average size of places in the lowest

size-class. Pareto's law, established for individual towns, thus holds also for the whole classes of towns, one more reason for
regarding as representative the arrangement of classes that was chosen.
The values actually obtained for class 1 were the starting point for the calculation

of all theoretical values.

Part Four.

AoQ

for very small changes, to the a-fold ratio of the inverse

That

is,

-^=

a,

which through integration leads

Examples

change in

to the

x.

formula

y
given above, a

the reciprocal of the coefficient of elasticity. Singer

series of countries that the formula expresses very
well the classification of towns according to size. It appears further
from his tables that at present a is nearly equal to 1 in a few cases

found

for a

is

whole

which we are

in

interested.

This

is

especially true for

England

1920), and Germany

elasticity
equal
to
an
with
1, a fourfold increase,
But
(1.05 in 1933)
means
a quartering of
population
minimum
for example, in the
1921), the United States

(0.99 in

(1.03 in

the

number

of towns

of towns falling in this class. Conversely,

falls

to

one quarter their

minimum

if

increase fourfold.

The

the

number

population must

towns by size in a theoretical system (k

4)
and in Iowa corresponds with this completely. The correspondence
between columns 9 and 10 ^^ is either an example and a proof of the
validity of Pareto's law or, conversely, if this is regarded as already
proved, further corroboration of the approach of our theoretical
classification of

system to reality.
G. K. Zipf [National Unity and Disunity [Bloomington, 1941])
gave Singer's discovery a simpler form. When the towns of a country
are arranged according to size, the nth town will have 1/nth the
population of the first. If the serial number (n) of a town is multiplied by the number of its inhabitants, the product will be the same
for all towns: that is, equal to the population of the metropolis. The
test works for Germany to the extent that of her 104 largest towns
in 1933 the product for the 25th to the 104th was without exception
between 5 and 6 million (Statistisches Jahrbuch fur das deutsche

Reich [Berlin, 1937],

p.

11.

For the 7

largest places

smaller, for the 8th to the 24th frequently larger.

it

was always

The importance

and the capitals of the major sections of Germany (such

Munich) was decreased in favor of the centers of economic land-

of Berlin
as

To

number of places with the minimum popuColumns 7 and 9 are calculated from these
two numbers. The assumption that each successive number should be exactly four
times, or \, as large as the preceding one is arbitrary, but practical. The places in Iowa
should be grouped in such a way that either the minimum size (column 10) or the
frequency (column 8) of the groups corresponds with the theoretical value. The
11.

lation 447

start with,

(819

is

819

the

assumption mentioned

is

sum

is

given as the

of

column

3)

chosen for convenience so that the grouping in column 3

can be employed and no new one becomes necessary. Consequently the perfect corre-

spondence between columns 7 and 8 is due to manipulation, whereas the approximate

correspondence between columns 9 and 10 gives the proof.

Regional Systems

437

Nuremberg) Zipf's rule is identical with Pareto's

found, a== 1. If the serial number of the last locality
in each class in Table 33 (or the equally large number of regions
of this class) is multiplied by the number of settlements in such
regions instead of by the population of that center, the product
(such as

scapes
if,

as Singer

likewise

Thus

is

a constant, 729, that

in regions of the

is

the total

same structure we get

number
for a

of settlements.
1

the following

relations:

Number of places in region

Number of all places

Size of region
Size of landscape

Serial

number of metropolis (=1) _ Population of regional center

Population of metropolis
number of last regional center

Thus

also, for

Serial

example.

Population of metropolis
economic landscape

Population of subcenter
Size of its region

Size of

was no more possible to find particularly frequent town sizes

in Iowa with any degree of certainty, than it was in Southern
Germany. Yet one would expect such agglomerations theoretically
It

not for the general system, at least for similarly constructed regions.
For the present it must remain undecided whether the question is
merely to discover a statistical method of making these agglomerations evident; ^- or whether differences in fertility, ability, and so
on are great enough even in a state as uniform as Iowa to effect
such a dispersion of town sizes that it conceals all agglomerations in
this way. In this case only a classification of towns geographically
and by individual size-classes, but not according to their dispersion
within these classes, would correspond with the norm. Or, finally,
whether size is influenced by still other factors, which underlie
Pareto's law of distribution but do not enter into our theoretical
if

pattern.

The

however, by another
^^ separating towns
increases with their size, not only in regions with the same structure
but generally, as is evident in Figure 32 (p. 127). The distance apart
theoretical system

From

point.

this

it

is

fully confirmed,

follows that the distance

of all places that represent centers for

Let

it

be called

a.

The

one or two regions

is

equal.

distance between centers for from three to

12. The few agglomerations mentioned by Christaller become clearer when the
places are arranged according to " centrality " (see p. 433, note 5) instead of populations.
13.

That

is,

the distance from the next town of equal or larger

size.

,o8

t'li^l

Examples

Four.

five regions is a in 59 cases, aV^in 25, and 2a in 1; the minimum

distance between centers^ for from six to ten regions is a in 1 case,
flV^in 2, Sa in 1, 2a 3 in 12, and 6a in 1. Thus it turns out not
only that the distance separating towns increases with their size,

but also that there is a typical distance for every size. This cannot
be given even theoretically by one single value, however, except
for regions of similar structure (Table 8) but only by a frequency
curve such as we have already met with in Figures 66 and 67."
Such curves provide an interesting comparison between a region
in which the assumptions of our theoretical deduction (similarity
of natural conditions) are approximately fulfilled and a country in
which they are manifestly not fulfilled. The frequency curves in
Figure 66 are typical for the American Middle West, and correspond
perfectly with expectation. In England, on the other hand, where
,

the towns cluster in the five coal districts and around London, the
differences are

much

less,

practically insignificant, especially

smaller and medium-sized towns.

Towns

between

are not evenly distributed

fertile plain, as in the American Middle West,

but cluster about the few places where natural resources are to be

over a uniformly
found.
b.

As

SPATIAL ARRANGEMENT OF TOWNS

for the relative position of

respect to one another,

we found

towns with different functions in

theoretically (Fig. 29, p. 125) that

they are grouped about the controlling metropolis in twelve sectors,

of which six are thickly and six sparsely settled. The environs of

Indianapolis and Toledo correspond so well with this theoretical

pattern that even fine details are repeated. So, for example, the
populous sectors are bounded laterally by a chain of towns; or again,
in sectors with but few towns one must travel farther from the
metropolis than in thickly settled areas before coming to the first
town. The area without any towns which, wholly in accord with
theory, surrounds many large cities,^^ would therefore have to take

the form of a cogwheel, strictly speaking, rather than that of a circle.

14.

The

dispersion in Fig. 66

" disturbances," since

we

is

theoretically unnecessary, but depends

upon

actual

are dealing with regions of similar structure in Iowa, as

we

already know.
15.

as I

This

am

taller,

fact has often

aware.

op.

cit.,

been described in the literature, but never explained so far

For Munich, Regensburg, and Wiirzburg, for instance, see W. ChrisFor Berlin. O. Schlier,
Die Landschaften Deutschlands,"
p. 256.
*'

Allgemeines Statistischrs Archiv,

XX

(19;]0)

39.

For Paris:

M.

agglomerations urbaines dans I'Europe contemporaine (Paris, 1897)

port, Iowa:

loxva State

P.

Meuriot, Des

p. 60.

Planning Board, Retail Trading Areas, Series

I,

For DavenNo. 6 (Des

Regional Systems

439

around Indianapolis and Toledo, where no

As Figures 30 and 31 (p. 125) show,
cogAvheel
that is deformed, to be sure, but
each is surrounded by a
Finally,
I
counted all the places within a
a cogwheel nevertheless.
62-mile circumference about Indianapolis (Standard Oil Company,
1937 Road Map, Indiana, Rand McNally, Chicago) and found that
This

is

actually true

great natural differences appear.

many

the area containing

45 per cent of
48 per cent of
53 per cent of
81 per cent of

Of

to-wns,

hatched in Figure

30,

included

the whole area,

the 573 places with fewer than 500 inhabitants,
the 38 places with 500-1,000 inhabitants,
the 52 places with

more than

1,000 inhabitants.

(there would be twelve according 'to theory) firstand federal highways that run out from Indianapolis, ten
the most part through the thickly settled sectors, and eight

the thirteen

class state

pass for

(again in accord with theory)

of these

THE FUNCTION OF TOWNS

c.

We

along or near their borders.

know from

theory, and experience shows it to be always

not advantageous for those who live in the country
to be associated culturally and economically with " the " town alone.
They have connections with many towns, depending on the business
in which they wish to engage. For certain purposes, however, such
as regional planning, it might be advantageous to have also a quantitative idea of them. I have before me the results of a rather good
true, that

is

is

investigation of the subject in Michigan,^

more

for

than for
Moines,

its

its

1936),

Minnesota

interests us here

its

general results

details.

p.

For Minnesota:

11.

1905-1929,"

Bulletin 269, p.

which

formulation of the problem and

11.

University

The

cause

is

of

C.

Zimmerman, "Farm Trade Centers

Minnesota,

Agricultural

Experiment

in

Station,

that all nonagricultural enterprises are represented in

a central town, so that agglomerations of such enterprises with long sales radii cannot

maintain themselves in the neighborhood

(see Fig. 28, p. 125)

Retail revenues also arc

shadow of a large city. Thus according to R. D.

McKenzie {The Metropolitan Community, 1933, pp. 323 ff.) retail sales in dollars per

smaller in places that

lie

the

in

capita in 1930 were

16. C.

In Los Angeles and Chicago respectively

738

638

In towns

0-20 miles distant

529

406

In towns 20-40 miles distant

709

637

In towns 40-80 miles distant

857

619

R. Hoffer,

"A Study

of Agriculture, Agricultural
1928.

of Town-Country Relationship," Michigan State College

Experiment Station, Special Bulletin 181, East Lansing,

Part Four.

4^0

More than

1,000 farmers, a sufficiently large

recalled that in the

United

States

Examples

number when

most farmers

live

it is

on separate

farms rather than in villages, were asked: (1) the location of their
banks, and where they bought: (2) clothing, (3) furniture, (4)
groceries, and (5) hardware. It appeared that not even half of their
business was transacted in the same town (chiefly by farmers living
near a large one)

while on the other hand only a negligible fraction

town for each separate

of those questioned patronized a different

Most of them were

purpose.

satisfied to transact all five types of

They did not change about

business in two or three places.

indis-

criminately from one to the other, however, but had their regular
places for

banking

as well as for the

hardware, and so on, but these

On the average the distance of
the following order: hardware,
women's clothing. The order

purchase of clothing,

their sources of supply increased in

men's clothing,
bank, physician,
third order was: church,

groceries, furniture,
for services was:

motion picture theater, tailor, hospital.

amusements, post office, newspaper.
d.

fruit,

places themselves did not coincide.

TOWN PLANS

many

respects towns are miniature copies of economic landThey, too, are composed of market areas for merchants and
workmen and of supply areas for offices and various enterprises, but
also for parks, transport points, and so forth. The advantages of an
agglomeration of locations at the center ^^ determine also the plan
of a town and the most suitable course for the main traffic routes.
Similarly, and especially in the case of retail trade, smaller agglomerations of locations are found in the suburbs, ^^ which correspond

In

scapes.

17. It is

better to have buildings high

and

set close together in the heart of a

town,

but with broad sidewalks; and lower and farther apart toward the outskirts. At the
center cluster the buildings most frequented by both inhabitants and outsiders for
widely different purposes: markets, post

office,

town

visited public buildings deserve this situation in

hall,

and

others.

the community.

Only constantly

Today

there is a
tendency to have the centers of towns and even villages too scattered and disconnected;

but

this pleases the eye,

building of a town

is

a nuisance for those

who have

business to transact.

The

no merely aesthetic or hygienic problem; innumerable economic

proportions must be correct, and the entire layout must be convenient for the public.
See F. Rechenberg, Has Einmaleins der Siedlung. (Richtzahlen fur das Siedlungswesen)
(Berlin, 1940)
W. Christaller, " Raumtheorie und Raumordnimg," Archiv fur Wirtschaftsplanung, I (1941)
122-126, 131-133; Uebler, on Fallersleben, Raumforschung
is

und Raumordnung,

1940, pp. 121-126.

18. An investigation of Baltimore will serve as an example.

K. Rolph, The
(J.
Location Structure of Retail Trade, Domestic Commerce Series 80, Washington, 1933)

The Abercrombie-Forshaw plan

for the rebuilding of

London provides

for the Individ-

Regional Systems

towns of an economic landscape. No wonder,

landscapes,
therefore, that cities should be like reduced economic
are essenthe more so because their main lines of communication
landscape,
the
tially determined from without by their position in
to the provincial

and because in the ideal case all nonindustrial enterprises of their

economic landscapes are represented within them." In one respect
modern towns are even ahead of landscapes: They are more a prodpromising
uct of planning than of unsupervised growth. The most
- through the
incompletely
and
painfully
develop
not
layout need
but can be consciously made a foundation for
the whole structure from the first.

free play of forces,

come to pass? Examining modern -^ town plans and the

literature on town planning, one is struck by a strong inclination
to abandon the lattice arrangement. Many large German cities have,
Has

this

though the pattern is seldom

in modern times Karlsruhe,
founded
so clear and
which generally had a
center,
town
for example. The medieval
rounded form for the sake of better defense, and the modern through
traffic routes that radiate from it, combine to produce this result.
like Berlin, a radiating street system,

perfect as in cities

Such an arrangement

is less

tances are too short to

often seen in smaller towns. First, disthe time saved by radiating streets of

make

any importance. Secondly, small towns frequently lie on but one

through highway or at most on but one right-angled intersection, as
is evident from the pattern of the theoretical economic landscape
Thus they can enjoy the advantages of the right(Fig. 32, p. 127)
.

uality of parts of the metropolis

and of neighborhoods with from 6,000

to

10,000

inhabitants by developing such cultural and economic subcenters, as well as by directing

traffic around them. The Times (London)
July 10, 1943.
Here origin remains an open question whether the metropolis is an original
or a copy, the seed or the fruit of its landscape; whether its purpose and, even more,
its view of the world, originates here or merely rises into consciousness; or whether

through

19.

town and country mutually condition one another.

20. Yet here, too, there are examples of good spatial arrangement with a free choice
of location. See Doxiades on Athens, Monatshefte fiir Baukunst und Stddtebau, 1942,
No.

2.

The concept of an
and squares predominate
21.

ideal

town blossomed

first

in sketches of that period,

with the Renaissance. Octagons

and a twelve-sided shape seems

But only once was

to have been proposed first by Francesco de Marchi (after 1540)
one of these theories put into practice. Palmanova, founded by the Venetians in 1593,
has a hexagonal plaza in the center with radiating streets. (G. Miinter, Die Geschichte
For a concise description
d. Idealstadt v. 1400-1700, Danzig dissertation, 1928, p. 16.)
of the plan and network of streets for all German cities see E. Keyser, ed., Deutsches
Stddtebuch (Stuttgart, 1939, and following years)
.

Part Four.

442

angled pattern without

its

Examples

disadvantages becoming of any real

consequence.^^
The advantages are the simplicity of the system, easy orientation
toward street crossings, and adaptability to the right-angled shape
of houses. In order to avoid the corresponding disadvantages of the
star-shaped arrangement, the individual angles of the star must be
conspicuously different; at the center there must be a large island

around which

traffic rotates,

and

this limits greatly the

number

of

street intersections; the single sectors must not be built over as far
as their points, for on the one hand this obstructs the view of traffic
emerging from neighboring streets, and on the other makes too
noticeable those departures from the right-angled ground plan that

are not entirely avoidable with close building.^^

But when

these

requirements are fulfilled, a radiating network of streets facilitates

metropolitan traffic considerably. For this reason diagonal streets
at least have been cut through subsequently in many cities that
were laid out on the chessboard plan. Then eight streets instead
of four radiate from a crossing, which is no doubt the reason why
several newly established cities have been laid out octagonally from
the first, like Littoria, in the former Pontine Marshes, and most
districts of the Australian capital, Canberra. Yet this remains a
compromise after all between the square and the radial pattern.
22. Fig. 82

shows how a settlement would have

cultural enterprise were to be represented but once,

to

be laid out

if

every nonagri-

and the settlement were situated

Trade and nonagricultural businesses are concentrated at the

and the condition under which all houses on the outskirts of the settlement

at a simple crossroads.

center,

Fig. 82.

Shape and

street

network of a small town

+ =

be equidistant from the center is x

constant. From this it follows that the
y
shape of the settlement is that of a square standing on one corner. This is reminiscent
of Washington, D. C, and its environs, but in the case of such a large city the assumpshall

tions according to

which

23. In the case of

in the

sharp corners.

this is the best shape are no longer fulfilled.

overland highways this corresponds to the difficulty of plowing

Regional Systems

443

first place, a few diagonal streets are not enough for a

and secondly they do not permit the most suitable shape
for the subdivisions the hexagon.^* For cities on a plain, a hexagonal center where six main streets cross -^ and from which twelve
streets radiate has a good theoretical basis. This pattern is seen in
Washington, for example, with the Capitol as a center, though in
combination with the chessboard pattern. The White House constitutes a secondary center. The hexagon is still more clearly evident
in Canberra around the site of the city administration and, unless
I am mistaken, around that of the Government offices as well.
But just as the isolated market area is circular, not hexagonal,
in
so also the environs of a town (which is thus always isolated)

In the

large city,

contradistinction to

its

center, have a circular form; or rather, the

outermost houses, situated on through traffic routes, lie on a circle.

The periphery itself, on the contrary, is star-shaped. This is plainly
evident when one considers the course of the isochrons for the trip
from the suburbs into the heart of a town. The nearer one lives
to one of the main traffic lines (street cars and so on) the less
important becomes the distance from the center. Hence the isochrons have approximately the shape of a diamond,^ and their long
axis is the street railway. Superimposition of six such diamonds
gives a twelve-pointed star. This corresponds throughout with the
experience that towns extend farthest outward along a through traffic
(Town Planning [London, 1909], p. 112) called it "the most
J. Triggs
form that has yet been devised," and Cauchon (Journal of Town Planning
Institute of Canada, February, 1926, p. 12) praised it for saving 10 per cent in street
24.

H.

successful

length.
25.

Whereas through

railroad

is

best

traffic is

directed tangentially around

run underground, or tangentially

passenger station, restricted to the

minimum

it

to the outskirts, the

to the center of the city,

requirements,

is

situated.

where the

Freight stations

should be distributed on the radially emerging tracks, along or on the other side of
which factories may be located. Switch yards, freight depots, and other extensive
installations should be in the outer districts.

of the city, cross

roads.

For

than radial

There, in contradistinction

to the heart

so that this layout cuts across the fewest

a careful consideration of the question see R. Wentzel, " Eisenbahn und
traffic is less

traffic,

Stadt," Grossdciitscfier Verkehr, 1942, pp. 180-186, particularly his

Example

1;

see also

Niemeyer, Raumforschung und Raumordnung, 1941, pp. 531 ff.

26. For their exact shape see H. von Stackelberg, " Das Brechungsgesetz des Verkehrs," Jahrbiicher fiir Nationalokonomie und Statistik, Vol. 148, p. 687. The feeder
streets are at right angles to the sides of the

diamond-shaped

main line at an oblique angle. The obliquity of the

upon the ratio of speed on the main street and on the
Wehner, Grenzen des Stadtraumes vcm Standpunkt des
(Wiirzburg, 1934)
and F. Ratzel, Die geographische Lage
the

Schriften, Vol. 2, p. 441.

figure, and thus enter

diamond depends in turn

feeder streets.

See also B.

innerstddtischen

Verkehrs

der grossen Stddte. Kleine

Part Four.

444

route (See, for example, Chemnitz, Raumforschung

nung, 1941,

Examples

und Raumord-

p. 65).-^

Even on a

level tract of land,

dull uniformity.

As

town planning does not imply a

villages are displaced eccentrically to a country

town, and this to the metropolis (Fig. 46, p. 167), so suburban centers
toward the more influential city. Even in individual houses the most important room and its window may be
situated with respect to a view (of interesting traffic). In small places
such imperceptible deviations from symmetry, associated perhaps
with a slight rotation or moving forward of selected buildings, may
not only create a compact and dynamic street pattern but also greatly
also are diverted

facilitate the orientation of traffic, as

shown {Das Gesicht

gart, 1941])

K. Bozenhardt has so well

des schwdhischen Hauses im S trass enbild [Stutt-

Careful designing in detail often results in very

effec-

tive refinements like this.^^

England this is made more difficult by the Ribbon Development Act

Of course such deviations must be justified by adaptation to nature or

27. In
28.

of 1935.

some
There must be no perfunctory or
affected enlivening, as in so many modern settlements. This is one of the
reasons why
so few modern village or town plans are satisfying. The problem of our
large cities
in particular can seldom be solved today by the principles, and still less
often by the
practical purpose, or by an assured artistic result.

methods, of yesterday's architects.

to

Chapter 25.

Frontier Regions

classical example of the economic problems of the so-called

" small border traffic " (" kleiner Grenzverkehr ") is provided by
the hinterland of Geneva. The city lies about at the tip of a tongue

of Switzerland that projects far into French territory.

The

political

immediate natural
boundary separates it
same difficulties
the
exactly
creates
This
supply and market areas.
farmers in
French
the
for
as
for the Swiss businessmen of Geneva
Figure 83,
in
hatched
Geneva,
its environs. Thus the hinterland of
almost completely from

Fig. 83.

The French

hinterland of Geneva.

The

its

dotted

line,

from Neue Ziircher Zeitung (October

broken
"small" zone,

" large " zone,

line, after C. B. Fawcett, Frontiers (Oxford, 1918), p. 23; the

19, 1930).

was excluded from the French customs area, partly by State Treaty
when Geneva became Swiss again after the Napoleonic Wars, and
partly by a voluntary decision of France when Savoy became French
in 1860. Matters remained so until 1914 and 1923 respectively. In
1932 the Hague Tribunal decided that the former state of affairs
" small " zone imposed upon
be restored, at least in respect to the
Switzerland whose customs
hand,
other
On
the
1815-16.
France in
since
1849, was to facilitate
coincided
had
and political frontiers
During the first four
zone.
this
from
products
the importation of
445

Part Four.

446

years after the

new

Examples

establishment of the zone, Geneva exports to

it

increased tenfold.

In a country as small as Switzerland the so-called small border

plays a really important role. The economic situation of its
frontier cantons has become especially bad since the last depression.
traffic

Fig. 84.

Influence of the drawing of the boundary

upon

the market area

of Bischofswerder (B), in East Prussia.

The

places indicated by black dots belonged in 1913 to the uncontested

supply area for

its

shops and artisans.

The importance

of

B was

so

reduced

by the boundary of the Corridor that it lost even two places that had
remained German to competing Freystadt. (After W. Volz and H. Schwalm,
Die deutsche Ostgrenze. Unterlageyi zur Erfassung der Grenzzerreisungsschdden [Leipzig, 1929],

Map

la.)

The Canton of St. Gallen, and the upper Rhine Valley in particular,
now suffers severely under the compression that resulted from extension of the German exchange regulations to Austria. The Canton
of Ticino also

comand the rest of Switzerland; by the

former through tariff walls, by the latter through especially high
railway rates (additional mountain charge) ^ On the German side
the revenue of groceries in Constance, which were some distance
from the frontier, rose by 50 per cent in 1933-1937, but that of
businesses nearer the frontier by only 12 per cent.^
As for conditions on the Canadian-American border, one fact
pressed as

1.

2.

it

is

is

in a highly unfavorable frontier situation,

between

Italy

March 26, 1939, " Dauerkrise in den Grenzkantonen."

Hartung, in Raumforschung und Raumordnung, 1939, p. 317.

See Frankfurter Zeitung,

44'i

Frontier Regions

clearly

is

in Figure 85: International trade

On the 687-mile stretch of frontier

shown

is

restricted to a

between the two

few gateways.
Canadian wheat provinces and the United States only eight railways
approach it closely!
cross the line, though nearly two dozen branches
undulating, along
slightly
but
or
fiat,
Yet the terrain is perfectly
the Rocky
toward
West,
the
Even
to
almost the entire border.
Mountains, where the

hills

become

higher,

many

rivers flow in a

north-south direction and thus offer natural traffic routes, but for
312 miles not one single railway crosses the line! This supports the
general belief, which must be relied upon here in the absence of
this border,
statistics, that the small border traffic is insignificant on

CANADA
Saskatchewan
larroad

Havre

Montana

\^

Fig. 85.

5^
The network

North Dakota
of railways

on the American-Canadian border

and lawful trade in particular. The only exceptions are the few
gateways and these, of course, are the center for market areas of a
special kind, which often reach exclusively into the neighboring
country. Here large quantities of articles are sold that can easily
be smuggled, or that make it worth while to spend two days as a
" in the neighboring country, after which purchases up to
"
tourist
a value of $100 monthly can be brought in free of duty. But regular
purchases of goods with a short sales radius are uncommon.
One who enters the frontier city of Detroit by way of the wide
pasture lands of Ontario will hardly believe that after the tariff
had been increased during the Great Depression practically not a
single drop of Canadian milk was sent there, whereas previously

New

York. This restriction of retail

of the importation of agricultural products
along a frontier, may lead to the establishment of twin cities where
one city would have sufficed. Each one then attracts completely the

had been shipped as

trade in particular and

it

far as

trade that otherwise would have crossed the boundary in spite of

the tariff. So instead of one market area, intersected by an international line, there arise two that extend only as far as the border.
Twin cities are typical of the northern boundary of the United

Part tour.

448

Examples

but it must be assumed in almost all cases that the split

would have occurred anyhow in smaller degree, since a river always
hampers connection with the opposite shore, even a bridge making
no change in the situation.
Before the Federal Reserve Banks were located, the regions controlled by the various bank sites under consideration were deterStates,

mined.

The

findings for El Paso are of interest, because

it

lies

directly on the Mexican border. Exactly the same regional form

(Fig. 86) was found as we have deduced theoretically for ordinary
It will

goods

(see Fig. 60, p. 341)

capital

transactions and trade

be proved that distance

affects

in physical goods in exactly the

same

way.

Fig. 86.

The

financial sphere of influence of El Paso.

bank keeping an account

at a

bank

in

El Paso.

Each dot indicates

(From Location of

Reserve Districts in the United States, 63rd Congress, Second Session, Senate

Document 485 [Washington,

When

1914], p. 149.)

is drawn through an already

damage caused by their separa-

an international boundary

existing group of market areas the

manifested in an especially painful way. A comparatively

is provided by the South Baden-Switzerland-Alsace
economic area.' The outlying parts of this three-country corner
were tightly woven together without regard to national boundaries
by shuttling workers and entrepreneurs, by interlacing capital, by
branch enterprises, and in particular by a vigorous finishing trade.
tion

is

recent exarnple

3.

See in particular, L. Dedi, Die oherbadischc Textilindiistrie unter

Einfluss ihrer Grenzlage, Gottingen dissertation, 1935.

dem besonderen

Frontier Regions

449

into a homogeneous production area, especially for textiles, that

had already been outlined by nature. The central point, particularly
in a financial sense, was Basel, as in general the Swiss had been the
chief leaders in developing the region.* South of Freiburg there is
hardly a great enterprise that was not either founded or continued
by the Swiss.^ Until World War I, the national frontier influenced

many instances, as we have already seen,

but made no change in the homogeneity of the region, thanks to
the encouragement of border trade and the finshing business. Only
with the tightening of frontiers by the war economy, unfriendly
Franco-German relations after the War, and now by exchange control was the region cut up into its political divisions. Individual
enterprises thereupon lost wholly or in part their sources of raw
materials, labor, and capital, or their market area for finished
products. The Wiese Valley, for example, opens toward Basel, in
whose natural hinterland it lies, and toward Alsace, whereas it is
closed off against Germany. After loss of the neighboring Alsatian
market, its textile enterprises had to seek new customers in much
more distant parts of Germany.^
Only then was its unfavorable situation with respect to the
German market fully felt. Yarns from the upper Wiese Valley reach
even the relatively near-by weaving mills of Wiirttemberg only by
way of long detours through Basel and then on through Karlsruhe,
or through Singen. This means high freight costs and delayed
deliveries. Consequently, competitors in Augsburg enjoy a considerable freight advantage. Upper Baden, on the other hand, had
to change from near-by foreign to much more distant German
the choice of a location in

sources of supply.

Thus

in 1926 the cotton industry of

received or shipped 90 per cent of

its

Upper Baden

wares over a distance of more

4. Consequently the cheapness of Swiss capital, a result among other things of

century-long neutrality and frugal Calvinism, can have meant for Basel only a negligible locational advantage in comparison with the German frontier area (W. Mangold
to the contrary notwithstanding, Standortsanalyse der Easier Exportindustrie seit 1870,

On the other hand besides the abundance of

speaks for the three-country-corner; for example,

Basel dissertation [Basel, 1935], p. 97)

capital a

whole

series of reasons

despite a certain eccentricity of location in

rather favorably situated at a great

nations,

and

so

on

(see

W.

some

respects, at least

with free trade,

it

is

maintains contact with three

Jaeger, Der Standortsaufbau der Easier Industrie, Basel
traffic

intersection,

it

dissertation [Cologne, 1937])

5.

According to E. Waldschiitz

(Die schweizerischen Industrieunternehmungen im

deutschen Grenzgebiet, Frankfurt dissertation, 1928, p. 39 f.) more than half the enterprises in the frontier zone were still Swiss in 1922; 80 per cent, indeed, in the food
industry and 100 per cent in the tobacco industry.
6.

For an example see Raumjorschung und Raumordnung, 1939,

p. 317, Fig. 2.

Examples

Part Four.

,{^o

than 156 miles

(L. Dedi,

flexibility in the

wage

op.

rate,

cit.,

105)

p.

Insufficient regional

exactly as in the depressed areas of

England, made it impossible to relieve the regional distress by

lowering regional prices.
The damage caused by disruption of markets by borders is even
more evident in the German East,^ because the border was drawn
in later and in an entirely arbitrary manner. It cut up thousands
of agricultural and industrial enterprises, which happens much less
commonly with old boundaries. Furthermore, the lengthening of
the road brought about by the boundary was more annoying than
usual, partly because the border was new and hence there, were no
suitable connecting roads running along it for those who wished to
avoid it, and partly because those who had to cross it were allowed
to do so only at a few points. German farmers in the Marienwerder
district whose cattle grazed a few yards across from their farms on
Polish soil beyond the dikes had to walk up to 7.5 miles a day to
milk their cows, since they were allowed to set foot on the dike
only at special " economic " crossings designated by the authorities
These crossings were often as much as 12.5 miles
{ibid., p. 27)
apart. Many lanes and highways ended blindly at the boundary
[ibid., p. 21)
Of 34 railway lines cut by the Corridor, 19 were
This was especially bad
closed to all through traffic {ibid., p. 16)
because formerly the main stream of traffic had flowed in a westeast direction,^ so that the later north-south barricade of the Corridor
lay directly across its path. Together with customs duties and the
.

Polish railway rate policy these effects of the boundary

on

traffic

led

to an extensive change-over of supply and market areas. A regional

deformation like this is disadvantageous to start with. Still, the loss
of an area by one town ought to be the gain by at least one other,
but for special reasons the losses here were chiefly German, the gains
chiefly Polish. For many more towns close to the boundary remained
German than became Polish, a situation that resulted in particularly
large regional losses. Thus Bischofswerder, like Geneva surrounded
7.

{Die

My

presentation

deutsche

[Leipzig, 1929])

is

based on the detailed investigation by W. Volz and H. Schwalm

Unterlagen zur Erfassung der Grenzzerreissungsschaden

Ostgrenze.

and information from W. Vleugels, former Director of the

Institut fiir

Ostpreussische Wirtschaft, in Konigsberg.

8.

Traffic

between East Prussia and Upper

Silesia

was very heavy.

The

eastern

among

themselves because they were unfavorably situated with

respect to the rest of the Reich, and cut off from neighboring countries by tariffs. At
provinces traded chiefly

present

[1944]

Upper

Silesia's

principal

trade

is

northward, to regions

formerly Polisli and to the seaports (Teubert, in Raumforschung

1941, pp. 28G-287.)

that

were

und Raumordnung,

Frontier Regions

451

almost entirely by the boundary, lost nine tenths of its market area
(see map, Fig. 84)
and its population fell in consequence from
2,314 in 1913 to 1,792 in 1933. Before World War I the market areas
of the industries of the Grenzmark stretched toward the east, because
toward the west they encountered the vigorous competition of Berlin
and other great cities. The new boundary therefore cut them off
,

from the largest part of their market area, and many enterprises had
to be closed down. Extensive agricultural areas, too, lost their
natural sales center. Thus instead of near-by Danzig, Eastern Pomerania supplied Stettin, three times as far distant, and a large fraction
of East Prussia surpluses became valueless if they could not be processed to something lighter (for example, the converting of potatoes

On

new boundary
Upper Silesia. As the
German market was almost closed to them and the Polish market
alone was inadequate, this coal made its way to Scandinavia, thanks
into starch, fodder

and

so on).

the Polish side, the

severely affected the coal mines of eastern

to a subsidized railway tariff especially after the strike of English

miners.^

Under normal conditions an

nomic

effort

is

made

to soften the eco-

boundary, at least for those who live

directly on the border and are therefore most nearly concerned, by
encouraging so-called small border trade. Thus residents of a frontier zone some six to nine miles in width, say, are generally allowed
to bring in free of duty certain articles for prescribed purposes and
in limited amount, especially such as have a short sales radius.^"-"

9.

effects of a political

See R. Regul, " Die Wettbewerbslage der Steinkohle," Vierteljahrshefte zur Kon-

junkturforschung, Sonderheft 34

(Berlin, 1933)
G. Wende, Die Ausrvirkungen der
Grenzziehung auf die oberschlesische Montanindustrie (Stuttgart, 1932)
;

10.

"

From

this

it

is

clear that, contrary to the usual statement, so-called " local," or

domestic trade " goods are by no means exempt from the

though within a limited area

11.

On

this

subject

Handelsvertragen

see

(Vienna,

to

R.

effects of

customs frontiers,

be sure.
Riedl, Die Meistbegiinstigung

1928),

Boundaries, 1940, pp. 107, note

setzungskunde, 1941 (geopolitical)

18,

pp.
124

in den europdischen
Boggs-Bowman, International
(Geneva zone)
and Baumgartner, Grenz-

94-106;

also

C.

Chapter 26.

We
The

Trade

Price Levels in Space

are inclined not to take regional price differences seriously.

which a monopolist fixes a uniform selling price are

cases in

too numerous. Even in our theoretical analysis we found that it

pays the seller to absorb one half the freight costs. And how low
the rates have become in comparison with earlier ones! The same
transport costs are frequently in effect over wide zones. But on the
other hand, it must be said, first, that when the freight is absorbed,
not prices but profits differ interregionally. Second, only a part of
regional price differences is caused by freight. But let the facts speak
for themselves. They show that regional price differences are regular

and wide.
a.

PRICES OF FACTORS OF PRODUCTION

In the theoretical section only the demand side was really

we should have discovered nothing essentially new
on the cost side. Like the purchase and sale of products, the acquisition and utilization of factors of production are influenced by
space. As the price of agricultural products rises with proximity to
a demand center, so also do the value of land of the same quality
and the wages of labor. And as nonagricultural commodities decrease
in price as we approach their place of production, so interest on
capital also falls with proximity to great financial centers, or wages
in areas of surplus labor.
analyzed, because

1.

Spatial Variations

in

Land Prices

Regional price differences are greatest in the case of land, and

the most expensive square yard even in a German economic landscape may easily cost a thousand times as much as the cheapest.
But at the same time these variations are most irregular, because
qualitative differences are hard to exclude and because there is no
central market for land. However, there is a tendency for prices
452

Price Levels in Space

to

be highest

453

at the center of every settlement, especially if it is a

comparable sites toward the outskirts (Fig. 87) .^

This local price gradient is continued as a field gradient that surrounds every community. With increasing distance from a place
even equally good arable land should necessarily become progressively cheaper, since each additional mile eats up an absolutely equal

city,

and

to fall for

Fig. 87.

Price of land in Nordhorn, 1926-29.

(From R. Klopper

Niedersdchsische Industriekleinstddte [Oldenburg, 1941], p. 111.)

put percentually increasing part of the rent

(see

H.

v.

Thiinen,

Der isolirte Staat in Beziehung auf Landwirtschajt und Nationalokonomie [Waentig edition, Jena, 1921], p. 103). The price summits
for every town and, in regions with the same structure for the next
lower places belonging thereto, lie on regional price gradients, of
which the steepest is the economic landscape gradient. Across section
therefore shows the following patern: Prices of land are highest in
1.

According to a

map

prepared by Wiesener (Reichsstelle fUr Raumordnung) the

could be had for every lot in Stuttgart likewise showed

price, carefully ascertained, that

great regularity.

For the price of land

Boden und Wohnung

in various distance zones see also A. Spiethoff,

(Jena, 1934), pp. 132-135. 149-154.

Part Four.

454

Examples

the metropolis, and fall around it in the shape of a cone. Above

subcenters and villages smaller apexes rise, but with increasing
distance from the central point of an economic landscape the decline
(See also U. S.
becomes progressively more irregular (Fig. 88)
.

Department

of Agriculture, Value of

Farm Land and Buildings per

Value of agricultural units around Stuttgart and Heilbronn (1)

and others, Landvolk und Landwirtschajt in den
Gemeinden von Wurttemberg-Hohenzollern (Kartenwerk) [Stuttgart, 1939],
Fig. 88.

in 1935.

Map

(After P. Hesse

9.)

Reichsmarks per hectare

2457 and more

1920-2456

1135-1919

568-1134
-567 and

less

Acre, Based on 1930 Census, map.) In national gradients land values

are highest where the soil is especially fertile (lowlands, Iowa) or
especially scarce because of a dense population (the Rhine Valley,
central Germany [average prices per agricultural unit], the northeastern United States (see p. 374, note 16)
.'-

2.

Land

in Chile

about 1897 was almost dearer by 300 pesos with every additional
(1/3 of a square mile) approximately (K. Karger,

inhabitant per square kilometer

Price Levels in Space

455

2.

The

Wages

Space

in

wages and prices are similar in principle.

As factory prices differ irregularly between production sites, so also
do wages. But as local prices rise with distance from the same production site for industrial goods, or from a great agricultural surplus
area, or the price to the producer of agricultural goods falls with
distance from the same site of consumption, so it is also with wages.
According to whether working or living places are more numerous,
we can distinguish demand and supply areas for labor exactly as
we speak of market and supply areas for goods. An example of the
first case would be a great community of miners who work in the
various mines of the neighborhood. The second is more common:
a town into which workers come daily from the country. In the
first case, the efficiency wage at the place of residence must be the
same for all workers under otherwise similar working conditions,
except for certain compensations for greater or less loss of time on
the way to work. On the other hand, wages at the place of employment are higher by traveling expenses and compensation for time
the farther away this is from the home. In the second case the
worker receives a lower wage the farther away he lives, and only
spatial patterns for

the efficiency wage at the factory site

structure of market areas for labor

goods and

is

is

the

same for all. Thus the

same as that for

exactly the

capital.^

Landwirtschaft und Kolonisation im spanischen Amerika [Leipzig, 1901], II, 105-107)

In the German Lander and provinces, the value of an agricultural unit for every additional inhabitant per square kilometer approximately averaged

marks higher
disregarded

in 1928

if

areas with

(correlation coefficient

something

like

lAOfl

more than 200 inhabitants per square kilometer are

0.67 as compared with 0.88 for Chile exclusive of

Valparaiso)
3.

The

size of

45 miles are not

The number
form.

of

commuting areas tor workers varies considerably, and radii of some

uncommon. Their structure resembles that of commodity markets:

commuters decreases with

distance.

The same

Figure 90 shows the supply area for Stuttgart

Pirath, Verkehr

und Landesplanung

thing

is

true of regional

(given in greater detail in C.

Again we see the

one (see
Fig. 76, p. 419). Where centers that are about equally strong lie next to one aonther the
regional form is much more rounded. The commutation area about Heidenheim
furnishes an excellent example of this. See G. Jahn, Heidenheim und seine Industrie,
ihr Einfluss auf Landschaft und Bevolkerung (Ohringen, 1937) Map 2. Not only are
there overlaps of supply and market areas around a metropolis as in the world market
(see our Figure 52 and M. Eckardt [or Landesplanungsgem., Sachsen]: Die Hauptstrome der Pendelwanderung in der siichsischen Industrie Pt. II [1940], p. 47, Fig. I)
many centers receive and supply at the same time. On balance, the nearer places about
Dresden get more commuters from it and the farther ones send more into it (ibid..

indentations that appear in

all cases

[Stuttgart, 1938], Figs. 9-11).

when weaker

centers adjoin a vigorous

Part Four.

^k6

As with land

The

the market.

Examples

prices, there are other gradients besides those for

town-country gradient deserves special attention.

calculated from the various regional gradients without regard

to geographic location, and is to this extent an abstract average of
the various regional gradients. For instance, according to Wirtschaft
It is

und

Statistik,

1942, p. 426, the actual hourly wage for unskilled

Germany in September, 1941, in a simple average

casual workers in

of 20 nonagricultural pursuits was higher than the corresponding

wage in place-class 1 in places with:

by
1.

Less than 10,000 inhabitants

2.

10,000-25,000 inhabitants
25,000-50,000 inhabitants

3.

4.
5.
6.
7.
8.

On

50,000-100,000 inhabitants
100,000-200,000 inhabitants
200,000-500,000 inhabitants
500,000-1,000,000 inhabitants
Over 1,000,000 inhabitants

the national gradient there

is

0%
2.

5.4%
5.8%
8.5%
13.9%
14.2%
30.9%

a depression for Bavaria be-

tween a high point in northwestern and another in southeastern

Germany. Perpendicular to this saddle-shaped gradient there is
joined toward the northeast, in the direction of Bohemia, Silesia,
Warthegau, and East Prussia, a flattening that finally bends somewhat upward and is known as the " west-east gradient " (Fig. 89)
I leave open the question to what degree this corresponds to an
efficiency or living-cost gradient, since I have discussed it elsewhere
in full detail.^ For the European continental gradient see page 476,
note 40.
In the United States pronounced differences in wages and, with
large group, slight differences in character lead to
sufficiently
a
extensive one-sided migrations. Figure 91 gives the pattern of
agricultural wages there. It is based on state averages, which are
entered on the map in the middle of the states concerned. The
problem of drawing in approximately the lines for equal wages
corresponds exactly with the cartographic problem of finding the
In Bavaria places with up to 5,000 inhabitants have more outgoing compp. 49 ff.)
muters on the whole, larger places more incoming. See Bayerisches Statistisches Landesamt. Die Pendelwanderung in Bayern. Beitriige zur Statistik Bayerns, Vol. CXXXIII
(Munich, 1943) p. 7*. This contains also some very good maps of Munich and other
.

towns.
4.

For example, in Zur Beiirteilung des west-ostlichen

memorandum)

Preisgefiilles

(unpublished

457

Price Levels in Spac^

Hourly

wage

EIID50-54
155-59

160-64

365-69

170-74
175-79
80-84
1
185-89

190-94
Reichspfennigs

Fig. 89.

wage

Gradation of wages in the German Empire. Hourly

of nonagricultural unskilled casual workers, September,

1941.

(From Wirtschaft und

Fig. 90.

The

Statistik [1942], p. 283.)

Stuttgart

commuting area

(from which more than half of all the commuters

into Stuttgart). (From H. W. Mayer, Miinchen und
gart

ah Industriestandorte

travel
Stutt-

[Stuttgart, 1937], pp. 27, 155.)

Part Four.

458

Examples

probable course of contour lines when the height of a number of

points is given. In both cases the lines have only the value of an
interpolation, but approach nearer to the truth the larger the

number

of points given.

Moreover, the pattern will be more reliable the more easily it

can be logically explained. In Figure 91 wages are lowest in the
heart of the old South, with its great excess population that is rela-

Fig. 91.
dollars.

Monthly wage, without board, of agricultural workers in 1933, in

NRA Economic Planning [Bloomington,

(Figures from Ch. Roos,

Indiana, 1937], p. 161.

From this low point they rise in

peak in flourishing California and
England, where they are almost five times as

lively little inclined to migrate.^

directions,

all

to reach their

highly industrial

New

high as in the South.

The two following figures, 92 and 93, do not show wages as such,
but the prices of certain services, which, however, are largely dependent upon the wage level. Once again, therefore, we find a low point
in the old South, and probably for the same reason, also in Kansas:
for in this farming area only agricultural wages are relatively high.
The region around Philadelphia may be so cheap for shoe repairs
because it is a source of leather. I have no explanation for the low
5.

Of course

these

money wage

differences are not entirely relevant, since in part

they reflects only the smaller productivity of the Southern worker; nor do they affect

him
6.

that

to the full extent, because of lower living costs.

The
is,

it

price difference between Philadelphia

($1.10)

and

Seattle

($1.73)

is

real;

holds despite the use of sole leather of the same quality and heels of the

same brands.

Price Levels in Space

Fig. 92.

459

Price in dollars for resoling

(For source see Table 38,

Fig. 93.

see

Table

column

and heeling a pair of shoes in

Price in cents for laundering a man's shirt in 1936.

38,

column

1936.

h.)

(For source

i.)

area around Cleveland; on the other

hand

suspect that the price

northward along the Californa coast are due at least in

part to quality differences caused by climate. Laundry prices, finally,
are connected partly with the general wage level (the South, Kansas,
Saskatchewan) and partly with the proportion of Chinese, who have
increases

4^0

Part Four.

most of the laundry business.

On

Examples

the East Coast they are especially

numerous in Massachusetts, hence the low around Boston; and on

the West Coast, in San Francisco and Vancouver, both cheap places.
Among the three price rings about Vancouver those places on the
innermost ring have on the average 6.4 per cent of Asiatics and an
average price of 15.4 cents; those on the next one have 5.04 per cent
of Asiatics and a price of 18.7 cents; and those on the outermost ring
3.9 per cent of Asiatics,

with a laundry price of 20 cents.

For Canada as a whole all statistics substantiate the fact that
wages rise from east to west, even though there are some fluctuations.
No doubt these can be easily explained by the different degree to
which the country has been opened up. The main stream of migrants comes from the East and gradually loses itself in the great
expanse, so that only a few eventually reach the man-thirsty West.
Regional wage differences of 50 per cent are no rarity in North
America.'' Yet a few years ago the Department of Labor declared
that there was no economic basis for this variation, and Roosevelt's
economic planning agencies hastened to abolish or at least decrease
the differences.^

The result of this equalization of wages was that industry, in

places or regions that formerly had been profitable locations chiefly
because of low wages began to languish and even to move away:
from small towns ^ and from the South." Uniform wage scales
necessarily depopulate regions that are unfavorably situated, and
it was only because of the brief duration of
and the laxity
with which its decrees were often carried out that the migration

NRA

7.

Many

additional examples are to be found in U.

S. Bureau of Labor Statistics,

No. 616 (Washington, 1936)
8. From an intimate knowledge of events C. Roos wrote: "
With crusading zeal the
NRA eliminated or very drastically reduced sectional wage differences." "Without
adequate appraisal of facts it faithfully followed the dogmatic advice of the Department

Wages and Hours

of

of Labor, Bulletin

Labor that pre-code differences should not have existed, and proceeded so zealously
them that few, if any, of its policies upset business inter-relations and

to eliminate

balances to a greater degree."

NRA

Economic Planning (Blooraington,

Ind.,

1937),

p. 154.
9.

Wages

are lower in small towns because living

is cheaper and also, perhaps,

productive since the more skillful tend to wander off to the large
cities.
To these may be added a number of other reasons, such as the less active
competition for labor, its lack of an inclination to migrate, the fact that wage
labor
is merely a supplementary pursuit, and
so on.

because labor

is

less

The

lower wages in the South are explained in part by the preponderance of

Yet Roos is of the opinion, which is probably too extreme, that the
smallest part of the difference between wages in the North and South, in
so far as it is
10.

small towns.

a real difference,

is

a result of geographic factors.

4^1

Price Levels in Sl>ace

did not assume greater proportions. Yet even so the effects were
apparent. Employment in the cotton-spinning mills ^^ of New
England and the wood industry of the West increased much more
than in the South {N.R.A. Hours, Wages, and Employment under
the Codes [Washington, 1935], p. 58)

Interest

3.

Seldom noticed and

still

less

Space

in

often explained, yet of special

importance to our interpretation of the spatial organization of the

economy, are geographic differences in interest. They must therefore be discussed in some detail.
a.

SPATIAL DIFFERENCES

I.

To

The

the

European

Facts

IN

THE DISCOUNT RATE

living in a comparatively small country the

discount rate seems to be fixed politically, or at least by the position

of a politically defined economy. He is but little acquainted with
the idea that there may be differences in the discount rate even

within a country, or in any case that they would be sensible. Even

where the reasons for inequalities are perfectly

and even the Federal Reserve Banks have
periodically closed their eyes to them. Thus in 1926 the same discount rate of 4 per cent prevailed throughout the entire country,
whereas in March, 1934, it varied between l^ and 3 per cent
according to locality. From New York (1^ per cent) the ruling
financial center, it rose toward the North (Boston, 2 per cent)
toward the West (Cleveland, 2 per cent; Chicago, 2^ per cent;
Minneapolis, 3 per cent) toward the South (Philadelphia, 2| per
cent; Richmond and Atlanta, 3 per cent) and toward the Southwest
(St, Louis, 2^ per cent; Dallas, 3 per cent)
The difference was
in the United States,

obvious,

politicians

11.

time
cent.

Between the middle of 1932 and the middle of 1933 77.8 per cent of all spinning
to the share of the South, whereas in 1933-34 its share had fallen to 73.7 per
Conversely, the share of the North rose from 20.2 per cent to 24.1 per cent.

fell

Lane, Migration of Selected Industries as Influenced by Area Wage Differentials

(b) Cotton Textile Industry (NRA, Division of
Review, Work Materials No. 45) (Washington, 1936) p. 37. Roos {pp. cit., p. 368)
See
in

J. J.

the Codes of Fair Competition,

wrote in similar vein. Chiefly as a result of government action the hourly wage of male
textile workers rose in the North from July to August, 1933, by 45 per cent, and in the
South by 67 per cent; for the women by as much as 56 per cent and 100 per cent. See
A. F. Hinrichs, "Wage Rates and Weekly Earnings in the Cotton-Textile Industry,
1933-34," Monthly Labor Review, March, 1935, p. 6.

Part Four.

4f)a

Examples

toward the end of May, 1931, when the rate of the Federal
Reserve Bank in New York was 1| per cent and that in Minneapolis
S^ per cent.

greatest

2.

SPATIAL DIFFERENCES

INTEREST ON BANK CREDITS

IN

Until 1933 the Federal

(aa) Differences among Landscapes.
Reserve Bulletin published the interest rates on prime commercial
loans, largely as estimated by representative banking houses, for
each of the 34 most important banking centers in the United States.

2000

7000
Fig. 94.

from

The

New

last figures, for

l^ and 8 per cent.

3000

Increase in the rate of interest with distance

York, 1919-25.

the middle of December, 1933, varied between

The

rates

were lowest in

New York

per cent) and highest, as usual, in El Paso, Texas

That

(7 to 8

(1^ to 3

per cent)

no way reflected merely differences in risk

is proved by the interest rates on loans that obviously are equally
safe. Early in June, 1923, a time selected at random, the interest
on bank loans covered by Liberty Bonds was 4^ to 5^ per cent in
New York and 8 to 10 per cent in El Paso. (Federal Reserve Bulletin,
These examples show the size of
July, 1923 [Washington], p. 857)
the difference, and their spatial pattern demonstrates once again
the characteristic rise from the North Atlantic coast toward the
South and West. Thus the interest rate on bank loans for the average
these differences in

(around New
York) 5.45 per cent in the Middle West (around Chicago) 5.99
per cent in the South, and 6.49 per cent in the Far West. Going

of 1922 to 1926 was 6.32 per cent in the Northeast

,

4^3

Price Levels hi Space

somewhat more into

detail,

we

discover a

phenomenon

that

we

shall encounter again in connection with the prices of a few goods:

Interest does not increase uninterruptedly toward the West, but

Mountain States, with an average of

6.84 per cent, and, within the mountain region, again in the far
south (El Paso, 7.63 per cent) and the north (Helena, 7.73 per
reaches

its

highest point in the

This
and the tendency of the interest rate to rise with distance from New York, are shown with special clarity in Figure 94.
Twenty financial centers are entered on the abscissa according to
their distance from New York by rail, and on the ordinates are
arranged the average interest rates on six principal varieties of bank
cent)

decreasing toward the Pacific coast

(6.05 per cent)

.^^

final decline

loans in 1919-1925."

within Economic Landscapes. The great

subordinated in turn to New York, the
leadinsj financial center. To this extent the United States constitutes one single economic landscape. Yet the regions surrounding
the large subcenters have a still better right to this name, because
their economic activities as a whole are oriented even more com(bb)

Differences

banking centers are

all

pletely toward their centers.

Within these economic landscapes,

too, interest rises

with

dis-

tance from the dominant banking center, but no data have been

published so far that would allow proof of this thesis. It could be

proved only indirectly, by comparing the interest rates (published

up

to 1928) for places of various size.

Here the ordinarily justifiable

on the average, farther away

assumption is that a smaller place is,

from the main center than a larger one, because it deals with the
center only through the larger place. On a basis of bills and the
like rediscounted by the Federal Reserve Banks, it was found that
the member banks had demanded the followinsr rates of interest
from their borrowers in June, 1928: in towns with a population of
over 100,000, 5.3 per cent; of 15,000 to 100,000, 6.2 per cent; of
under 15,000, 7.0 per cent. {Annual Report of the Federal Reserve
Board for 1928 [Washington], p. 102.) Differences were still greater
in a recent special investigation that

compared

total interest received

with total outstanding bank loans of all sorts. In the first six months
of 1936 and for central reserve city banks the ratio was: New York,
Calculated after F. C. Mills {The Behavior of Prices [New York, 1927], p. 184)
As most statistics on regional differences in interest
have not been published in recent years, it is often necessary to go back to old data.
12.

who

gives the rates for 34 cities.

13. From W. W. Riefler, Money Rates and Money Markets

(New York and London, 1930) p. 97.
.

in

the United States

Part

^.().j

I-

our.

Examples

and in reserve city banks,

{Federal Reserve
cent.
per
banks,
5.62
4.28 per cent; for county
296.)"
Bulletin [Washington, 1937], p.
Naturally an exact pattern of the interest rate within one and
the same economic landscape is especially convincing, and I am
fortunate in being able to furnish such an example. The Federal
2.36 per cent; Chicago, 3.22 per cent;

Deposit Insurance Corporation asked each of the insured banks for

the ratio in 1936 of total interest received to total average loans,
which represents the average interest on bank loans. At first sight
it might appear disturbing that all kinds of loans were included, but
for our purpose this is actually an advantage since, besides the
figures for the same type of loan, we wish to know also the interest
on loans of the form actually obtainable at the time.^^ I have
arranged the banks in Texas according to their distance by rail or
automobile from the chief financial centers: Dallas (location of a
Federal Reserve Bank) and Houston, San Antonio, and El Paso
(with branches of the Federal Reserve Bank) and collected them in
groups of about the same distance. The average interest was calculated for each group as a simple arithmetical mean, without regard
to the varying size of the banks. In every case interest increased at
first with distance, and then fell off as a competing center was
approached. The increase extended over the widest areas (about
155-220 miles) in the case of the three branch offices,^^ among which
we select Houston, the largest city in Texas, because with it the
rise is steeper than in San Antonio and based upon many more
When short distances
observations than that for El Paso (Fig. 95)
are measured the increase is found to occur beyond the immediate
environs (50 miles circumference) and irregularly, mainly because
the influence of smaller subcenters makes itself felt intermittently.
But when the banks are grouped by longer distances, as in the lower
part of Table 35, these secondary fluctuations disappear. Random
disturbances as well as secondary fluctuations are most completely
,

14.

The

rate was highest in the Dallas, Texas, area,

cultural loans was the rule.

15.

The

rate of interest

where

on

10 per cent

agri-

(Federal Reserve Bulletin [Washington, 1937], p. 298.)

is

often the same

anyway on

all

types of loans to the

same

customeis because the long-term total profit on the business connection in question,

not the single transaction, decides what

it

same type

of loan

is

shall

may

other hand, a regional interest differential

the same everywhere,

be (Riefler, op.

arise because,

more

cit.,

p. 87)

On

the

although interest on the

distant customers are excluded

from

the cheaper varities.

16.

But

distance of

for Dallas over only

to 10 miles to 14

some 63

miles.

Interest rose

per cent at 50 to 60 miles. This

large parts of the Dallas area lie near the St. Louis

the whole are cheaper.

from

8.4

per cent at a

may have been

and Kansas City

areas,

because

which on

Price Levels in Space

465

0/0

16

15
1

If
1
13
12

e-"^

11

10

^ A/ \ .J
/

"^ _^

s/> u

A,

x?=

20

60

60

IW

120

100

160

Miles

Fig. 95.

Increase in the rate of interest with dis-

tance from Houston, Texas, 1936.

Table

(For source see

35.)

eliminated, however, and the clearest result

achieved,

is

when

the

combined. Every one of the 218 banks

then assigned to its nearest center (Table 35).

figures for all four centers are

under consideration
Table 35.

is

INCREASE IN INTEREST RATE ON BANK LOANS

WITH DISTANCE IN TEXAS, 1936*
Interest in Per

Cent according

to Distance

Distance

in miles

Houston

from

Nearest of
the four
locations

0-10
10-20
20-30
30-40
40-50

0-40
40-80
80-120
120-160
160-200

6.9

7.0
7.6
7.6
;

'

7.3
9.3

8.2
8.7
9.1

9.6

10.2

9.6

8.6
'

'

9.0
10.1
1

10.5

11.0

10.7

11.3

11.0

a. Arranged according to distance from the original data of the Federal Deposit
Insurance Corporation. I am deeply indebted to Dr. Donald Thompson, who made
this valuable material available to me.

On a basis of the same survey the average interest on long-term

bank deposits was calculated also, and I have arranged it according
to distance, but here the data are less complete and less reliable.

Port Four.

466

Examples

In several cases the interest was found to be above 2.5 per cent, the
legal rate. I was unable to determine the causes for these
fluctuations, and therefore offer the result with reservations.

maximum
Table 36.

INCREASE IN INTEREST RATE ON BANK DEPOSITS

WITH DISTANCE IN TEXAS, 1936
Distance from
Dallas or Houston
in Miles

Interest

Deposits
in Per Cent

0-20
20-60
60-100
100-140
140-180
180-200

SPATIAL DIFFERENCES

3.

The

on

Time

1.60
2.19

2.24
2.34
2.70
2.74

IN

BOND INTEREST

also probably tends to

York, but of course the proof of this
is not so simple; partly because the differences are smaller, since
naturally the security market is open only to known and fairly
riskless borrowers, and partly because manifold differences in the
conditions of issuing and repaying, and the frequent difference of

rate of interest

rise with distance from

on long-term debts

New

branch enterprises) and real (national mother

make comparison difficult. Hence conclusions
have to be drawn from only a small number of similar cases.
First, the rating ^^ of public bonds falls with the distance of these
corporations from New York. Only one state west of the Mississippi
River, Iowa, received the highest rating without reservation in 1937.
All the other states in this class (New York, Delaware, Virginia,
apparent

(local

enterprises)

debtors

Massachusetts, and Vermont) are near

New

the second class are not, though in the

York. Most
main they lie

of those in
east of the

The

majority of those in the third class are west of it.

to what degree this classification
expresses actual financial reliability, and to what degree it reflects
the caution that grows with distance from the situation to be
appraised. But even if reliability west of the Mississippi really is
less, this might be because, among other reasons, the higher rate of
interest prevailing there, which itself is influenced in turn by distance from New York, makes financial obligations more difficult to
fulfill.
Hence according to circumstances distance would have an
influence upon presumptive or actual reliability.
Mississippi.

We

must leave open the question

17.

According to Moody's Manual of Investments, Governments and Municipals {New

First-class paper is designated by Aaa, next in rank by Aa, A, Baa, Ba,

York, 1937)

and so on.

;.
.

Price Levels in Space

4^7

The
a

yield also rises with distance.

"
representative " public loans,
of

list

Moody

{op.

cit., p.

a6) gives

with information as to their

average yield in 1936. Bonds of the State of New York yielded

2.48 per cent, of North Carolina 3.46 per cent, of Louisiana 3.89
per cent, of North Dakota 3.90 per cent, of Arkansas 5.35 per cent,
and of Alberta, Canada, 6.15 per cent (this is the complete list).
The distance from New York increases (except that Arkansas is a
little

nearer than Louisiana)

falls

in this order.

But

dently of the ratings.

a few

cities, all east

and the

yield rises,

and Moody's rating

interest rises with distance also, indepen-

In the same place.

Moody

gives the loans of

and all in class A; thus they

equivalent and should be felt to be so.

of the Mississippi

should be more or

less

New York, 3.30

per cent; Philadelphia, 3.33 per cent; Toronto, 3.84 per cent; Birmingham, Alabama, 3.89 per cent.
Nevertheless, the yield also increases with distance:

Finally, the

coupon

rate, too, increases

with distance from

New

Of

the fourteen states that floated bonds in 1928, most of

which matured in 1945 and were used principally for highways, only

York.

New York could

issue

them

at

3^ per cent and

its

neighbor, Vermont,

at 3| per cent. With the single exception of California, which had

to pay from 4 to 4^ per cent, only loans for states east of the

Mississippi

had a coupon

offer at least

4^ per cent

rate of 4 per cent.

all lie

The

states that

had

to

west of the Mississippi River except

which borders on the

bank and

is, of all the

York. Montana,
in the far Northwest, had to pay as high as 5 per cent for its loan
even though, like three states east of the Mississippi that had to
offer but 4 per cent, it had an A rating (data taken from Moody)

Mississippi

states

on

itself,

this side of the river, farthest

east

from

New

One final example of different interest rates on equivalent paper

provided by the bonds of electric power companies (Central
Hudson Gas and Electric Company, New York; Edison Electric
Illuminating Company of Boston; Consolidated Gas Electric Light
and Power Company of Baltimore; Cleveland Electric Illuminating
Company; San Diego Consolidated Gas and Electric Company)
All were issued during a period of four months, March-July, 1935;
all fall due in 1965 (payment before maturity only at a higher rate)
and all were rated by Moody as first class (Aaa) The issues of
companies in New York and near-by Boston and Baltimore have a
coupon rate of 3i per cent; those in more distant Cleveland of 3|
per cent; and those in San Diego, on the California coast, of 4 per
is

The difference becomes still greater when the issuing price is

taken into account. In Boston this was 103.8, but in New York only

cent.

Part Four.

468

Examples

was higher than in Boston (now

Boston are still lower than those in New
York)
Baltimore was sold privately, without any statement as to
the price, while Cleveland and San Diego were issued in 102.5 and
101 respectively. Thus the interest differential between Boston and
San Diego, without regard to the repayment loss, was 0.6 per cent.
Assuming that neither loan is repaid until 1965 (premature redemption is permissible under exactly the same conditions) the difference
in interest, when the repayment loss is considered, rises to 0.7 per
cent. (Moody, op. cit., pp. 647, 2050, 2275, 2464, 2559)
100, so that the effective interest

and then

interest rates in

/?.

1.

We

The Explanation

^^

THE MARKET RATE OF INTEREST

have maintained from the

wide regional
from the
all
from
great financial centers of the Northeast, above
New York.
But now this must be explained in detail. This we shall endeavor
to do, not in general terms but by using the example of the East-

differences in interest

depend upon

first

that

the

differences in distance

West

interest differential," in order to facilitate the presentation.

Why

is

the

interest higher in the

demand

West?

Why

are the supply of

and

for capital balanced there only at a higher price?

In ordinary language, there are two reasons. First, the formation

still partially developed area lags behind the great
demand for it. Second, connection with the capital markets of the
East, where the situation is reversed, is not perfect. This must now
be shown more exactly and in detail. ^^

of capital in this

Other things being equal, the demand is greater in the West

same rate of interest because there are more undeveloped
possibilities there, and more credit is demanded to bridge over
1,

at the

agricultural losses.
18.

Although

seems to

me

this

explanation agrees in principle with that given for

suitable, considering the

what holds for other prices holds for it also, to repeat the explanation
and in a form more nearly adapted to the special case of interest.
19.

The

all prices it

importance of interest and the strong doubt that

in greater detail

reader will soon notice that most arguments can be applied also to dif-

ferences in interest between large

and small towns, or between western and eastern

Germany.
arguments have been taken from the extensive work of
(Twenty Years of Federal Reserve Policy [Cambridge, Mass., 1933]) and
an admirable study by W. W. Riefler (Money Rates and Money Markets in the United
States [New York and London. 1930])
Others are based on my own investigations and
20. Several of the following

S.

E. Harris

personal inquiries.

Frice Levels in Space

469

Other things being equal, the total supply is smaller in the

same rate of interest, (aa) The supply of local capit3l
is smaller, mainly for three reasons: Less capital is formed, a smaller
part of this is in liquid form, and the costs of lending are higher.
First: Less capital is formed in the West because agriculture predominates there, and its profits are lower than those of the great
industries in the East. Furthermore, there is less forced capital
formation through credit creation, because with the more uniform
2.

West

at the

economy

West

money

is spent locally to return

Second: A smaller amount
of local capital is free for further loans in the West.^^ In the first
place, the banks have to keep larger cash reserves on hand, because
of the less liquid state of their borrowers and the greater average
distance of their Reserve Bank. Furthermore, part of their capital

finds

of the

banks

to the

its

less

of the

lent

as a basis for further credits.

way

to

New

York for clearing purposes, as a last reserve ^^

and as a temporary excess reserve. It may

to spread out the risk

way in part to New York, indirectly, through regional

where some of it is absorbed. Only a portion returns as
payment for obligations of Western debtors. The larger a money
market the more additional money it attracts. Third, and finally:
The costs of banking are higher in the West. This is certainly true
for management and general expenses, in part directly because of
the greater distance from New York (appreciably larger outlays for
travel, postage, telegrams, telephone, insurance on valuable shipments, and so on) -^ and in part because of the sparser population,
which makes the individual bank smaller ^* and its district larger.
find

its

centers

21. In the middle of 1935, for example, the total loans (including bills of exchange)
by banks in the East amounted to 41 per cent of the deposits, in the Middle West and
Mountain States to only 29 per cent. (Comptroller of the Currency, Annual Report for
1935 [Washington, 1936], pp. 102 ff.)

22.

The legal
demand

cent for

reserve ratio
deposits.

is,

of course, highest in

In the other Reserve

7 per cent, for country banks.

The

cities

New York and

it

is

Chicago: 13 per

10 per cent,

and

lowest,

gradation of actual cash reserves, on the contrary,

on hand was 0.8 per ecnt, 1.25 per cent, and 2.25 per cent of
(Annual Report of the Federal Reserve Board for 1932
[Washington, 1933], p. 269.) When we consider the fact that the smaller and more
distant banks maintain additional balances also with larger banks and banks in the
financial centers as a reserve, it turns out that they actually have a higher reserve ratio
than New York banks.

is

reversed; in 1930 cash

the deposits, respectively.

23.

Expenses of

this sort for all Federal

Reserve Banks, for example, averaged two-

New York alone they amounted

(Federal Reserve Bulletin, February. 1937 [Washington], pp.

thirds of their net profits in 1936, whereas for that in

to less

116

than one third.

f.)

24. In

1935 the loans per

West and the Mountain

for 1935, p. 103.)

bank averaged

States $200,000.

$3.8 million in the East, in the Middle

(Comptroller of the Currency, Annual Report

Pr( Four.

^yo

The

Examples

the districts results in large outlays for the overcoming

of distance, while the small size of the banks is responsible for a
high proportion of general expenses in their total cost.^^ The necessize of

cash reserves and the limitation on the creation of

furthermore, are equivalent to a lower utilization of the
available capital. The individual agricultural loan is generally
smaller than the industrial, so that the fixed costs associated with it
become more important. On the other hand, it must remain an open
question whether or not the lower land rents are more than counterbalanced by higher bank salaries here and there. In addition to the
higher cost of running a bank there is the increased risk, caused
partly by greater insecurity on the frontier, partly by the greater
one-sidedness of the economy, which is chiefly agricultural,-^ and
finally, also, by the longer average distance from the money center
and from customers. This last makes contact with a market and the
supervision of borrowers more difficult. According to Riefler (op.
sity for larger

credit,

p. 108)

cit.,

losses of

member banks from

in the East to 0.61 per cent of their loans,

per cent. As a third important factor in

in the West may be mentioned.
{hh)

The

1919 to 1925 amounted

and

in the

costs, the

West

to 0.75

higher rediscount

supply of eastern capital is smaller. Despite the great

eastern capital does not flow freely enough

interest differential,

toward the West to equalize the difference. The various causes have
common denominator: the higher cost of loans toward the West
to both debtor and creditor. Again there appear the direct costs of
greater distance, which may also take the form of a greater loss of
time. Thus a country bank in the middle of Mississippi can obtain
an emergency loan from a larger bank in Memphis in three days,
a

25.

According

to the

Comptroller of the Currency

for national banks of various size in the

{ibid., p.

678)

general expenses

half of 1935, expressed as percentages of

first

the deposits, were as follows:

Deposits per Bank in Dollars

to
750,000 to
Over
100,000
1 million
50 million

Up

Salaries

1.64

0.65

Other expenses

1.15

0.41

Unpaid loans

0.80
1.35

0.44
0.66

1040

5700

Net

receipts in per cent

Absolute in dollars

This one-sidedness leads

0.40
0.25
0.27
0.49
1,110,000

an expansion of bank areas, in order that they may

include at least a certain amount of economic diversity. Risks could be spread even
better if great regional branch banks could be developed whose districts would be still
larger, but in the United States this is forbidden by law.
26.

to

Price Levels in Space

47'

would take a week if it borrowed directly from New York,

went to the expense of telephoning or telegraphing. Many
banks therefore prefer Memphis, even though interest is somewhat
higher there. Other banks and industrial enterprises in the West
are denied direct access to the New York market in any case, because
they are too small or not well enough known." They can all deal
with New York only through middlemen (Riefler, op. cit., p. 2)
Hence before the abundant eastern capital reaches the small western
borrower, numerous commissions to middlemen have made it more
expensive. In addition there must once more be mentioned above
all the risk to both parties, debtor and creditor, which is increased
by great distances. Even to the debtor, since he can rely on the fact
that even formally short-term loans by a local bank will not be inexorably recalled when money is short, because the bank is interested
but
in him from a long-term standpoint (Riefler, op. cit., p. 87)

whereas
unless

it

it

with eastern surpluses lent out temporarily in the West, the possibility of sudden recall must always be reckoned with. For the eastern
27.

op.

Various classes of western borrowers

cit.,

and elsewhere)

p. 75

lowest for the

first class,

for

whom

may

therefore be distinguished

the rate of interest

is

(Riefler,

variously high.

large enterprises that can choose between the

It is

New York open

market for first-class bills and the great New York banks. It is highest for small enterprises, whose credit is good only at one local bank. Thus a certain class of customers
and banks always deal with one another. The larger both are, the more distance loses
in importance. J. P. Morgan is as well acquainted with General Motors, although it is
a thousand miles away, as

is

the village bank with

Hence any distance can be small

the baker around the corner.

for certain classes of firms

(and for certain kinds of

transactions)

From

this

standpoint one can adopt a definite attitude toward the

German

discus-

on regional banks: In so far as objections to the large banks

were sound, they amounted to saying that these did not limit their customers to the
great enterprises that would have been appropriate to them. They should have been
reproached less for fostering small and medium-sized credit too little than for attracting
so many small and medium-sized deposits in defiance of all economic principles, merely
because they knew that the State would guarantee them. It could be objected further

sion of the early 'thirties

that in exaggerating their function of bringing about an interregional equalization they

paid too little attention to regional differences in risks. Their regional credit policy
was too regular, their personal policy too irregular. From this a special purpose for
regional banks, as middlemen between medium-sized deposits and medium-sized credits

on an agricultural basis followed. In order to equalize the risks the only problem was
to locate them in such a way that the borrowers should be engaged in different pursuits;
or, if it was desired to root out the evil entirely, to bring about a more balanced
development of individual economic lanscapes. Regional banks have the advantage
over the large banks that during the depression medium-sized credits proved to be more
liquid than large ones.
1933], II, 172.

Tagblatt.

May

Also

my

3, 1932.)

Bankwesen 1933 [Berlin,

Fur die Bank von Wiirttemberg," Stuttgarter Neues

(See Untersuchimgsausschuss fUr das

letter:

"

P^'i't

j^2

creditor there

which

is,

in addition to the

also exists

more or

less

Four.

objective great risk

we have

for the western creditor as

Examples

seen,

the

additional risk of distance.'^ He does not know men and conditions

from his own long experience and cannot keep in touch with
further developments, which in pioneer regions particularly may be

stormy and uncertain. Information and credit bureaus may compensate partly for this lack of personal knowledge, but they cannot

make up

for

it

entirely.

In addition there is a political risk when capital is transferred

to a region under the control of a different public authority, whose
future course is hard to foresee and still harder to influence. In such
cases one must be prepared for anything, from confiscation by the
state down to special local taxes. Foreign capital is the first to suffer
from national emergencies or social reforms. This is true not only
of international capital movements, for which it would be superfluous to cite examples. 2^ The situation is no different even within
the same country. The hostility of the American West and South
toward " exploitation by eastern capital " breaks out now and again.
I recall the activities directed against the banks by the social reformer
Earhart, in Alberta, and against the oil companies by the Louisiana
dictator,

Huey Long,

later assassinated.

The

price of this hostile

higher interest since capital shies away

from such states, districts, or cities.
Two groups of phenomena underlie this association of distance
with risk, which can be observed again and again: in surplus regions,

reaction, of course,

is

still

the efforts of those with capital to invest it in their own businesses

or in the place, the economic landscape, or at least the state to
deficit regions outside

which they belong; in

the great financial

centers, the complaint of capable small entrepreneurs that the

large banks will lend them no money. I shall mention only a few
examples: The attitude of those with capital before the war, who
held that in general their money was most safely invested in their

own
28.

countries;

No

and Ford, whose factory

is

situated in the city

matter whether he lends directly to the western borrower or through western

The

banks.

upon the solvency of

Even western branches of eastern banks would not make up for the
they were allowed, because their supervision would be made more difficult
solvency of the latter depends in the last analysis

their customers.
risk,

even

if

by distance.
That they put up with

in turn
29.

it

so frequently since 1914

is

partly a cause

and partly

a result of the decline of the European powers.

30.

According to Untersuchungsausschuss

des Bankwesens 1933 [Berlin, 1933],

deposits

and demand deposits

in

II,

filr

das Bankwesen 1933, Untersuchung

443-447, about three quarters of savings-bank

Wiirttemberg around 1931-1933 went to savings banks

Price Levels in Space

473

no one in Buffalo to finance

other great entrepreneurs had to be financed
locally at first; outsiders had to be shown that things could be done.^^
Even in the southward migration of English industry the fact that
the capitalists live in the South of England and prefer to finance
of his birth because he could find

him. Like Ford,

many

industries there,

journeys,

is

where they can maintain contact without long

said to play a role.^-

In the American West, furthermore. Federal Reserve policy has

done little so far to decrease the risk and cost of an East-West flow
of capital. It might be thought that the Federal Reserve Banks in

and secure enough to attract abundant capital

from the East at lower interest by rediscounting with the eastern
Reserve Banks, and then to get it into circulation by rediscounting
bills presented by their own member banks. But this is prevented
because the Federal Reserve Board certainly does not wish a greater

the

West are

large

Member banks are not supposed

Banks merely to profit by the difference between the market discount and the Reserve Bank discount
But even if this were permitted on a large
(Riefler, op. cit., p. 29)
scale it would only moderate the drop in interest, as is easily seen,

effectiveness of the discount rate.

to rediscount with the Reserve

not equalize

it.

up in the West
must be described in detail, to meet the objection that an explanation by distance alone is too simple. It is now easy to see that in
the final analysis almost all ^^ the factors cited depend upon distance.

The

multiplicity of factors that force interest

its stage of development, its industries,

population density, are in every respect fundamentally determined by its distance from the Northeast. The important migration
(not that of the Spanish and French) came originally from there.

All conditions in the West,

its

which lent them out again locally for the most part, or at least in
the Reich as a whole, exclusive of Berlin, this proportion was
approximately one half, in Berlin one twentieth (on the other hand, almost two thirds
of all deposits went to the large banks)
31. See also F. S. Hall, "The Localization of Industries," U. S. Department of Com-

and

credit unions,

the same land;

in

merce, Tiuelfth Census of Manufactures, 1900, Pt.

I,

pp. 211

ff.;

M. Keir, "Economic
American Academy

Factors in the Location of Manufacturing Industries," Annals of the

of Political
32.

PEP

and

and others.
and Economic Planning) Report on the Location of Industry

Social Sciences, 1921, p. 89;

{Political

(London, 1939) p. 9.
33. Among independent factors the fixing of legal maximum rates of interest might
be mentioned. These in turn, however, adapt themselves to the independent interest
,

differential.

in the East

As a rule they are higher in the South, and especially in the West, than
per cent in New York, for example, and 12 per cent in New Mexico).

(6

In general they are very high, but can be circumvented by additional credit terms.

P^^^ Four.

474

Examples

consequence the West is a step behind the East in its

development. At the same time the soil over wide areas is younger

and

as a

and more

fertile,

and therefore better suited

larly the continental climate, with all

its

to agriculture.

Simi-

risks to agriculture

the density of population, depends

and

upon long

influence upon
distance from the sea. But even when these chance historical and
geological factors are disregarded, the number of inhabitants, indusits

trialization

(especially in the

diversification of the

economy

form of

large-scale industries)

and

are greater at the center than at the

edge even in a theoretical system. To these indirect effects of distance upon interests are to be added all the direct effects, which
need not be repeated. Whoever is still in doubt need only imagine
New York shifted from its eccentric position to the middle of the
continent in order to be convinced how greatly this would lower
the rate of interest in the West.
2.

DISCOUNT RATE OF THE FEDERAL RESERVE BANKS

Spatial differences in the discount rate are

much

smaller in the

This is possible
only because the discount rate is not in close touch with the market
rate, as it is in Germany. The causes are institutional and political.
Purely economically, the readiness of individual Reserve Banks to
rediscount is determined by their available capital (and thus finally
by their gold reserve, which sometimes can be increased by rediscounting through other Reserve Banks) whereas the demand of
member banks to rediscount could be thought of as determined by
profits (difference between the discount rate of the Reserve Banks
and that of member banks) by necessity (exhaustion of their own
means) and by competition (difference between the discount rate
of Reserve Banks and that of outside banks)
Discount rates originating in this way may differ regionally by at least as much as the
discount rate of a Reserve Bank in the cheapest financial center
differs from the considerably higher rate ^* of interest on loans
between ordinary banks. For example, if the discount rate in New
York is 2 per cent and member banks there will not lend to other
banks at less than 3 per cent, the Reserve Bank in Atlanta can
immediately fix its discount rate at 3 per cent without having to
fear that its member banks will turn to New York.'^ Indeed, it can

United

States than the differences in

market

interest.

34. It

is

only slightly below the rate that other customers pay. See Riefler, op.

cit.,

p. 92.
35. For the lower rates in the impersonal open market compete only for the most
important banks with the Reserve Bank discount. If a bank can obtain means still more

Price Lex/els in Space

475

go even beyond 3 per cent, because not all its member banks can
borrow in New York at the lowest rate, or borrow at all, and because
in any case borrowing is associated with higher costs.
But the Reserve Banks have not used their gold reserves to the
limit, and therefore have never been interested in an effective discount rate that would facilitate international transfers. Nor was
the Reserve discount very effective as a business cycle policy, partly
because of the objective market conditions and partly because of the
Reserve Banks themselves. Because of the abundance of American
capital, the creation of credit does not play such an important role
as it does in Germany, and there is a smaller need for notes since
payment by check is widespread, so that the point at which banks
have to rediscount if they wish to extend their credit still further,
is reached later.
Thus the Reserve Banks do not exert very strict
control over their member banks through the discount rate, and
try to make up for this by changing reserve requirements ^^ and by
open market operations."
Furthermore, this abundance of capital leads member banks to
reduce their securities holdings at a favorable price during an upswing, when money is tight, rather than to call immediately on the
Reserve Banks for help. These arguments, however, apply entirely
to the rich Northeast only, whereas it is impossible to escape the
impression that the Reserve Banks in the capital-hungry West and
South often do not promote the creation of credit to a degree that
would be actually possible. Only too often they are restrained by
regulations and principles that appear to have grown out of conditions in the Northeast, and hence are not suited to the West and
South. The prohibition of rediscounting from motives of profit
seems to me especially open to criticism. For the Reserve Banks
do not want member banks to rediscount bills that they have
extended at a high rate of interest, with their Reserve Banks at
cheaply in the open market,

it

will not deal with its Reserve

has the same low discount rate as the

36.

Within certain

New York

Bank even though

this

Reserve Bank.

legal limits the Federal Reserve

Board can change the reserve

requirements.
37. I

doubt their

When

efficacy.

the

Reserve Banks want to

sell

Government

example, to reduce the liquidity of the banks, the question is, especially
when the banks themselves are supposed to be the buyers, whether they are disposed to
securities, for

make an investment
fall

that bears such relatively low interest

in the price of securities)

loans bearing a high rate of interest.

ment
them

If

the latter

is

possible they will

make

industrial

buy no Govern-

if not, no tricks with Government securities are required to make

no matter how welcome this investment of capital might otherwise be to

obligations;
refrain,

(except with a substantial

or whether they would not prefer to

the banks for lack of a better.

Part Four.

^^5

their

Examples

lower rate, merely to profit by the difference in interest

cit., p. 29) .^^ The Reserve Banks themselves thereby

(Riefler, op.

further the already limited effectiveness of their discount rate.^^ On the other hand, this slight effectiveness of discount
rates allows a discount policy that would not be tenable with more
restrict still

Low and

equal discount rates are not only considered

politically desirable, but are welcomed by the Federal Reserve Board
also because they are supposed to strengthen the position of the
Reserve Banks. That is to say, it is expected that with low and equal
effective rates.

often with their own

This, of course,
banks.
Reserve Banks instead of with outside private
that the
mentioned:
is inconsistent with the other principle just
Reserve Banks are to help out only in an emergency, and then only

discount rates

member banks

will deal

more

happened and in areas Avith but little

was much rediscounting from time to time
(in 1928-29, for example) it had the further result, of course, that
the Reserve Banks which were thus used had to rediscount with
the Reserve Banks in regions where capital was abundant. Thus
they strengthened their position vis-a-vis their member banks at the
price of greater dependence upon other Reserve Banks, and the end
result was always that they finally raised their discount rate, partly
because they did not want this dependence to continue and partly
because the means of even the rich Reserve Banks are limited.
Thus actual circumstances together with self-elimination of the
Reserve Banks make it possible (and, indeed, because of a certain
striving for power the banks even consider it desirable) for interregional differences in the discount rate, though often considerable,
to be smaller than interregional differences in the market rate of
interest. The contradictory effects of these two activities, which seem
to produce the same result, appear only when the Reserve Banks
really wish to exert their power, at least within the restricted limits
that are actually possible. For to the extent to which discount rates
temporarily. In so far as this

capital there actually

become

effective,

they must naturally also increase regional dif-

ferences to the extent that

b.

It is

we have deduced

PRODUCT PRICES

not always easy to

tell

in the prices of any particular

38.

Hence

rates in the

above.
40

a priori whether local differences

good

will

be large or small. At

first

open market may often be higher than the discount rate of

the Reserve Banks.

39.

means
40.

The moment

which member banks rediscount after exhaustion of their own

which they do so.
Useful data are so rare, so difficult to collect, and take so long to explain that

is

at

affected less than the degree to

Price Levels in Space

477

is tempted to suppose that the differences are greater for raw

materials than for finished products, because their unit of weight

one

cheaper and the freight therefore higher in proportion to the proThen the following, say, are mentioned as examples
of the first group: ore, coal,*^ iron; wood, paper; bricks, cement; ^^
oil and salt,*^ as well as potatoes, hay, animals, and fruit. Typical
of the second group would be jewelry, watches, tobacco products,
is

ducer's price.

and so on. But in the first place, the freight rate

generally lower for the former group; and second, in many

drugs, clothing,
also

is

not most

shipping distance

For instance,

it is

shorter for paper than for books, for iron than for machinery,

and

if

cases, the

is

shorter.

Third, interest and insurance

during transit are lower; fourth, competition is keener because
qualities can be compared more easily than in the end product;
for potatoes than for potato spirits.

and

finally, in

the case of raw materials, prices are usually

f.

o. b.

prices plus freight, whereas with finished products the retail prices

include selling

costs,

which vary greatly in different

localities.

Thus

glance it is not at all certain which group will show

the greater regional price differences. At any rate, the labor of
examining individual cases cannot be saved by a few general

at

first

reflections.
1.

Agricultural Products
a.

The geography

Wheat

of grain prices in the United States was investi-

gated at an early date by T. H. Engelbrecht,*^ whose pioneer work

market, regional, and national price gradients can frequently be shown only in fragmentary form and not sharply separated one from the other. According to A. Jacobs

("Die riiumliche Ordnung der Preise in Europa," Wirtschaftsring, 1941, pp. 205-207),
the European continental gradient for groups or averages of single prices at the opening

Food was most expensive in Germany; for industrial materials

more expensive southeast and the less expensive northwest. The
real wages, which in Germany were twice as high and in Denmark

of 1940 was as follows:

she was between the

same was true of

more than three times
41.

as

high as in Bulgaria.

In 1931-1933 the freight on cement in the United States, for instance, amounted

on the average
Urdahl and L.

on lime to 1/2, and on coal to 1/1 of the f. o. b. price. (T. K.

O'Neill, " Operation of the Basing Point Provisions in the Lime

to 1/3,
J.

NRA,

Division of Review, Work Materials, No. 65, 1936, pp. 59, 71.
Economic Survey of the Bituminous Coal Industry under Free Competition and Code Regulation," ihid., No. 69, I, 34.)
According to some sources,
August 13, 1940, salt prices in Mexico varied between 95 and 230 pesos per ton. On

Industry Code,"

F. E. Berquist, "

the whole, regional price differences are said to be great there during the rainy season

because of loose economic relationships and

difficulties in transportation.

Die geographische Verteilung der Getreidepreise

1862-1900 (Berlin, 1903).
42.

in

den Vereinigten Staaten,

Part Four.

478

for the latter half of the nineteenth century

is

still

Examples

well worth

He

introduced the concept of isotims, lines connecting

places with equal prices. More recent price maps for wheat are
based on an admirable investigation by L. B. Zapoleon.^* It includes
tables of producers' prices by counties, that is, relatively small areas,
for the years immediately preceding World War I. Corresponding
reading.*^

statistics for

recent years are in the

wheat

files

of the

Department of Agri-

United States (producer

(From F. A. Fetter, The Masquerade of
Monopoly, p. 295, after L. B. Zapoleon, Geography of Wheat Prices, U. S.
Department of Agriculture Bulletin No. 594 [Washington, 1918], Map 3.)
Fig.

96.

Spatial pattern of

prices in cents per bushel, 1910-14)

culture, but have not

prices in the

been released

maps
These do not

for publication. Zapoleon's

give prices only for the wheat-raising areas proper.

constitute a compact whole, however,

which makes a review of their

but by interpolation, F. A. Fetter {The Masquerade of Monopoly [New York, 1931], p. 295) has prepared a
new map that affords a good general view of the whole field and
gives price zones for the entire United States (Fig. 96) .^^ The lowest

connections

difficult,

43. In this period, for

which diminished
44. Geography

example, occurred the great cheapening of transportation,

local price differences.

of

Wheat

Prices,

U.

S.

Department

of Agriculture, Bulletin

594

(Washington, 1918) Map 3 in particular.

45. It is based on producer's prices regardless of quality differences, but as the interpolation includes also regions where no wheat is grown, it may perhaps come nearest
;

to a

map

statistical

cents,

of wholesale prices.

Zones are given, not lines of equal price, partly for the
way or the other to the nearest five

reason that prices are rounded off one

but partly also for the actual reason that freight

entire zones.

costs are often the

same over

Price Levels in Space

479

price prevails in the surplus region that

namely eastern Idaho. Here,

farthest

is

therefore,

is

from the market,*^

the great divide between

the supply areas for the Pacific and Atlantic exporting ports.
the

main

transport routes to these ports

prices rise
p. 16)

and

about in proportion to freight

Here

Along

to the inland markets,

costs

(Zapoleon, op.

cit.,

and most stable. Smallest

trade, and most stable because

price differences are smallest

because of well-organized interlocal

even in the years of poor harvests, the great surplus regions continue
as a rule to supply wheat, so that the flow of traffic hardly changes
its direction. In smaller and more remote wheat areas, which sometimes have a surplus and sometimes a deficit, local price differences
on the contrary are greater and more variable.
Zapoleon's map includes also, though only in rough form to be
sure, the smaller price cones about the main collecting stations in
the wheat area. However, only the two great price funnels around
distant Idaho and the great surplus region of Nebraska appear
clearly. About the ports on the northwest coast fragments of price
cones, at best, can still be recognized. Thus the map does not show
with perfect clarity to what degree price cones (which in my judgment must predominate) and to what degree price funnels, actually
determine the pattern. This is partly because of the rounding-off;
partly too, no doubt, because of Fetter's interpolation, which seems
to start from the conception of price funnels as the regulating principle; partly because freight rates are not given; and finally, in part,
because the eastern ports are so far from the relatively small surplus
,

region.

But however

this

question

is

decided the significance

of,

and a

certain regularity in, regional price differences are clearly apparent

on the map. This does not exclude the

fact, however, that agreement

never complete in all details. Thus there is a striking
example of three places in Kansas with the same freight rate for
wheat to Kansas City, the collecting station; yet only once in the
entire harvest year 1929-30 did the storehouses in these three places

with the rule

buy wheat
price!

is

of the

same

quality,

on the same day, and

at the

same

"
p.

Potatoes

The price of potatoes just about doubles as it rises from the

North, the surplus region, toward the South. A comparison of
Figures 97 and 98 will show how the importance of Idaho and
Not in North Dakota, the region of largest surplus.
Bureau of Railxuay Economics, Coinviodity Prices in Their Relation
portation Costs. Bulletin No. 40, Wheat (Washington, 1930), pp. 2 f
46.
47.

to

Trans-

Part Four.

48o

Examples

Producer prices for potatoes in cents per bushel on December 1,

(From H. Working, Factors Determining the Price of
Potatoes in St. Paul and Minneapolis, Minneapolis, 1922.)
Fig. 97.

average for 1906-15.

Fig. 98.

Retail prices of potatoes, 1936, in cents per 10 pounds.

plus regions.

(Sources for the figures: Canada,

United

Bureau of Labor

States,

Statistics.)

Dominion Bureau

+ = sur-

of Statistics;

Price Levels in Space

481

Colorado has increased since World War I. The low price around
Florida is a result of large imports from Cuba and Bermuda. That
around the Canadian province of Saskatchewan requires special
examination, because its potato production, though considerable,
is nevertheless low in proportion to the population.
For the rest,
the isotims, which had to be derived from comparatively few price
data with due consideration of transport conditions, naturally represent but a rough interpolation."*^ Even at the best they constitute
only a sound, yet for that very reason a useful and important,
presumption.
y.

Oranges

Over two thirds of the American production is furnished by

where the largest groves are gathered closely about Los
Angeles, and a bare third by Florida. About both these centers
California,

there are definite rings of rising prices.

Table 37.

ORANGE PRICES AND DISTANCE

Retail Price per Dozen, 1936

Distance from
Los Angeles in

Cents'

miles (rail)
16.0

Los Angeles

25.7
26.8
27.6

San Francisco
Salt Lake City

21.2
31.9
33.5
35.0
36.9

From

a.

El Paso
Portland (Oregon)

Denver

Omaha
Minneapolis
Chicago

470
780
820
1220
1370
1930
2280
2430

the Bureau of Labor Statistics, Retail Price Division.

Table 37 shows how greatly distance from a producer affects the

As both great producing areas supply the principal
markets in the Northeast at about the same time,*^ but Florida is

price of oranges.

48.

The

smaller price cones simply disappear in the interpolation, yet they are often
Thus in the Minneapolis supply area differences in producers' prices

highly significant.

up
(L.

to 66
F.

per cent, according to distance, have been showrn to persist over long periods.
Farm Crops in Minnesota, University of Minnesota,

Garey, Local Prices of

Agricultural Experiment Station, Bulletin 303, 1934, p. 29.)

49. This lies partly in a contested area that in 1936 stretched approximately along
the lower and middle Mississippi River, the Ohio River, and the northeast coast.

Southeast of this area Florida controlled the market, while northwest of it California
was in possession of more than two thirds. {U S. Department of Agriculture. Carlot
.

Unloads of Certain Fruits and Vegetables in 66 Cities and Imports in 4 Cities for
Caimda 1936 [Washington, 1937]). Chicago and New York are similar "corner
markets " for oranges, as northwest Europe is for wheat.

Pfl^*

^82

nearer to
example,

must be higher there than in

hardly half as far from Chicago

it,

prices

it

is

Four.

Examples

California.
to

For

Jacksonville

Los Angeles. It could therefore be supposed, and

statistics confirm the presumption, that the price in Jacksonville
(27.3 cents a dozen) would be somewhat above the mean for
Chicago and Los Angeles prices.
(Florida)

as to

8.

As the shipping distance

differences

may

Milk

for

milk

be especially large

is

and

usually short, local price

Thus the pro-

irregular.

Canadian dairies in 1936 fluctuated between

12.8 cents a gallon on the East Coast (Charlottetown) and 45.3
cents on the West Coast (Vancouver) .^
ducers' prices paid by

e.

"Heavy" and "Light" Goods

would be wrong

It

wide regional price differences

on the score that they concern excep-

to dismiss the

in the preceding examples

tionally heavy goods. Salt, too, is a heavy product in the sense of

our argument: that shipping over a given distance raises the price
disproportionately. Yet in so far as data are available," the retail
price in Canada on the border of any area is never more than one
third above the price at the production site, and generally much
less than that, merely because salt is produced in almost every
Canadian province and the actual shipping distance is therefore
relatively short. Coffee, on the other hand, is a " light " commodity;
that is to say, the freight rate is less important. Yet in the interior
in 1936 a pound cost half as much again as in a Southern importing
port (New Orleans, 21.4 cents; Denver, 31.8 cents) .^^ The insignificance of the freight rate in proportion to value was obviously
balanced by the long haul. This comparison shows that not only
the " weight " of a commodity, but the extent of its market area
as well, determines the importance of its regional price differences.

50. See

1934)

Dominion Bureau of Statistics,

isotims
f.; also
J. M. Cassels'

pp. 54

Prices
for

and Price Indexes 1913-53 (Ottawa,

milk and butter

fat

(A Study of Fluid

Milk Prices [Cambridge, Mass., 1937], pp. 161, 165).

51. Source: Dominion Bureau of Statistics, Internal Trade Department.
52. Differences in quality may not have been eliminated with complete success, but
in the general region of Denver prices were equally high (Salt Lake City, 31 cents;
Sioux

Falls, S. D., 31.4 cents).

Price Levels in Space

2.

483

NONAGRICULTURAL PRODUCTS
Homogeneous Goods

a.

NEWSPAPERS

1.

The New York Times,

sold for 2 cents in

the leading American newspaper, formerly

New York

itself;

for 3 cents in the environs of

the city; for 5 cents in Boston, 220 miles distant; for 6 cents in

and for 7 cents in Ottawa (550 miles) The

Sunday edition varied between 10 and 15 cents. Conweight, about 3/4 pound on weekdays and about 2^

Montreal (440 miles)

price of the

sidering

its

pounds on Sundays, the explanation

largely in the fact that

lies

freight costs rise with distance whereas sales decrease, so that a

greater proportion of the fixed selling costs

falls

upon

the single

copy.

AUTOMOBILES

2.

The

price of a Chevrolet that sold for about $600 in Flint,

production site, rose in accordance with the freight

on January 10, 1935, by $16 in Chicago (270 miles)
by $37 in New York (670 miles) by $78 in New Orleans (1,160
miles) by $91 in Miami, Florida (1,460 miles) by $115 in El Paso,
Texas (1,650 miles) and was highest in San Francisco (2,540 miles)
and California as a whole, where the price increased by $130 that
is, by more than 20 per cent.''^''*
Michigan,

its

rates prevailing

3.

CLOTHING

Summer

suits bearing the Palm Beach label sold for $16.75 at

everywhere in the United States in 1936. But it would be
absurd to conclude from such cases, which are well known to be
numerous, that distance is apparently of no consequence for sales.
With a prescribed uniform price the costs of distance deter the
manufacturer or retailer, of course, not the consumer. Instead of
retail

the price level,

53.

Information

it is

the profit level that varies from place to place.^^

kindly

supplied

by

Mr.

S.

du

Brul,

of

the

General

Motors

Corporation.
54.

The buyer

takes a used car at

55.

does not always pay

more than

its

all

the freight, of course, for a dealer often

market value

as part

payment.

Sometimes, however, the price level only seems to be the same.

western branch of a large Canadian department store

from the

East,

were something

like

found that

towels,

Thus

in the

which came

an inch smaller instead of more exnensive.

In

another case the conditions under which a mail-order house would deliver in the West
were less favorable, and the assortment included more expensive qualities.

Part Four.

i^^

Examples

In the present instance Palm Beach suits were not to be had at all
in remote San Francisco, according to reports of the Bureau of

Labor

Statistics.

EUROPEAN RETAIL PRICES

4.

particularly valuable because of the method

employed is that undertaken by the French Institut Scientifique
de Recherches Economiques et Sociales. Retail prices in European

study that

is

countries were to be compared, special emphasis being laid on

obtaining prices for actually comparable qualities.^^ For this purpose
the same investigator with the same sample case visited leading

department stores in the various capitals and obtained the prices

for 200 goods and services. It was found that prices in France,
Holland, England, and Sweden averaged about the same, or at most,
somewhat lower in the two latter countries; whereas in Switzerland,
an important health resort, they were very much higher and in
Belgium much lower. This price inquiry preceded the French and
Swiss devaluations. Belgium, England, and Sweden owed their low
prices to early devaluation, and Holland to its policy of free trade."
J3.

Similar Goods

The range of trade-marked articles obtainable anywhere in the

United States and recognizable as such is not so wide as it is striking.
However, almost all the available material on retail prices relates
not to identical but to similar qualities. Even this has not always
been so. Until 1935 the Bureau of Labor Statistics, in Washington,
determined prices in single localities, not for comparable articles
but for those that were then most widely purchased.^^

The standardization of production goes especially far in the

United States, and the Bureau of Labor Statistics has commendably
endeavored for years to obtain interlocally comparable prices by
exact instruction, central training, and supervision of its outside
(The Canadian Bureau abandoned such an investi
investigators.
gation as hopeless because of its limited means.) Yet, although I
worked for months to choose from this material particularly such
articles as might be most readily assumed to be of somewhat comparable quality, the results show the extraordinary difficulty of the
56. Nevertheless, qualities for
57.

some

finished goods could be only roughly compared.

Charles Rist, carts de prix, France-tranger (Institut Scientifique de Recherches

Economiques

et

Sociales, Paris,

1936)

pp. 20-22; supplementary information by Dr.

Herberts, Paris.
58.

Hence

F. C. Mills' calculations of

average local differences in retail prices based

on these findings [The Behavior of Prices [New York, 1927]) are

also useless.

Price Levels in Space

485

Even an orderly

task.

over-all pattern of local prices could not

be

established in every case, nor could this spatial order always be

logically explained; that is, it did not always correspond with what
would be expected from a knowledge of the production site,^^ freight
rates, and local conditions. But of course it must never be forgotten
that this knowledge itself is incomplete, and above all that one must
be prepared from the first to find that retail prices, even for exactly
the same product, differ locally to a greater degree and more irregularly than the prices paid by retailers.^" For retail margins vary
considerably from town to town, and even between neighborhoods,^
different businesses, and single businesses in the sanje place ^^ because
of variations in ground rent, wages, interest, taxes, advertising costs,
conditions of competition, ease of supervision, size of store, and

Hence

so on.2

irregular price patterns are not always illogical

simply because they are irregular. Especially

when production

also

59. Where this was not already known it was obtained from business directories
(Thomas, Register of American Manufacturers, 1932-33 edition; Canadian Trade Index,
1936) and American Census of Manufacturers or the statistics on production of the
Dominion Bureau of Statistics.
60. Thus, in all stores investigated, a certain package of aspirin cost 12 cents in
Jacksonville, whereas in Mobile an identical package cost 15 cents. For another brand
the prices were 10 and 15 cents respectively; the difference, that is, was much greater
than would be caused by the insignificant difference in freight, since both places are
almost equally distant from the production center. New York. Similarly, the great
difference between the price for spectacles in New Orleans ($9.00) and Los Angeles

($15.50)

is

apparently genuine;

but rather by the wage

may be cheaper

level.

it

is

not explained by the freight situation, however,

In the same way, even without dumping, exported goods

at retail in the country to

which they are shipped than

in the country

of origin.
61.

For example, in November, 1932, the prices of 19 important foods were 10 per
(C. Boehm, " Zur Frage

cent higher in the west end of Berlin than on the north side.

der Preisstreuung," Vierteljahrshefte zur Konjunkturforschung, Vol. XI, No.

4A

[1937],

and vegetable prices were higher in the outskirts than at the center of
the city, because it cost more to transport goods from the great central market to the
shops; because the population density was down and sales were accordingly fewer; and
p. 460.)

Fruit

because competition was farther away. Extraordinary price differences prevailed in the

had but a small sale. Thus in average stores en

grade cost from 5 to 13 pfennigs a pound, and
spinach of the same quality from 5 to 25 pfennigs. As perishable goods cannot be
withdrawn from an overstocked market, their prices differ by more than the costs of
distance. Hence, though competition is perfect within the same wholesale market, it is
case of goods that spoiled easily or

November

18, 1930,

onions of

limited between markets.

und Gemiise
62.

These

medium

(Well demonstrated by H. Liebe in Preisbildung bei Obst

[Berlin, 1931], pp. 12, 17-19.)

differences are eliminated in dining cars.

succeeding meal between San Francisco and

West

to $1.30-$2.00 in the East)

supplies.

New York

The

increased price at each

(in 1935

no doubt depended upon

from $.70-$1.10

in the

differences in the cost of

Examples

Part Four.

^85

regionally scattered, a regular pattern is seldom to be expected

when comparisons are drawn between a few central places, because
is

the smaller price funnels around a single factory simply drop through
the wide meshes of the including network. This is true of mattresses,
where, in addition, quality
for instance (Table 38, column /)
,

differences cannot be wholly eliminated.

Nevertheless there remain a fair number of price patterns that

are regular and logical at the same time, and thereby furnish proof
of the correctness and reliability of the manner in which they have
been collected. In such cases rings of increasing prices surround the
site of surplus production (soap, for example) or those places where
an important factor of production is especially cheap: labor (laun,

When
a raw material (shoemakers)
nevertheless wholly out of line, further investigation, wherever possible, has generally shown a difference in the
quality of the product or in business methods, or perhaps special

dries)

land (motion pictures)

occasionally a price

is

local conditions such as a price war, for example. In this way we

obtain at the same time a clue as to where the statistical inquiry
should be critically tested.

1.

SOAP

The most important

production centers for soap of the variety

and Toronto,
in Canada. Prices rise appreciably with distance from these centers
As the unit of weight is cheap and the
(Fig. 99 and Table 38)
shipping distance for the brand concerned is long, freight plays an
important role in the explanation of price differences. For soap
shipped from Cincinnati to Boston in cartons it amounts to 75 cents
a hundred pounds, or about 4 cents for 10 cakes, which corresponds
exactly with the difference in the retail price. Toward the South
the isotims lie closer together, because freight rates there are higher
than in the Northeast. Toward the West conditions are not entirely
clear. In California there seems to be a local product, made in Los
Angeles, since prices rise toward the North.^^ In Buffalo and Detroit
imports from Canada may play a part. In Kansas and New Orleans,
and perhaps 'throughout the South as a whole, there are differences
in quality. As for Philadelphia, it could not be determined whether
investigated here are Cincinnati, in the United States,

63.

On

the Pacific Coast, along which only a narrow but very long strip

the influence of distance can be followed with special ease.

overalls

is

made

at the

northern end of this

strip,

and

is

populated,

For example, a surplus of

prices accordingly rise toward

the south: Seattle, $1.30; Portland, Ore., $1.42; San Francisco, $1.47; Los Angeles, $1.55

(from data of the Bureau of Labor Statistics for 1936)

..

487

Price Levels in Space

TabU

LOCAL DIFFERENCES

IN

NONAGRI CULTURAL RE^^

38.
PRICES IN THE UNITED STATES AND CANADA,

1936
1

g
59
60
56
59
56
58
57
58
55
60
56
58
73
61
60
57
58
62
61
68
67
63
68
64
47

Boston, Massachusetts
Portland, Maine
Buffalo, New York
New York City, New York

Philadelphia, Pennsylvania
Pittsburg, Pennsylvania

Scranton, Pennsylvania
Chicago, Illinois
Cincinnati,

Ohio

Cleveland, Ohio
Detroit, Michigan
Indianapolis, Indiana

Kansas

City,

Kansas

Minneapolis, Minnesota
Saint Louis, Missouri

Baltimore, Maryland

Washington, D.

Norfolk, Virginia
Richmond, Virginia
Atlanta, Georgia

Savannah, Georgia
Jacksonville, Florida

Birmingham, Alabama
Mobile, Alabama

New

Orleans, Louisiana

64
70
66
54

Memphis, Tennessee
Houston, Texas ...
Denver, Colorado
Los Angeles, California
San Francisco, California
.

59
59
62

Portland, Oregon
Seattle,

Washington

Montreal, Quebec
Toronto, Ontario
Winnipeg, Manitoba
Regina, Saskatchewan
Saskatoon, Saskatchewan.
Calgary, Alberta
Edmonton, Alberta
Vancouver, Brit. -Columbia
.

50
47

94 91 1.21 45
1.60 97 93 1.17 25
1.63 100 85 1.32 25
1.41 72 89 1.13 39
1.38 80 66 1.13 30
1.56 89 74 1.16 32
1.56 69 68 1.23 40
1.34 67 73 1.15 36
1.75 69 89 1.13 33
1.51 67 102 1.18 29
1.48 68 98 1.17 40
1.62 73 86 1.11 36
1.99 89 83 1.15 24
72 99 1.17 25
1.
1.74 73 92 1.12 38
1.53 65 88 1.28 39
1.68 68 96 1.18 35
1.81 72 96 1.23 28
1.96 84 86 1.31 36
1.65 68 74 1.20 20
1.70 78 92 1.19 22
1,05 28
1.51 72
1.66 70 69 1.10 24
1.86 67 60 1.14 24
1.96 71 76 1.17 32
1.74 69 82 1.24 30

9.5

1.30

11.0

1.40

10.8

1.29

12.3

1.12

11.3

1.34

10.8

1.54

13.1

1.16

12.3

1.51

13
19
17
16
16
16
15
14
15
20
15
13
12
15

11.5

1.24

11

1.12

1.50

1.56

91

1.19

31

11.8

1.47

13.2

1.17

10.5

1.15

12.6

1.10

13.8

1.21

12.2

1.25

14.8

1.31

12.2

1.25

13.7

1.18

13.1

1.25

12.9

1.31

16
17
16
15
13
15
10

12.3

1.15

11

12.4

1.36

11

9.0

1.23

12.6

1.27

12.3

1.62

13
15
15
16
15
14

1.86

71

1.73

74 101 1.25 31 11.6 1.55

71 86 1.16 39 15.1 1.22
81 102 1.05 30 14.5 1.42
67 94 1.05 33 13.3 1.49 20
80 111 1.07 35 13.6 1.73 18

1.68
1.57
1.83

1.83

1.87 87
2.00 79
2.00 117
2.00
2.00 150
2.18 97
2.00 100
2.25 79

1.59
1.49

1.59
1.68
1.49

1.43
1.52
1.44

45
39
42

21.2
23.7

41

21.0

42
46

20.7

41

20.9

56
44
50
36
45
29
33
44
39
37
46
43
34
39
32
46
28
33
35
46
32
40
50
44
50

19.8

19.8

19.0
22.0
18.3
23.6
19.7

22.7

21.0
20.7
26.8

20.4
22.4
27.9

26.3
27.8
24.2

22.6
24.1
23.0
25.1

22.5
19.1

28.3
22.7

24.0

17 32
17 39
18
15 35
15
16 35
15 35
16 36

cakes of 6
(U.S.A.) or laundry soap (Canada). Price ^o^ 10
(less sales tax in U. S. A.). Uther
cents
in
each
ounces
(Canada)
(USA) or 8
Kingston. Ont.. 49; Port
Canadian cities: Halifax. 51; St. John, 50; Quebec, 47;
B.C., 52.
Arthur. 50; Nanaimo, B.C.. 51; Prince Rupert.
quality (more detailed descripMen's cotton shirts with attached collars, medium
of production are New
centers
chief
The
tax.
sales
less
In dollars
tion added)
York. New Jersey, and Pennsylvania.
cents
detailed statement)
Cotton work shirts with collars (according to more
The Canadian surplus area is Quebec. In the United
A.)
U.

Kitchen soap

(less sales tax in

States production

S.

is

divided especially

among

the original cotton belt, the Middle

Examples

Part Four.

488

West around Chicago, and Pennsylvania

as well as

Halifax, 96; Quebec, 87; Ottawa, 87.

Cotton union suits for men, summer weight, size

Maryland. Other Canadian

cities:

d.

inclusive of sales tax.

e.

Bed

sheets,

dollars

81

X 99

(less sales

The production

inches

tax in U.

center

(according to
S.

A.)

The

is

more

states

6.

Price in July, 1936, in cents,

the Pennsylvania area.

detailed statements)

Price in

along the East Coast are the chief

production area.
/.

Motion

g.

Glasses.

Admission price for adults, weekdays, dress circle, in cents.

Examination of eyes, frame, lenses. Price for the more popular of two

pictures.

varieties described in
h.

of heels, in dollars
i.

I.

detail, in dollars

(less sales tax)

Laundering a man's

(less sales tax)

Price in cents. Other Canadian cities:

Halifax, 17; St. John, 17; Charlotte town, 12; Quebec, 14; Lethbridge, Alba., 19;
Nelson, B.C., 15; New Westminster, B.C., 15; Victoria, 19; Prince Rupert,
B.

k.

more

Resoling and heeling men's shoes. Sewed, best quality leather, well-known brand

C,

shirt

with

collar.

20.

Haircut. Adults, cents. Other Canadian cities: Halifax, 32; St. John, 28; Ottawa,
25; London, Ont., 35; Medicine Hat, Alba., 35; Nelson, B. C, 50; Trail, B. C, 50;
Prince Rupert, B. C, 50; Victoria, 35.
Mattresses, according to more detailed statements. Price in dollars (less sales tax).

Sources: United States.

Calculated by the author from original data of the Bureau

(original data obtained by field surveys)
Canada. Compiled by the author from original data of the Dominion Bureau of
Statistics, Internal Trade Branch (original data through correspondence with the large
department stores) Prices for work shirts come from a special inquiry of November 1,
1936, in which importance was attached in the United States to comparable qualities,
whereas in Canada prices of the most popular qualities were entered.
of

Labor

Statistics,

Retail Price Division

Fig. 99.

Isotimes for soap, United States

production centers.

(Sources: see

Table

and Canada, 1936. +

important
column a and last footnote.)

38,

the figures refer to another brand produced there, or whether the

competition of this likewise important soap center lowered the price
for the Cincinnati product also.

Price Levels in Space

489

Z.

TEXTILES

which are expensive per unit of weight,

if freight rates were
not considerably higher than they are for soap, say, if prompt
delivery of seasonal and fashionable goods especially were not preferred, and if shipping distances were not often very long. Thus,
in 1929 80 per cent of all men's shirts were made in the comparatively small area about New York City and Philadelphia. Prices
increased definitely around this center, at least in the industrial belt,
with the single exception of Chicago: Zone I (about $1.40) Philadelphia, New York; Zone II (about $1.55)
Boston, Scranton,
Pittsburgh, Cleveland, Detroit, Baltimore; Zone III (about $1.65)
Portland, Maine, Buffalo, Indianapolis, Washington, D. C; Zone IV
Cincinnati, Minneapolis, Richmond, Va., Norfolk.
(about $1.85)
In Canada prices rose westward from Quebec, the chief center of
production (Table 38, column h)
For union suits, too, there are
definite isotims about Philadelphia, the center of production, and
about Chicago and Mobile. In the case last named I rather suspect
that a lighter quality must be involved. In Canada pajamas are
made almost exclusively around Montreal and in eastern Ontario.
Quebec is the only surplus area, with an average price of $1.50.*
The average price in the Atlantic provinces east of Quebec was
In the case of

distance

would

textiles,

necessarily play a smaller role

$1.64; in the more westerly provinces, in order of their distance, it

was: Ontario, $1.60; Manitoba, $1.67; Saskatchewan, $1.64; Alberta,

and British Columbia, $2.01. Prices rose similarly toward the

north within the individual provinces.
For a few varieties of Canadian textiles such as bed sheets and
work shirts one gets the impression from the inquiry of November 1,
1936, that prices do not rise steadily from the production centers in
the East toward the West, but fall again from about the eastern
edge of the Rocky Mountains to the Pacific Coast.^^ This observa$1.72;

64. For men's cotton pajamas. The prices refer to pajamas that were deliberately
chosen because of their comparable quality (according to the Canadian special inquiry

November 1, 1936).
65. The same is true of cement, of which British Columbia imports a rather large
amount by rail. {Economic Council of British Columbia, The Trade of British
Columbia with Other Canadian Provinces and with Foreign countries, 1935 [Victoria,

of

1937], p. 97.)

following

In 1933 a 350-pound barrel of Portland cement cost at wholesale in the

arranged in order from east to west: Montreal, $1.70; Toronto, $2.10;

cities,

Winnipeg, $2.68; Regina, $3.35; Vancouver, $2.60. {Dominion Bureau of Statistics,

Prices and Price Indexes, 1913-33 [Ottawa, 1934], p. 74.)
The wholesale price of
gasoline increased similarly in 1933 from 16.8 cents a gallon in Montreal to 23.8 cents

49"

Part Four.

Examples

tion, if accurate, could easily be explained.

For example, it costs
14.54 to ship a hundredweight of bed sheets from Montreal,
the chief
production center, to Calgary, 2,240 miles distant and
just east of
the Rockies. But if it is shipped farther on
to Vancouver

(2,880
the freight for the entire stretch from Montreal
to Vancouver
falls to only $3.27 because of the competing
water route.^^ As a
second factor there may be added more the risk than
the

miles)

volume

of

cheap imports from China, just as on the Atlantic

Coast of the
United States certain products are especially cheap
because of European competition."

COST OF LIVING 68

c.

1.

General Principles

For practical reasons, indices of living costs are

generally calcuby determining from time to time the total cost of
a constant
aggregate of goods and services (the method of
Lowe or Laspeyres)
If this collection were representative-that
is, if it consisted of the
typical total requirements of every individual
member of a group
according to economic landscape, category,
occupation, income, and
size of family for similar persons-the
method might be considered
meaningful. But there still remains the difficulty
that an aggregate
of^eds can be typical only of the period for which it
was^'estab
lated

and fell again toward the west to 20.2 cents in

Vancouver (ibid p 72)
eggs the situation was exactly reversed,
because Saskatchewan is the most important surplus region. The average price of
a dozen eggs of the highest grade
was 18 2
cents
Saskatoon in 1933. From there the price rose
toward the east and west to 245
cents in Vancouver and 28 cents in
Montreal {ibid., p. 57)
66. VJAestern railway freights dropped
similarly ^n the'united States until
1916
0\. Predohl " Die ortliche Verteilung der amerikanischen
Eisen- und Stahlindustrie,"
Weltwtrtschaftliches Archiv, XXVII
[1829], 279.)
in Regina,

With

67.

For instance, in so far as freight plays

a role, northern Europe can compete
New York with Pittsburgh in the case of pig iron,

easily in

from Pittsburgh amounts

since the railway freight

about twice the ocean freight from

Europe
(L B
Zapoleon, "International and Domestic
Commodities and the Theory of Prices"
(luarterly Journal of Ecorromics, XLV
(1931) 442.) Furthermore, an iron industry
has
developed in the seapoVts of the East Coast that
uses foreign ores exclusively from the
shores of the Atlantic Ocean. (A. Riihl. "
Zur Frage der internationalen Arbeitsteilung
Erne s atistische Studie auf Grund der Einfuhr
der Vereinigten Staaten von Amerika/'
Vtertel]abrshefte zur Konjunkturforschung,
Sonderheft 25 [Berlin.
to

The

19321, pp 10 26)
East Coast belongs in part to the market
area of northwest Europe for Ponland
"^ xriJinduu

cement
68

also

(zbzd.. p. 28)

For the sake of argument

it

will

..

T'

^".P"""P^^ ^^^y

P^r.
m'/h
TtI share neither view.
art ill
that
1

be assumed at

first

that there are such things as

-"

ed.

The

"^^

reader will recall from

49^

Price Levels in Space

however, for technical reasons generally lies far in

the past. This is not a disadvantage if only the price level moves;
that is, if every price changes in the same direction. If, for example,
all prices rise by 10 per cent, the total needs also will rise by 10 per
cent. Those who cannot afford to spend more will therefore get
fewer goods, though it cannot be said how many fewer because their
decreased purchasing power affects different goods differently. The
aggregate of needs will be reduced unequally. It also will provide
a smaller total utility, whose decrease, however, must be less than
lished, which,

10 per cent, according to Gossen's

lawas,

conversely, a deflation of

10 per cent increases the utilities of those with fixed incomes by

less

than 10 per cent.

when

It is different

system has been

have

fallen.

the index has gone

dislocated,

More

some

up because

the price

prices having risen whereas others

of the cheaper

and fewer

of the dearer goods will

bought. The typical aggregate changes, but without anyone

being able to say that either it or the utilities it provides have
increased or decreased. Cases can be imagined in which a " drop in
real wages," calculated in the usual way, may actually mean an
increase in utilities. On the other hand, a rise in real wages, similarly calculated, is actual in every case, for if one still wished to do
so one could buy the same things with less money than before.
Hence the Laspeyres index may be relied upon to show a rise
in the standard of living, but not a fall. Conversely, the Paasche
index, based on the typical aggregate of goods and services for the
given rather than the base year, is dependable in case of a fall, not
a rise, in real wages. From this G. v. Haberler concluded in his
thoroughgoing analysis (Der Sinn der Indexzahlen [Tubingen, 1927])
that a combination of these two indices, as in Irving Fischer's " ideal
formula," would necessarily decrease the error. But of course only
the degree of uncertainty, not the fact of uncertainty, would be
altered. Even the ideal formula definitely shows a change in living
costs (in direction, not extent) only when the result agrees with that
of each of the two component formulas.^^ To publish only the result
of the ideal formula without the results of the two component
formulas is worse than simply to calculate the index from one of

now be

them
least,

69.

alone. This would give an accurate result in some cases at

whereas the ideal formula by itself alone is always uncertain.

The

third case, in

Paasche index
rises

rises, is

which the Laspeyres index of living costs falls whereas the

The fourth, in which the Laspeyres index

certainly impossible.

whereas the Paasche index

important.

falls,

remains

possible,

uncertain,

but especially

Part Four.

^Q2

Examples

when living costs are to be compared

For instance, if it is desired to compare
a German with an American economic landscape Wiirttemberg, say,
with New England it must first be established what the aggregate
needs typical of Swabians at home would cost in New England
Even this is not easy, because many typical
(Laspeyres' formula)
Swabian goods are simply not to be had in the United States. Hence
one must compute, when possible, how much they would cost if
they were to be imported from the homeland. If the cost of living
index falls despite this, it is well.^ But if it rises, as it usually will,
one must calculate next the cost in Wiirttemberg and New England
of the aggregate needs, not of a New Englander, but of a typical
Swabian living in New England and enjoying the same nominal
If this index also rises it is certain
income (Paasche's formula)
beyond any doubt that living costs for a Swabian in the United
States are higher than at home.^ But if both indices change in a
different direction, as they generally will that is, if the aggregate
needs of a Swabian living abroad are more expensive at home, and
those of a Swabian living in the homeland more expensive abroad
this question must remain objectively unanswered.
The individual Swabian, on the other hand, may know very
clearly where he requires more money in order to live equally well.
This tempts even the statistician to measure at least subjectively
what cannot be compared objectively, (a) He can either determine
what aggregate needs most Swabians in the United States regard
as equal to those customary at home,
(b) Or he can decide for
himself which aggregates are held to be equivalent. Here he may
start with requirements at home, and substitute only what is not
to be had in the United States, (c) Or he may assemble an entirely
new aggregate of goods that is adapted to American conditions.

The

procedure

is

the same

in space instead of in time.

2.

Statistics

The Reich Statistical Bureau (Direccompared the living costs for German officials abroad
by methods a or b, and the International Labor Office established
for 14 European cities by methods b or c the costs of living that
correspond to those of a worker in Detroit.^^ As it was soon found
that many articles bought by the Detroit worker were not obtainable
a)

Subjective Comparisons:

tor Jacobs)

70.

Except when the same aggregate provides a different

71. Internationales

utility in the

United

States.

Arbeitsamt, Beitrag zur Frage der internationalen Gegeniiber-

stellung der Lebenshaltungskosten

(Geneva, 1933)

("The so-called

Ford Inquiry.)

Price Levels hi Space

493

in Europe, an aggregate of local needs equivalent in the opinion of

the investigators, was substituted. Interlocal differences in costs as

great as 80 per cent were found, those in Detroit being that

higher than those in Barcelona

much

{ibid., p. 33)

Objective Comparisons: So far as I am aware no interlocal

y8)
comparison of living costs has been carried out according to the
correct principles developed above. On the other hand, the WPA
endeavored to discover the cost of the same aggregate of needs in
Yet despite the rather uniform
all parts of the United States.
succeeded only with important
attempt
America
the
in
conditions
fuel,
ice,
and transport facilities was
need
for
limitations. The
addition
there
remained significant qualiin
determined locally, and
tative differences, no matter how great the effort to avoid them.
Washington was found to be the most expensive city, its living costs
being 25 per cent above those in Mobile, on the Gulf Coast, which
was the cheapest. The range in the price of food was only 17 per
cent; ^^ for housing, where local conditions and difficulties in comparison play an important role, it was 125 per cent. These figures
are interesting, even though they do not measure differences in the
cost of living as they were intended to do, but represent simply an
interlocal price comparison a comparison not of different prices for
one product, which often vary considerably, but of the much more
nearly equal costs of a group of products. The error sets in only
where a special significance is attributed to this group of commodities; that is, by regarding it as representative of the American
standard of living. Regional differences are not so small, even in
the United States, that this has meaning for interlocal comparisons. ^^
This is strikingly small, contrasted with the fact that for Germany the Institut
Konjunkturforschung found, by a procedure that methodologically was not entirely
satisfactory, however, the price level for the most important foods in Saxony to be one
third above that in East Prussia. (" Materialien zur Frage dcr regionalen Preisunter72.

fiir

schiede

und

ihrer

Bedeutung

fiir

die Lebenshaltung," Vierteljahrshefte zur Konjunktur-

forschung, Vol. X, Heft 3B (1935)

also that in the case of the

pp. 185-189.)

Nevertheless

main expenditure category

(food)

it

was true of Germany

and

the price differences,

wide price differences (rent, heat) the expenditures, were not so great
example, Arbeitswissenschaftliches Institut, Jahrbuch, 1937, p. 86)
73. How differently regional variations may be viewed according to income level is
illustrated by a little incident. I asked the American Consul in Vancouver (Canada)

in the case of
(see, for

whether it or the neighboring American city of Seattle seemed more expensive. He

found Seattle cheaper, an opinion that was contradicted by his secretary. He was
thinking of such things as automobiles and gasoline, which cost more in Vancouver
by a good third, as well as of many other nonagricultural products, whereas she
naturally had in mind her principal expenses, food and housing.

Part Four.

4y4

Examples

Occasionally such a method is justified by asserting that with

sufficiently small chronological or geographical intervals the aggregate of needs is hardly changed, and that a useful series of indices
can therefore be obtained by the chain method. But with small
intervals either price differences also are small,
as

much

affected

by

and hence exactly

slight errors in the aggregate of needs; or price

differences are wide, in

which

case changes in this aggregate cannot

be small, except with deflation or

inflation.

The

Arbeitswissenschaftliche Institut (Jahrbuch, 11 (1938), 26 ff.)

ascertained for 9,000 places the prices of goods of a quality usually

found in each (!) added the unweighted figures (!) ^* separately for
and heat, weighted only these three groups among themselves with constant (!) weights, and took the result to be interlocally
comparable indices of living costs. Wrongly, since according to this
method living costs may be greater not only where prices are high,
but also where people live extravagantly because they buy a better
quality of product. At best, only the indices for housing are usable.
In 1938 the International Labor Office compared the retail prices
,

food, light,

19 articles of food in the capitals or principal cities of 25

for

countries and assembled

them

in eighteen groups, for each of

which

the same aggregate of goods was taken as a basis; for example.

Group

III, Germany, Holland, Belgium, and, earlier, Czechoslovakia

Jahrbuch, 1941, pp. 152-153, 162-164) A good feature of the
investigation is that both the Paasche and the Laspeyres indices were
calculated for each pair of countries, since according to what has
been said above it would be a pity to publish only the geometrical
mean. In addition, the comparison was supposed to hold for incommensurable types of people, instead of for the same type in both

(see

As

countries.

of footnote 74

for the restriction to international foods, see the

Finally, there remains to be

74.

The

end

(above)

mentioned the most serious argu-

weights would have to be very different. For example, in 1927-28 families

and with equal incomes consumed: in Brandenburg, 7,820 calories daily;

9,323; in southwest Germany, 11 pounds of fish yearly; in Pomerania, a
little over 114 pounds; in Bavaria, 583 pounds of bread yearly, in Pomerania, 911
pounds, and also 618 and 1,976 pounds of potatoes respectively. (" Unterschiede im
Nahrungsmittqjverbrauch der deutschen Wirtschaftsgebiete," Institut filr Konjunktur-

of equal size
in

Nordmark,

forschung, Wochenhericht, 1937, pp. 162-166.) In 1937 the Schleswig-Holstein household smoked 87 cigars, 350 cigarettes, and b\ pounds of tobacco; the Berlin household,
141, 1,421,
p.

45.)

and

To

1^ respectively.

(Arbeitswissenschaftliches Institut, Jahrbuch, II

limit oneself to the part of

objectively or by subjective substitution

requirement

(in reply to

is

consumption that

is

common

to eliminate precisely the

Keynes, Treatise on Money, 1930,

I,

105

ff.)

to

all

(1939)

places

most variable peak

Price Levels

ment

i)i

against

Space
all

495

objective comparisons of living standards: the aggre-

gate of needs varies not only with changes in relative prices, but also

independently with changes in time and place. ^^ No objectice index

can take account of these variations. Every index is either subjective
or an unrealistic static construction that becomes less reliable the
further one departs from its foundations. Such a construction is
better employed as an index of living standards than of real wages,
and better as a price index than as an index of living standards.''^
But is loss of the measure so unfortunate when the object to be
measured itself evaporates? M^hen the concept of utility is revealed
as but a vague word after all?

75.

People drink more in the South, even though drinking

In the country one raises one's

price becomes irrelevant

own

(Rompe)

is

not cheaper there.

vegetables at small expense, so that the market

As far

as

drinking

concerned,

is

life

is

more

expensive in the South than in the North, even with equal prices, and in the North
cheaper in the country than in the city (see p.492, note 70.)
.

76.

Even though the index of

real wages, too,

is

meaningless, scientifically speaking,

nevertheless in countries that are changing over from a free to a planned

thus experiencing labor troubles,

it

fulfills

entrails of sacrificial animals in antiquity:

it

economy and

a social function similar to that of the

guides decisions on war and peace.

Chapter 27

a.

Price Changes in Space

SPATIAL DIFFERENCES IN THE MOVEMENT

OF COMMODITY PRICES

At the time of their great traditional football game, which is

regarded by high and low as an event of extraordinary importance
and every year attracts from the surrounding country many times
the population of the little place, I found myself in a small American
university town. Prices rose temporarily with the transitory increase
in demand, the cost of a night's stay, of refreshments, of having one's
shoes shined, and so on, suddenly doubling. Although we observe
this sort of thing again and again it has not yet received the attention
necessary. Incorrectly, under the influence of the prevailing theory
of foreign trade and because of a lack of regional statistics, a national
average of price movements passes as an adequate description of
what happens. In a few cases and for a few purposes this may be
justified. But, as the following examples will show, the differences
between economic landscapes within a country and similarities in
the price movements of economically related parts of different countries are generally too impressive to be disregarded. The proof of
such differences and similarities constitutes the concluding part of
our entire system.

Differences Due to Regional Business Cycles

1.

Schaffle

wrote of the business

crisis of

1857:

"With

devastating

end of August] raced unchecked from

the banks of the Ohio
toward the East ... to descend after a
mightly leap across the ocean [at the end of October] upon England
and to overrun the Continent of Europe [Hamburg in the middle
of November] as far as the plains about the Baltic Sea." ^ Business
indices in Iowa, available for even small districts, show clearly how
the great depression gradually advanced between the end of 1929
and the beginning of 1931 from the eastern to the western border
of the state (see Fig. 100)
The progress of business cycles was surprisingly slow, a little over half a mile daily on the average. At the

force the avalanche [at the

.

1.

Gesammelte Aufsdtze,

II,

23-24, 42.

496

Price Changes in Space

497

n
w\t
9

1929 1930 1931

Fig. 100.

Westward movement

of the depression in Iowa, 1929-31.

The

figure gives

whose position, like that of

Chicago, the nearest focus of disturbance, appears on the map. (Assembled by the
author from Iowa State Planning Board, Second Report, 1935, pp. 194 f.) The depression
indices of business activity for ten counties in the state,

period

main

is

indicated by heavy lines.

traffic

In correspondence with the west-east course of the

routes, the depression spread

center of the region, in District

5,

was

most rapidly in

without, as would be theoretically expected.

The economic
by these influences from

this direction.

relatively soon affected

Part Four.

^q8

Examples

end of 1937 consciousness, or even signs, of the business recession

were hardly noticeable in distant parts of the United States; Texas,
it still continued its full course in the East,
near the center of political unrest. Similarly, the last upswing in
South Wales progressed but slowly from the coastal towns up the
long valleys of the depressed area (Economist, October 30, 1937,
In short, business cycles differ geographically in their
pp. 199 f.)
timing and amplitude, and these differences are reflected in price
movements also. Thus during the last great depression prices of the
most important foodstuffs fell from 1927-28 to 1932 by 30 per cent

for instance, whereas

in Essen, at the heart of the most severely affected

Ruhr

district,

but in Stuttgart, the center of the least affected economic landscape,

by only 21 per cent. Conversely, the following upswing affected the
area of heavy industry
prices

upward by

more

and from 1932 to 1935 drove

compared with only 0.7 per cent

strongly,

4.6 per cent as

in Stuttgart."

A comparison of American cities in different economic landscapes

with one another, and with neighboring Canadian cities of similar
First, a nationwide
character, is especially interesting (Table 39)
movement of prices appears in the effects of currency devaluation.
As this was not forced by the foreign exchange situation, it resulted
in a national tendency toward higher prices. Table 40, calculated
from Table 39, compares the price level before and after devaluation,
which in Canada occurred at the end of 1931, and in the United
States at the beginning of 1933. After the Canadian devaluation
prices fell less in Canada than in the United States, and after the
American devaluation they rose more in the United States than in
Canada. The few exceptions are limited to rent, which lags because
at first it is purely locally determined,^ and influenced only indirectly
by a change in foreign demand. As the Canadian devaluation took
place before, and the American devaluation at the turning point,
American prices fell on the whole more than Canadian prices.
The same regional differences appear on both sides of the international boundary. Take rents, for example. As a consequence of
the disturbance in world trade they fell at the beginning of the
World "^iVar I in the seaports, Seattle and Vancouver, whereas they
rose in automobile and other industrial cities. See Table 39 in
connection with the following remarks. After the war, prices reached
.

2.

"

Materialien zur Frage der regionalen Preisunterschiede

und ihrer Bedeutung fiir

XX, Heft 3B (1935)

die Lebenshaltung," Vierteljahrshefte zur Konjunkturforschung,

pp. 188
3.

f.

The

advance.

smaller the market areas for a product, the

more slowly do

price

movement*

Price Changes in Space

499

COMPARISON OF PRICE MOVEMENTS ON

THE AMERICAN-CANADIAN BORDER

Table 39.

Food
Industrial

Seaports

cities

a
o

H
1915
1916
1917
1918
1919
1920
1921

1922
1923
1924
1925
1926
1927
1928
1929

1930
1931

1932

1933
1934
1935

1936

1937

Basis:

102
126

102
125
162
180
188
216
163
139
144
140
147
157
153
147
152
147

102
117
150
167
172
204
159
136
138
135
148
152
147

161

188
193
208
152
152
156
154
172
176
171
165
163
167
169
162
144
126
112
110
103
104
109
117
116
126
129
125
129
125
137
130
130
134
139

U.

>
S
o
o
a

141

153
144
157
145
130
110
106

161

153
141

116
113
96
101
98
105
108
108
109
107
113
118
113
114
117
116
120
120

91

99
94
100
101

102
103
101
108
111

106
108
113
113
112
115
S. A.,

Rents

_J

Automobile

Industrial

cities

cities

"3

a
o

o
-a

Seaports

cities

o
a
c

o
u
c
a

C/3

98
108
137
173
181
195
139
142
143
145
158
152
151
145
146
150
152
150
126
118
112
102
96
100
100
103
110
117
115
113
119
116
121
120
121
130
127

200
151
131

129
129
141
141
140
135
141
142
151
144
124
105
98
89

104
124
156
182
195
211
149
149
144

>
101

116
151

170
181

216
161

121
111

136
132
130
136
147
142
137
144
142
149
138
126
101
95

151

171
172
170
159
159
166

164
157
138

98

81

90

91

91

96
105
115
112
123
126
124
127
124
133
133
128
134
139

84
84
89
90
93
95
93
99

95
97
97
96
99
103
104
99
106
109
109
114
114

December, 1914

= 100.

101

94
99
105
103
104
103

101
105
109
121

128
147
161
165
171

176
179
178
175
173
169
167
166
165
162
156
150
140
129
120
115
113
112
112
112
113
113
114
117
117
118
119
126

100
102
112
119
130
151

165
172
176
176
171
165
165

164
164
165
165
171
171
171

173
173
159
144
144
144
147
147
147
159
159
159
167
167
170
170
173

Canada, 1914-15

Automobile

94
102
122
132
147
166
178
188

98
95
99
144
161

181

176
172
164
163
164
164

174

161

171
171
171

158
155
154
152
152
150
148
144
137
125
115
108
103
100
99
99
100
101
101
102
103
105
107
108
109

191

190

173
173
176
176
177
177
162
156
145
145
150
156
156
163
163
163
163
163
163
172
172
179

84
79
91

126
158
188
201
200
190
191

192
193
192
190
190
189
189
189
189
178
178
152
152
130
126
120
120
120
124
124
124
124
130
130
146
146
152

-a

Q
102
117
133
139
153
188
196
189
202
205
198
195
187
179
178
177
178
173
160
145
131
118
101

89
84
86
93
96
100
109
111
114
116
117
125
127
131

100
104
109
117
128
144
156
154
160
166
169
169
169
162
162
163
163
161
161

158
158
126
105
105
92
98
98
98
105
113
113
113
113
113
117
117
117

= 100.

Bureau of Labor Statistics, Changes in Costs of Liwing, Washington.

Canada, Department of Labour. The Canadian figures, published here for the first
Sources: U.

S. A.,

time, were kindly placed at

The

my

disposal by Mr. C.

W.

Bolton, the director.

1928-1933 apply to June and December; for 1934 to June and

November; for 1935 to March, July, and October; for 1936 to January, April, July,
September, and December; for 1937 to March and June.
figures

for

Part Four.

Examples

Table 40
National Price Increase after Devaluation of the Currency in

Canada

U.

Price level, December, 1932

(June, 1931

U.

S.

Hamilton, Canada
Toronto, Canada

A.

Price level, June, 1934

(December, 1932 = 100)

100)

Rent

Food

Rent

82

83

114

87

90
87

93
90

102
106

91

75

80

108

87

84

86

108

79

81

70

127

85

86

67

107

94

Food
Buffalo,

S.

96

Seattle,

U.

S.

Vancouver, Canada
Detroit,

U.

S.

Windsor, Canada

between the end of 1920 and the middle

and in the automobile and other industrial cities from
the middle of 1923 to the end of 1925. The great depression
reached its trough in the automobile cities toward the end of 1933,
but in the two seaports mentioned, not until the beginning of 1935.
their peaks in the seaports

of 1921,

110

100
1

5^

60

so

JJ

-\

\\

70

s.

of

J.

J.J

^
/
f

y.

\
\

SO

60

*,

'/

V**
U. S. A.
1

'A

192930 37 32 33 3f 35 36

C A N A D A
1

1330 31 32

33 3V 35 36 37

Fig. 101. Comparison of house rents in the United States

and Canada, 1929-37. J: Buffalo or Toronto. H: Seattle or
Vancouver. A: Detroit or Windsor. (Based on Table 39.)

Price Changes in Space

501

Rents dropped in both countries, most in the automobile cities,

which are especially sensitive to business conditions, and later
increased most there; they fell less in the seaports, and least in the
other industrial

cities

(Fig. 101)

The

similarities in the develop-

ments in neighboring cities of different countries, and the differences

between distant cities in the same country, are striking. Besides their
geographical proximity, the parallelism of the developments is
certainly due also to the fact that we are dealing with cities of
similar economic character. But it must not be overlooked here
that this very character itself is decisively formed by their similar
geographic situation.

2-

We

Differential Price Movements Caused by

Regional Changes in Structure
have already discussed the fantastic price increases that

accompany a gold rush

is

suspected.

Its

where the presence of deposits

in regions

opposite can be observed today in chronically

depressed areas, though as a consequence of stupid adherence to

the customary national wage scale unemployment often takes the
place of a fall in prices.^ If the pressure on prices here is caused by
the removal of locations away from the depressed area, in another
case it depends conversely upon the removal of locations to the
area concerned: when the area develops from an importing to an

Thus wheat prices in Idaho during the 1880's,

imported wheat, were above the average for the United
States; but before World War I, when Idaho had already become
a surplus region far from its market, they were below this average.**
An excellent example of regional shifts in price levels is furnished by the price changes in the southern and northern parts of
the United States that accompany alterations in the tariff policy.
The prices of nonagricultural goods and of cotton are taken as
representative of the North and the South respectively. The proportion of tariff receipts to dutiable imports is an adequate yardstick
exporting region.

when

it still

During the protectionism that prevailed until 1830

proportion rose. Then, under the attacks of the South, the
tariff was lowered, with a negligible interruption in the 1840's,
until the lowest rates since 1816 were reached, just before the Civil

of tariff policy.
this

4.

For Great Britain see

J.

Uhlig, " Die Notstandsgebiete Grossbritanniens," Wirt-

schaftskurve, 1938, p. 75.

5.

See Zapoleon's diagram. Geography of

culture Bulletin, No. 594

Wheat

(Washington, 1918)

Prices, U.

p. 25.

S.

Department

of Agri-

Pari hOiir.

5oa

Exam^iles

Curve h (Fig. 102) sinks accordingly from 1830 to 1861.

the latter date onward, duties began to rise again, with a few
unimportant reversals after 1872 and 1894, until the opening of

War.

From

the century.

1820

The

greatest increases took place during the Civil

30

The ratio of price levels in the North and South in the United States and
dependence upon tariff policy, 1820-1935. a) Level of American industrial prices
(L. Myers and M. R. Cooper, Cotton Statistics and Related Data [Washington, Department of Agriculture, 1932], pp. 3-5) relative to the price of middling upland cotton
in New York (pp. 7-9. The 1861 ratio is set at 100. b) Customs receipts as percentages
of dutiable imports. (Statistical Abstract of the United States, 1891, pp. 15 ff.; 1936,
Fig. 102.

its

p. 436)

War years, partly because tariff revenues had decreased in consequence of the preceding depression, and partly because Government
expenditures had increased enormously. This period, too, is well
characterized by curve b. The fall between 1900 and 1920 was
caused, in addition to the relaxing of the protective tariff particularly in 1913,

by the
6.

The

try tariffs

by special conditions associated with World

War

many

rates

fact that after the tariff increases of

1897

and
were

energy of the protectionists was weakened because most of the infant indusfulfilled their purpose in the meantime. (See F. W. Taussig, The Tariff

had

History of the United States

[New York,

1922].)

5"3

Price Changes in Space

prohibitive and thus for lack of imports are no longer expressed in

the curve. After World War I duties were raised again in a new
wave of protectionism, especially in 1922 and 1930. Little as the

smaller fluctuations in curve b need depend

tariff, the curve obviously reflects well the

tendencies of the

upon changes in the

main developmental

tariff policy.

Comparison of curves a and b shows on the whole a remarkably

close parallel movement, particularly for the larger tendencies. After
a short lag, the price ratio changed in favor of the South, which
depended on exports, when the tariffs that protected the North were
lowered, and grew worse when they were raised. The Civil War marks
one of the most pronounced turning points. In the period preceding
its outbreak a closer and closer approach to free trade raised prices
in the South as compared with the North. The free-trade southern
states fought on this point also for real economic interests, and from
this side, too, their defeat meant at first a real economic disadvantage.
In time, of course, these wounds began to heal at the expense of
the victor. The cheaper conditions in the South, due in part though
policy, attracted northern
northerners were intent only on
protecting their industry from foreign competitors,^ and when they
succeeded in this after a bitter struggle and at the expense of the
South, the South lured away a large part of their laboriously pro-

not entirely to the protectionist

industry.

What

irony of fate!

tariff

The

tected industry!

New England was intent only on erecting a high

without realizing that behind such a wall violent changes
in location would necessarily take place to its disadvantage. Regions
threatened by imports are not merely protected by a tariff; they are
The

industry of

tariff wall,

also

made more

expensive, and therefore

less

favorable locations

than those parts of the country that depend on exports and have to
make up for their lessened chances of exporting, brought about
through the tariff, by lowering prices. Thus before the Civil War
the cotton industry of the South "was insignificant absolutely, and
declining in addition. After the war and up to the turn of the
century, that is until the protective tariff reached its then highest
point, cotton spinning and weaving mills moved from the North
to the cheaper South at a constantly increasing rate.* From 1850 to
7.

However, the Northeast

is

protected against the rest of the United States by

But this artificial proby freight rates was less than the tariff protection.
8. In 1859 the average wage of the industrial worker in the South was only 12 per
cent under the wages in the North, but in 1869 it was 45 per cent below these. (C. Hecr,
freight rates that favor

tection

it,

particularly as against the South.

Examples

P^^i Four.

C04

1860 the share of the states south of Virginia in the total production
of cotton goods had further decreased by 53 per cent; in the decade
1860-1870 it rose by 15 per cent, in the decade 1870-1880 by 36 per
cent, in 1880-1890 by 70 per cent, and in 1890-1900 by nearly 100
per cent. In the following period, up to 1920, the price level in the
South rose in comparison with the North, as we have already seen;
and wages especially increased more in the South than in the North;
the rate of growth of the southern cotton industry fell correspondingly to 35 per cent between 1900 and 1910 and to 34 per cent
from 1910 to 1920. After World War I there were fresh orgies of
the South became cheaper, and
tariff protection (1922 and 1930)
the rate of growth jumped back again to 41 per cent between 1920
,

and 1930.
This interpretation is strengthened by the development of wages
and cost of living. If the 1901 level is set at 100, the wages of cotton
workers in 1920-21 ^ at 335, were higher than those of industrial
workers, at 315." From 1922 onward they dropped below these
until, in 1932-33, the levels were 106 and 245 respectively. Thereafter they rose again more sharply (up to 1934-35 by 18 per cent
At the end of 1920 living costs in
as compared with 13 per cent)
five cities of the Northeast whose records go back furthest (Boston,
Portland, Buffalo, New York, Philadelphia) were 95 per cent above
the level of December, 1914, and in five southern cities (Jacksonville,
Norfolk, Sanvannah, Mobile, Houston) 98 per cent. Conversely, in
.

the period of rising tariffs (1920-1932) living costs in the Northeast

fell by only 30 per cent, and in the South by 37 per cent. From the

middle of 1933 to the end of 1936 duties fell again, and living costs
in the South went up by 11.7 per cent and in the Northeast by only
9.1

per cent."

Incomes and Wages in the South [Chapel Hill, 1930], p. 25.)

strictly comparable labor, to be sure, and particularly is it

The

difference

less for skilled

is less

for

labor than

for unskilled.
9.

L.

Myers and M. R. Cooper, Cotton

of Agriculture, Washington, 1932)

10.

U.

11.

Calculated from U.

S.

Statistics

and Related Data

(U.

S.

Department

p. 95.

Statistical Abstract, 1936, p. 312.

(Washington)

S.

Bureau

of

Labor

After what has been said

it

is

Statistics,

Changes

in Costs of

Living

not surprising that regionalism, which

everywhere, even in England and especially in France, should be so strong in the

American South, with its vivid memories, its great poverty, and its wide possibilities.
Hardly anywhere else does one encounter a more lively interest in regional investigation. Among the many scholars we can mention only H. W. Odum {Southern Regions
of the United States [Chapel Hill, 1936]) and R. B. Vance (Human Geography of the
South [Chapel Hill, 1935])
P. Molyneaux {What Economic Nationalism Means to the
South, World Affairs Pamphlet, No. 4 [Boston, 1934]) has worked out the effects of
arises

Price Changes in Space

SPATIAL DIFFERENCES IN THE MOVEMENT

OF INTEREST

b.

On

505

bank credits (cusYork was 6.08 per cent; in eight other cities
of the Northeast, 6.25 per cent; and in twenty-seven western or
southern cities, 6.29 per cent. From November, 1927, up to the
date mentioned it rose by 1.73, 1.43, and 0.73 per cent, and then
fell until the end of September, 1931, by 2.15, 1.77, and 0.97 per
cent. These figures are typical. Tlie cyclical fluctuations are regularly greatest in New York, the chief financial center, and least in
October

tomers' rate) in

1929, the average rate for

30,

New

regions that are poor in capital.

The

result, as

can be seen above,

that geographic differences in interest are least at the

is

boom and
roborates

greatest during the downswing.^^

The

end

of a

following table cor-

this.

The

yearly averages of interest rates for

bank

credits

1:

5.88

5.19

5.15

4.69

4.67

4.60

4.53

4.49

4.47

4.22

4.02

3.33

2.70

2:

0.26

0.75

0.55

1.03

0.94

1.11

1.07

1.13

1.11

1.17

1.54

1.84

1.99

in
to

New

York from 1923

Row

magnitude.

row

to 1935 are arranged in

shows by

below those of twenty-seven

how much

according

these rates were absolutely

centers in the South and

financial

West.i3

The
on

more member banks have to rely

and the more the Reserve Banks have to
on the Federal Reserve Bank of New York, the more uniform
explanation

is

simple: the

their Reserve Banks,

rely

be the rates; the tighter the reserve position of banks throughout the rest of the country becomes, the more reserves and surplus
liquid funds must they withdraw from New York. In times of
plentiful money New York absorbs these excess liquid funds from
will

the

tariff

policy rather well in popular form.

of attributing

all

the poverty of the South to

condition, of which the tariff policy

is

But
this.

do not wish

The most

to give the impression

potent single cause of

only a part, appears to

War, which destroyed both

me

rather to be

its
its

abundance and its self-confidence.

12. Similarly, with constant freight rates, fluctuations in commodity prices are
greatest percentagewise at the center of production, and decrease toward the edge of
the market area. (Where competition prevails or the demand is very elastic producers'

defeat in the Civil

its

prices, contrary to the ruling opinion, are especially flexible precisely because of

fixed costs, since

costs.)

if

high

necessary they can fall as low as the relatively insignificant variable

In Tsarist Russia the wages of agricultural laborers seasonally fluctuated most

inward migratons thus again in central markets. (G. Pavlovsky, " Zur
Frage der raumlichen Ordnung der Landwirtschaft," Internationale Landwirtschaftliche Rundschau, Vol. I, No. 33 [1942], p. 357.)
in regions of

13.

Annual Report

of the Federal Reserve

Board (Washington, various

years).

Examples

Part Four.

f-oQ

everywhere (which depresses its interest rate to an especially low

but helps out everywhere when money is scarce (hence the
level)
The higher
more than average increase of its interest rate)
the costs
important
less
the
whole,
the interest rate structure as a
that the
observation
the
of distance become. This explains also
less
loans
local
on
small country banks change their interest rate
,

frequently.

The same thing is true of the discount rate of the Reserve Banks.
In July, 1928, for example, when the most frequent rate was 5 per
cent, the regional spread amounted to but 0.5 per cent. By May,
1931, the most frequent rate had fallen to 3 per cent, and at the
same time the regional spread had gradually risen to 2 per cent.
Nevertheless, and especially after what we have said about the slight
connection between American discount rates and market rates, it is
pertinent to ask whether they really play the same role as the discount rates of European central banks, say, in facilitating transfers.
To anticipate: Despite the similarity in technical function between the Federal Reserve Banks and the European central banks,
disturbances in the balances of payements between Federal Reserve
districts in the United States are more easily overcome than corresponding disturbances between the countries of Europe. The causes
lie partly in the political unity of the United States, and partly in
its special history. Its enormous gold holdings, which it owes to its
position as creditor nation, to
of gold sterilization (and thus,

minimize the

its

protective

among

effect of international

tariff,

and

to

its

policy

other things, to the desire to

payments on American

prices)

permits internal payment also to be made without any great shifts

in relative price levels. The gold reserves of the Reserve Banks far

exceed the

lesj-al

minimum,

so that transfer of srold

between them

generally possible without reaction on the circulation of notes or

on the credit structure. Furthermore, the legal gold reserve in itself
is

we have seen, mitigates price movements

expense of gold movements, even with full utilization
of the gold reserve. But even if the point is reached where a Reserve
Bank has lost so much gold to foreign countries or to other parts of
the United States " that a European Central Bank would be forced
is

already high, which, as

at first at the

14.

Fund

Generally no gold

is

actually shipped; deposits in the Interdistrict Settlement

are merely transferred. International gold shipments, too, could be

made

unneces-

same way and, finally, expensive hoards of monetary gold could be abolished
and replaced by credits in an international clearing house, such as London was before
World War I. (A. Losch, " Verrechnung und Goldwiihrung ein Vergleich," Die
Bank, August 21, 1940.) The gold points would thereupon coincide and there would
be practically no further scope for fluctuations in the rate of exchange, just as today
the price for payments between any given place in the United States is the same.

sary in the

Price Changes in Space

507

under similar circumstances, the Federal

this.
For it can easily force credit
partly by disposing of government securities

to raise the discount rate

Reserve Bank can

movements
(that

is,

in

its

still

favor,

so to speak,

avoid

" foreign assets ")

in the districts of other

Reserve Banks, and partly by rediscounting bills of exchange with

other Reserve Banks and thus, as it were, forcing credits in its favor.^'
Only when even this does not suffice must it fall back upon a change
in the discount rate as a last resort. On the whole, however, discount
policy in the United States is intended more to influence business
conditions than to facilitate transfer, but without, even in this respect, playing the same role as in Europe. It is less the construction
of the currency than actual conditions that create these differences.
One road is closed to the Reserve Banks, however, when they
have to make interregional payments, and it is important to note
this. They cannot pay with their own notes beyond the bounds of
their own districts. If this were allowed, an ambitious Reserve Bank
could buy gold with its notes from other Reserve Banks, issue new
notes on the basis of it, repeat the maneuver, and finally acquire
all the monetary gold in the country and supplant the notes of all
the other Reserve Banks by its own; in short, set itself up as the

dominant bank of

therefore one of the most important

Reserve Banks are obliged to return all
notes received from other banks to the bank of issue. As it appears
to be of a purely technical nature this regulation has received but
slight attention in the literature, yet it is the foundation for the
independence of the individual Reserve Banks, and the reason why
Reserve districts constitute transfer communities between which,
as between countries, net balances can be paid with gold alone.
Only because of special circumstances are these transfer communities
less frequently forced into a rapid completion of transfers through
issue.

It is

legal requirements,^^ that

district-wide price

15.

movements.

In 1920-21 the Reserve Banks in agricultural regions borrowed more heavily

than usual from those in industrial areas.

16.

Section 16 of the Federal Reserve Act of

December

23, 1913.

5o8

Part Four.

Epilogue.^

On

Examples

Space

If everything occurred at the same time there would be no

development. If everything existed in the same place there could
be no particularity. Only space makes possible the particular, which
then unfolds in time. Only because we are not equally near to
everything; only because everything does not rush in upon us at
once; only because our world is restricted, for every individual, for
his people, and for mankind as a whole, can we, in our finiteness,
endure at all. The extent of this horizon differs, of course, from man

to man. But in economic affairs, as in all other affairs, our ken is

limited for acting intelligently and for finding our way through the
complexities of life. And even within this little world, we are

familiar with not more than its innermost circle. Depth must be
bought with narrowness. Space creates and protects us in this limitation. Particularity is the price of our existence.
To let this space-conditioned particularity grow without letting
the whole run wild that is political art. For me one of the happiest
results of my study is to be able to show for the spatial organization
of the economy that the free initiative of normal men produces
results that in general are wholly desirable, politically as well as
economically, provided only that man can build on rational conditions. Because the powerful forces of spontaneity, if rightly guided,
are an ally to national economic policy, this is saved the superhuman
task of planning everything down to the very last detail. The mighty

elements of spatial discipline tend toward preserving geographical

and cultural roots in spite of freedom.
For our science, finally, the question how the economy fits into
space not only opens a new field but leads in the final analysis to a
new formulation of the entire theory of economics. Even static theory
enters upon a late flowering. For, as is not the case with distance in
time, the static picture itself changes with distance in space. Life
development in time but of spatial diversity as
well. Space stimulates the creative forces. And I see in my mind's
eye an economic science that, more like architecture than like
the
history of architecture, creates rather than describes!
consists not only of

1.

He who

wishes to recapitulate a system can do no more, after

it is based.

once again the thoughts upon which

all,

than

set

down

Subject Index
1

.:

Table

n.:

footnote

Aarhus, 269n.

Barcelona, 493

Abercrombie-Forshaw plan, 440n.

Basel, 449

"

Agglomerations,
343n.;

areal,

6,

10,

lOff.,

90;

15,

149n.,

chance,

similar enterprises, 75-77,

77;

164,

Bavaria, 456, 456n.

dis-

Belgian Congo, 420

and economic

stability, 76; of pure consumers, 78, 90;

and freight rates, 172, 175; production
cost, 261; punctiform, 10; effect of price

discrimination on,

164fE.; restricted, 79ff.;

Belgium, 258, 430T., 484, 494

Belts, 12, 372; formation of, 15,

wheat

belt, 386,

425

Bend, Oregon, 413

424n., 430, 436, 438n., 441, 473n.

Agricultural substructure, 374; unevenness

Bermuda, 481

of, 380f.

See Occupational indices

Alaska, 356n., 407n., 422, 423T.

Besatzziffern.

Albania, 430T.

Birkenfeld, 381, 382

Albany, N.Y., 354

Bischofswerder, 446, 450

Alberta, 385, 425

Black Forest, 383

Algeria, 430n.

Black

Alsace, 383, 449

Bohemia, 258, 456

Texas

494

Argentina, corn exports, 416; wheat ex-

s. a.,

392

Boston, 81, 386, 407, 460, 461, 504

Boundaries,

German-Polish,

13, 384;

Canadian-American,

421, 422, 423T., 424

384f.,

Arkansas, 374n.

man-Swiss, 382f.; overlap,

Athens, 441n.

ments

Atlanta, 407, 408, 461

economic, 103, 192, 196,

445;

wheat exports, 422, 423T.

450f.;

446f.;
13,

Ger-

168; pay-

across, 275f., 282n.; political

prices

at,

market

between

251;

and

199f., 292, 384,

areas, 117, 166, 252; Swiss-French, 445f.;

Austria, 430T.

twin

Autarky, 323f.

cities at, 447;

Boundary region,

Autobahnen, 183n.

width

136f.,

Bahia, Brazil, 421n.

of, 207f.

181, 448;

in, 143n., 181, 387, 424;

Bradford, England, 218n.

migration and, 307

Branch enterprises, 383, 384f.

Brandenburg, province of, 370n.

Balkan countries, 416n., 420n.; see also

of individual countries

Brazil, 421, 423T.,

424

Baltimore, 81, 440n.

Breslau, 216n.

Bank
Bank

clearing, 126

British East Africa, 171n.

for International Settlements, 281n.

British

509

Honduras, 423T.

demand

competition

153n.

Balance of payments, 97n., 98n., 233, 298;

names

b.

Border wasteland, 205

Appalachians, 35n.
Arbeitswissenschaftliches Institut,

soil areas, 258;

Bolivia, 423T.

Antwerp, gateway, 251

Australia,

179,

85ff.,

182, 380; of industrial population, 258;

Berhn, Germany, 129n., 216n., 370n., 402,

of similar enterprises, 68-72

ports,

157f., 164, 165

Basing point system, 31,

administrative principle," 132n.

in,

The Economics

of Location

Colonies, 424n.; value of, 335f.; saving of

British India, 423T.

foreign exchange, 335n.

British

West

Africa, 423T.

British

West

Indies, 422, 423T.

Colonization, 330

Budapest, 187n.

Colorado, 481

Buffalo, N. Y., 407, 427, 473, 499T., 500T.,

Combination problem, 305-314; compared

504
Bulgaria, 429, 430T., 477n.

Burlington, Iowa, 410

and

322f.;

wars, 209;
capitals,

transfer
to

large

transfer through

applicable

economic

areas,

339;

spatial
tries

232-236;

wheat

market,

421T.,

Dominion Bureau of Statistics,

Dominion Tariff Board, xiv

xiv, 480;

Cost of banking, 469f.

Cost of living, regional differences:

Cannstadt, 354

470;

321,

(exports,

formation

Eastern

in

and

States, 469f., 472

Cardiff, 416n.

Germany,

US,

international,

493n., 494, 494n.

goods industry, 378,

449, 503f.; imports of Europe, 424n.
Cowles Commission, xiv
11, 366;

Currencies, effect of different construction

126,

134,

on
216n.,

342,

350,

354, 354n.

transfer,

276f.;

with different gold

cover, 279f.; paper, 280f.

Customs unions,

" Central stratum," 433n.

340f.; possible

American-

Canadian, 385f.

Chemnitz, 444
11,

494;

Cotton, gins,

504;

Cuba, 423T., 481

" Centrahty," 433n., 437n.

Chicago,

492f.,

493,

Cross hauling, 157, 165

Cedar County, Iowa, 418T.

Cement, 367n.

sites,

490ff.,

Credit creation, 276f., 469, 475

Carpathians, 258

Central

295.

imports,

209, 265, 278, 284, 289f., 301, 305,

Western United

4I6f., 424n.

Costa Rica, 423T.

Canberra, 442, 443

movements

coun-

Comptroller of the Currency, 469n., 470n.

Copper, 424n.
Cornell University, 417

occupation,

many

or persons, 230-232; and emigration

Corn market,

flow)

of

applied to

423T.; price and wage differences, 460ff.;

Capital

impedi-

327f.

of factors, 310

California, 334n., 406, 412, 416, 458, 481

355n.;

choice

to

and formation

275;

transmission of, 496f.

Canada,

312;

Communication, lines of, 22, 32n.

Communication principle," 131n.
Comparative cost, 229ff., 250f., 259n.;
229f.,

of

problem,

new combinations,

"

Business cycles, 76, 120n., 293f., 298, 318,

economic

with

ments

Czechoslovakia, 430T., 494

82,

166n.,

354,

37 In.,

378,

Dakotas,

379, 385, 390, 407, 412, 416, 419, 435T.n.,

374n.

Dallas, 461, 464

439n., 461, 481n., 497

Danzig, 451
Chile, 423T., 454n.

Davenport, Iowa, 435T.n., 438n.

China, 423T., 490

Denmark, 423T., 430T., 477n.

Cincinnati, 371n., 486

Denver, 407, 408, 414

Depressed areas, 200, 250, 326, 380, 449,

Clearing, 339, 469

Cleveland, 459, 461

Coal,

11,

424n.,

379,

477;

380,

501
380n.,

attraction

of,

386n.,
83,

403n.,

90,

258,

367n., 374, 438; freight on, 170; Illinois,

11;

location of individual mine, 35n.

Coefficient of localization, 369T.

Colombia, 423T.
Colonial policy, 193n.

Depression, 283n., 318, 332, 333n., 400n.,

500n.;

westward movement

of,

496ff.

Detroit, 37ln., 385, 388, 412T., 447, 492,

493, 499T., 500T.

Discount

rate, 277, 278, 286, 290, 293, 299,

300, 318, 319, 320n., 461, 474f., 506, 507

Distance,

importance

underestimated,

Subject Index

bank

of

401n.;

396f.,

from

locations

District,

rates, 97n., 231T., 233; fluctuat-

Exchange

182, 372

12,

Exchange

ing, 281, 284n., 299n., 318, 506n.

Chicago, 412
Division of labor, 223f., 264, 265

stabilization fund, 284n., 318

importance of

Expenditures,

Donets area, 258

Dresden, 455

Export industries,

Duluth, 257n.

Extra-economic

Dumping,

157f., 163n.,

234

375,

325,

136, 204,

metropolitan, 412f.; affecting

price waves, 275, 496; in reality, 216f.;

each

toward

and

square, 134;

states,

other,

135f.;

196-210

Economic provinces, 13, 216

Economic regions, overlapping

8,

of,

168f.,

in

with

theory

434f.;

of,

lOlff.

vs.

movement of goods, 307, and shift

demand, 307; movements of factors
and goods compared, 310, 329; redistrifor

Deposit

Insurance

Corporation,

464, 465n.

Federal Reserve Banks, 277n., 281n.,

448, 461, 469, 473, 474f., 505f.;
to

European

415f.,

compared

central banks, 506f.; inter-

differentials,

461f.;

of Kansas City,

Louis, xiv, 416, of Minne-

Finland, 423T., 430T.

and distance, 146, 149; of inand agricultural demand, 141n.;

differences

regional,

143f.;

and

size

300;

volume of

of

Florida, 408, 481, 482

Ford Inquiry, 492n.

local

Foreign trade, 327; proportion of Europe's

of region,

overseas trade, 338; as function of dis-

141f.;

in,

and

146n., 180n.; monopolists and, 322;

tariffs,

difficul;,

substitute

apolis, xiv, 416, 462.

Egypt, 423T.

geographic

316,

328f.,

of,

of

416, of St.

Efficiency wage, 231T.n., 309, 455

dustrial

international mi-

305f.,

prevention

309f.,

est

Ecuador, 423T.

Elasticity:

251,

of,

bution of factors, 305-314

reality, 215-220, 431f.; size of, 109;

equal structure, 431,

gration

Federal

191, 205n., 401, 410, 420f., 424;

173,

premiums, 301n.

252f.;

factors, 27n., 32n., 33, 34,

Factors of production:

Economic landscape, 127, 130,

436, 496, 498; empty comers,

relation

269,

35, 302f.

East Prussia, 373T., 456, 493n.

205, 448;

local,

308n.. 369n., 370n., 469

traffic

with

respect to freight rate, 171

tance, 428ff.

Fort Churchill, Canada, 426, 427

France,

258,

283n.,

403n.,

429n.,

430T.,

Electrification, 379

484, 504; devaluation of 1936, 321; loca-

El Paso, 448, 462, 463

tion

Employment, fluctuations in level of, 265;

full employment policy, 322f.; through

of

control of foreign trade, 323

England,

424n.,

339n.,

337,

473, 484, 504;

430T.,

444,

corner market, 425; de-

towns, 389f., 394, 436, 438; market areas,

sources

of

wheat

imports

of,

423T.
location

of,

244-245,

248;

and

loca-

ability, 191f., 403, 406; profits

tion,

Free entry,

330

Comparative
toms unions

Freight
396n.;
72ff.,

83n.;

293f.;

goods,

Cus-

334,

and agglomeration,

affecting price spreads, 267

rates,

170-178,

graduated,

210, 503n.; ocean, 425f.;

171-

discriminatory

US, 258, 486, 503n.; on Mississippi

French Africa, 423T., 424n.

Exchange, control, 320, 321, 339, 449

depreciation, 294

different

lowest, 260;

River, 416

Estonia, 430T.

depreciation,

for

cost,

cost. Tariffs,

173; level of, 174f.; as protective device,

in

Erie Canal, 427

Exchange

source

260

8,

see also

Freight

Entrepreneur,

367n.;

Free trade, 328, 339, 341 n. and passim;

valuation of 1931, 321; distribution of

403n.;

of sugar refineries,

wheat imports, 423T.

Freystadt, 446

American
Cialveston, 425

The Economics

Industrial areas, 275n.; of US, 257, 375n.;

Gary, Ind., 379

Gateways,

ISSn.,

187n.,

187,

189n.,

191,

Geneva, border zone

Institut

258, 259, 373, 379, 386n., 396,

400,

416,

422,

426n.,

number

430T.n., 477n., 494;

towns, 393; distribution of

428,

427,

of medieval
cities,

43 If.,

flows, 277f., 279, 280, 282f., 318f.

Gold
problem

Gold

484

et Sociales,

Insurance companies, 402; different from

other businesses, 402n.
Interest,

and

movements,

capital

305f.;

Interest differentials, 461 ff.; of commercial

Gibraltar, 423T.

standard,

Recherches Eco-

Scientifique de

nomiques

trade, 337f.

16ff.

interlocal equalization of, 306

436; supply of wheat, 423T.

Gold

and foreign

Industrial location theory,

of, 445f.

Georg-Weierbach, 381

397,

of Europe, 257; English, 258

Industrialization

251, 447

Germany,

of Location

318f.;

see

also

Transfer

banks, 463f.; of corporation bonds, 467;

of Federal Reserve Banks, 46 If., 474f.,
505f.;

sterilization, 285n., 290, 316, 319,

506

for,

Gossen's law, 491

within Texas,

464f.; of state

municipal bonds in US,

movement

468f.;

in

466f.;

and

reasons

space, 505f.

Intervention, into combination of factors,

Great Lakes, 258, 378, 427

Greece, 423T., 429, 430T.

324f.;

compulsory,

334f.;

into

transfer

process, 316f.

Ground

rent, 247f.,

259n.
Inheritance, division of land through, 65n.

Guatemala, 423T.
Institut fiir Weltwirtschaft, xiv

Guelph, Ontario, 387

Hausern,

Maschinengenossenschaft,

International
400,

criticized,

402n.

trade:

and

interpersonal

trade compared, 231-232; classical theory

classical

312f.;

theory

and

location theory, 103f., 104n.

Haiti, 423T.

Hamilton, Ontario, 499T., SOOT.

Iowa, 257, 365, 366, 389, 409f., 417, 418;

distribution

Heidenheim, 455n.

business

Heilbronn, 454

of towns, 389ff., 434ff.; land values 454;

cycles

in,

496f.;

Hennigsdorf, 379

market areas, 41 7f.

Iowa State Planning Board, 417

Helena, Mont., 463

Hides, 424n.

Ireland, 423T., 430T.

Hohenstauffen, 342n.

Isochrons, 443

Holland. See Netherlands

Isodapanes, 19, 20, 25, 28

Hong Kong,

Isostants

420n.

= lines

of

minimum

transport

cost, 28n.

Houston, Texas, 415, 465, 504

Hungary, 393n., 430T.

Isotims, 25n., 28n., 481, 482n., 486, 489

Huygen's principle, 275n.

Isovectures, 19, 20
Italy, 258n., 423T.,

430T.

Iceland, 430T.

Idaho, 425, 479, 501

371n.;

Illinois,

distribution of towns, 392

Import premiiyiis,

man)

Jacksonville, 504

Jamaica, 423T.

" Ideal index," 491

301n.; certificates (Ger-

426n.

Japan, 423T.
Joint production in agriculture, 60

Jones Report on Nova Scotia's Economic

Welfare, 386n.

India, 420n.

Indiana, 366, 37 In.; distribution of towns,

392
Indianapolis, 125, 371n., 438, 439
Indifference curves, 225

Indo-China, 430n.

Kamenz, 403n.
Kansas, 414n., 425, 458, 479

Kansas City, 399, 413, 414, 415T., 435T.n.,

479
Karlsruhe, 441, 449

Subject Index

513

Marginal workers, 239

Marienwerder, 450

Kentucky, 371n.

Land grabbing,

348

Large economic areas (Grossraum)

339f.

Laspeyre's index, 490, 491, 494

names

See

Latin America.

tion of, 401; circular, 417; corner, 204,

of individual

countries

with equal structure,

481;

Germany,

in

Latvia, 430T.

"Law

Marion, Iowa, 418T.

Market areas, 9, 105ff., 395 f.; consolida-

of retail gra\ itation," 411

sizes

and

110,

182, 248;

Lithuania, 430T.

in

US,

395ff.,

Littoria, 442

420fr.;

Locations
banks,
36.5f.,

fairs,

315ff., 346f.

(actual)
365f.,

370;

distribution,

distribution,

37 In.;

consumer,

to

close

367, 403n.;

366,

regular

even

4l7ff.;

371;

of

of farms, 374ff.;

irregular

365f.;

8,

agricultural,

36ff.;

and joint production, 60fE.;

agricultural and industrial compared,
agriculture

interdependence of

256;

all

loca-

tions, 8, 28, 92fF., 255, 259, 261n., 263,

343;

influence

nature,

of

33n.,

256f.;

lack of coincidence of best location for

producers and consumers,

of gravity,

98f.; at

of ports,

121f.;

188;

center
sticki-

ness of location system, 81, 217n., 352n.

effects of political

boimdaries on, 203f.

shift of location to

historic

forces,

adjoining state, 206

256,

changes in pattern,

386,

shipping distance, 108

Mecklenburg,

state of, 393n.

Memphis, Tenn., 415T.

Michigan. 371n., 439

63f.,

wheat,

259

Maximum

Mexico, 423T., 477n.

420r.;

Maximization of number of competitors,

of shoes, 377n.; soap, 371n.

(theory)

for

oil,

of, 124ff.

distribution, 376f.; of production, 365fE.;

Locations

tung

Massachusetts, 378, 460

automobile,

377;

for

wholesale, 404ff.; retail, 396f., 419;

system

Location policy,

shape

355n., 417;

133f.,

of,

Liverpool, 426

of,

locations, 116f.; restriction of,

square,

211ft.;

Leipzig, 82

130f.;

128,

networks

408f.;

possible vs. actual, 120; possible

109ff.;

Leeds, 218n.

401,

259,

330,

352n.

305f., 325; in reality

Middle West.

See

Minneapolis-St.

Paul,

218n.,

385,

403n.,

Minnesota, 439n.
Mississippi, 374, 416

Missouri, 369, 375; distribution of towns,

392
Mittelgebirge, 258

Mobile, Ala., 504

Mobility of labor and goods compared,
243n.

Montreal, 257, 386, 426n., 427

Mortgage

credit, 402n.

Motorization, effects

siderations, 344

Mountain

London, England, 129n., 259,

London, Ontario, 387

individual

of

435T.n.

329; ecentric location, 414; military con

Location triangle, 18

names

states

States,

of,

183n.

412

Multiplier, 308, 308n.

416n., 440n.

Munich,

129n., 216n., 436, 438n.

Muscatine, Iowa, 417, 418, 419T.

Lorraine, 21, 379

Los Angeles, 407, 408, 439n.

Nationalization, 332n.

Louisville, Ky., 409

Nebraska, 425, 479

Luxemburg, 430T.

Netherlands, 423T., 429n., 430T., 484, 494

Madison, Iowa, 410

New
New

Maggi, 384

Manitoba, 386

Marginal product of land, 306; of labor,

226, 238n.

England, 369, 458, 503

Orleans, 294,

415,

416,

416n.,

425,

427n.

New

York, 354, 407, 412, 414, 416, 416n.,

427, 447, 461, 462, 481n., 504, 505; gate-

way, 251; harbor,

81, 82,

330

The Economics

514

New

Poland, 258. 430T.

Zealand, 423T.

Niagara

Falls,

Polish Corridor, 450f.

Ontario, 387

Population, interlocal distribution

Nicaragua, 423T.

Nordhorn, 453

between

bution

North Carolina, 375

North Dakota, 479n.
Norway, 423T., 430T.

diflBculty of

Nova

Scotia, 386

260,

NRA,

460, 460n.

and market networks, 109f..

and possible market areas,
advantages and disadvantages of

403;

115f.;

location

236-240;

Ohio, 371n., 378;

(Besatzziffern)

distribution

408

of towns,

392

179;

311,

209;

375;

irregular

density

180n.,

of.

485n.

382, 403, 474,

cycles, viii,

of a declining population,

effects

viii

Ontario, 385, 447

Open market

US.

176n.;

Population cycles and business

Omaha, 435T.n.

Portland, Maine, 504

operations, 475n., 507

Portland, Oregon, 425

Oranges, price of as function of distance,

481f.

Port Said, 416n.

Ports. 217, 344, 367, 424; location of, 188;

Orient, 407n.

simplify price pattern, 189f., 427

Orientation, 17, 33n., 34, 377; cost orientation,

17,

261;

23,

cost, 18, 35, 261;

minimum

by gross receipts,

27ff.;

transport

mechanical model,

20, 21; one-sided, 17, 30, 35;

26ft.;

and specially favored

and raw materials, 35n.

23;

by

18,

profits,

technical,

locations, 32f.;

Potato market, 479f.

Prague, 129n.
Prices

US

(actual)

Prices

Pareto distribution applied to towns, 433,

426,

449,

shifts

products,

of

501f.;

in,

in cost of living, 490ff.;

spatial

US and

in time, 486f.; after

(theoretical discussion of)

129n.;

in-

and Economic Planning)

369T., 473n.

333;

180n.,

of

188,

land,

189n., 251, 265. 272.

253f.;

lowest

tions.

265f..

price

282;

waves.

267ff.;

16,

neutralization of price waves, 274, 279,

286; interspatial price

with credit

Petroleum, 424n.

prices

Philadelphia. 458, 458n., 461, 504

296

in

creation.

the large

movements.

and

in

Price maps. 329, 478. 480, 488

Pianos. 416

Price policy, geographical. 139f.;

petition. 160-164;

uniform

270f.;

changes of

277;

Philippine Islands, 423T.

Pittsburgh. 11, 164n.. 166n.. 407, 490

delivered

333n.. 453ff.. 462ff.. 477n.; price fluctua-

Pennsylvania, 378

Peru, 423T.

spatial

price, 261; price gradients, 263ff., 273n.,

ternal customs duties, 210

Location of Industry,

at

price differences, 24n. 126f., 139ff., 168n.,

176n..

434f.

Report on

295.

Canadian devaluations, 498, 500T.,

US-Canadian Border, 499

Paraguay, 423T.

(Political

domestic goods, 294;

452ff.; retail price differences, 387. 484f.;

movement

Canal, 186. 416, 426

central location of, 82,

US

regional differences

476ff.;

Palmanova, 441n.
Panama, 423T.

Panama

Portugal, 423T., 430T.

regional

Paasche's index, 491, 494

PEP

distribution,
257n., 258n.,

in,

in

and passim.

Oklahoma, 425

Paris,

increase

of

optimum

115n.;

agriculture

of

350;

effect

women's, 237n.

240ff.;

settlement,

scattered
of,

Occupation indices

226f[.;
to, 226;

cost, 229f.;

432, 436

Occupations, choice

occupations,

marginal approach

according to principle of comparative

size,

of,

of, 99,

I43n., 146, 181, 246n., 256f., 342; distri-

Norfolk, 504

Nuremberg,

of Location

f.

the small.

and comb price.

o.

Subject Index
159.;

515

uniform

c.

price,

i. .

140;

price

Seattle, 407, 425, 458n., 493n., 498, 499T.,

189n.;

com-

Selling costs, 212; as function of distance,

500T.

discrimination, 147-159

Product differentiation,

168f.,

pared to definition of location, 245n.

Production
399
Profits,

lowest 261; and distance,

cost,

397f.

Shanghai, 420T.

Siemens-Martin process, 379

195n.,

differences,

spatial

211;

Silesia, 426n.,

Situation

monopolistic, 259, 260

456

from orientation)

distinct

(as

33

Quebec, 385, 386

Soil quaUty, differences in, 178-182, 257

South Africa, 338n., 423T., 424

South America, 228n.; see also names of

" Raiimforscher," 349n.

Reaction.

See Transfer problem

Refraction,

law of

184f.;

limitation

of,

individual countries
^

South Wales, 416n., 498

186

Regensburg, 438n.

Spain, 423T., 430T.

Regional banks, 471n.

Spanish Guinea, 423T.

Spatial planning, 333

Regionalism, 504n.

Regional planning, 249,

Regions, of demand,
9,

Springfield,

346ff.

of

supply,

12, 188, 190, 217, 403n., 455;

produc-

9,

455;

tion as per cent of demand, 367-371;

objections to method used, 371-374

279f., 283, 469n., 475,

505

Sterling area, 339n.

Stettin, 216n., 451

Stratford, Ontario, 387

498
Substitution equilibrium,

Reserve requirements, 475

Windsor and Ontario com-

Suchard, 384

pared, 387; areas in Iowa, 409-410; Los

Sudan, 423T.

Angeles and Chicago, 439n.

Suez Canal, 417

Retail sales,

354

Stuttgart, 216n., 354, 382, 453n., 454, 457,

Reparations, 266

Reserve ratio,

111.,

Stages of economic development, 223n.

20f.,

24n., 29n.

Rhine, 258n., 259, 454

Sweden, 423T., 430T., 484

Rhode

Switzerland, 382f., 386n., 430T., 445f., 484

Island, 374, 375

Ribbon Development
Richmond, 412n., 461
Risks,

212,

402n.,

399, 470, 472;

Act, 444n.

469ff.;

and

distance,

and regional banks, 470n.

Rothenburg, 333n.
Rubber, 424n.
Ruhr, 21, 218, 258, 333n., 373T., 379n.,
424n., 498

district,

300,

386;

208n., 210, 213,

201, 206,

41 In.,

Canadian,

384,

and regional

386;

infant

on market

industry, 328n.; effect

341;

American, 202,

501;

area,

price shifts, 501 ff.

Tariffs, graduated, 19n., 22

Taxes, 345n., 383, 472

Technical progress, 259n.; tax on, 345n.

Terms of trade, 285, 286, 34 In.; of Northern and Southern prices within the

Russia, 401, 420n., 428, 505n.

St.

322,

300f.,

Rocky Mountains, 35n.

Romania, 258

Saar

200n.,

Tariffs,

426n.

Louis, 414, 415, 461

San Francisco, 407, 408, 460

San Salvador, 423T.

US, 502T., 503f.

Texas,

406,

distribution

496;

of

towns,

392, 393

Thomas
Thunen

process, 379
rings,

ix,

13,

14,

51,

62n.,

380;

conditions for

Sarnia, Ontarid, 387

boundary between,

Saskatchewan, 386, 425, 426, 459, 481

emergence,

Savannah, 504

ample,

Saxony, 258, 493n.

systems, 50, 61; inversion of,

Scrap, 379

of uneven soil quality on, 59, 62, 85, 86

40ff.;

46ff.;

44ff.;

milk-cream-butter ex-

applied

to

production
52ff.; effect

5i6

The Economics

Time

212, 257n,

costs,

Bureau of Mines,

Tipton, Iowa, 417, 418

Agriculture,

Tobacco, 424n., 429

National

Toledo, Ohio, 125, 438, 439

395;

Toronto, 384, 486, 499T., SOOT.

210n., 493

Towns: formation
of,

178,

of,

as

389f.;

the

390f.; attraction of

246n., 406;

15,

179;

68ff.,

size

function of distance,

function

more

of,

gifted into,

126,

178, 275,

439f.; distribution of, 127, 136, 178, 180,

389fE.,

43 Iff.; size of

Canadian,

344n., 386

Trade follows the

flag,"

336

291f.

316f.,

real transfer, 274, 279, 282; pre-

276-278,

transfer,

279,

282,

287f., 299; final transfer, 278-279, 288n.,

with

reaction

299;

transfer,

283f.; difficulties of, 281n.;

and terms

speed

282-

Silesia, 258, 424n.,

Utility, 224f., 246, 260, 309, 315n.,

zation of, 241, 242f., 306n.

Vancouver, 426, 460,

SOOT.

187ff.,

Wage

differentials,

240-244,

243n.,

Wages,

217; nodal points,

19, 182

efficiency

piece

wages,

237n.,

239,

309;

real

493

Weber, Alfred (theory) assumes

demand, 17, 27, 104n., 108n.
,

inelastic

Weights, 21, 22, 33n., 406, 482

Unemployed, 239
States, 283n., 364; agricultural sub-

structure, 374f.; distribution of produc-

distribution of towns, 436;

population distribution, 256, 374, 375,

428; land values, 374n.; market areas,
differentials

456ff.;

see

also

and towns
Bureau of the

wheat
names

190, 420ff.

SOI

385,

Census,

xiv, 295n.;

388,

499T.,

Wisconsin, 354n.

Wurttemberg,

331n., 334, 348n., 354, 357n.,

373T., 449, 472n.; stabiUty of economy,

194-196

WiJrzburg, 438n.

Wybert, 383, 384

Yugoslavia, 430T.

366n., 367, 37ln., 372, 396n., 399f., 403;

Statistics,

387,

SOOT.

Wyoming, 425

of individual states

Bureau of Labor

in-

Warthegau, 456

Wiese Valley, 449

Windsor, Ontario,

States:

334,

correspond to exchange rate, 233; time

vs.

Ukraine, 258

United

170n.,

326n.,

wages correspond to

Wheat market, 189,

Wheat prices, 477f.,

423T.;

99n.,

309f.,

ternational prices, 234, 309; hourly wages

Turkey, 423T.

421ff.,

499T.,

380, 383, 384, 449, 455ff., 501, 503n., 504

Westphalia, 393n.

exports,

43n.,

25,

306,

Troy, N.Y., 11

wage

498,

384

Welland Canal, 427

395ff.;

493n.,

Vienna, 129n., 216n.; a gateway, 187

Trans-Siberian Railway, 417

tion, 356ff.;

326n.,

490n., 491, 492n., 495; interlocal equali-

Transshipment points, 188

United

450n.

Washington, D. C, 257, 354, 442n., 443,

354

187

Transport surface,

Administration,

wages, 305

427f.

lines, effect of, 184-187,

Transport points,

276f.,

of,

of trade, 285

Transport cost in practice, 396,

Transport density, 127, 129
Transport

285;

279,

with different currency systems,

283, 285;

Committee, 306n.,

Progress

Uruguay, 33 In., 423T.

Villiger,

Transfer community, 293, 298, 507

Transfer problem, vii, 265-304,
liminary

of

454;

Venezuela, 423T.

Transfer aid, 287, 290f.; cost of transfer,

506f.;

376n.,

demand compared

to country, 143; plans, 440f.;

"

Department

374n.,

Resources

Works

Upper

xiv;

295n.,

of Location

Zollverein, 340n., 383

Name
T.:

Aereboe,

F.,

Table

Index
n.:

89

footnote

W.,

Christaller,

AUix, A., 366n.. 367, 403n.

xiv,

104n.,

114n.,

115n.,

126, 131n., 132n., 218, 350n., 393n., 408,

409,

440n.;

431ff.,

Backe, H., 51n., 288n., 380n., 402n.

criticism

of

system,

433
Baker, O.

E.,

376n.

Cooper, M. R., 502T.n., 503n.

Barfod, B., 269n., 308n., 309n.

Cournot,

Barlow, Report, 25n., 348n., 380n.

Barton, Minister

(Ottawa)

Baumgartner, 451n.

v.,

208n.

Deasy, 420T.

Bell, J., xiv

Decken, H.

Berquist, F. E., 477n.

Black,

Dennison,

Blum, 180n., 187n.

Boehm, C, 485n.

Bohm,

DuBrul, S., 483n.

Duddy, E. A., 177n.

25n.

Earhart, 472

Bosch, R., 195n.

W.

Eckardt, M., 402n., 455n.

415T.

A., 406n.,

Bozenhardt, K., 444

Economist, The

Brinkmann, C, 104n.
Brinkmann, T., 60n.,

Edwards,

Bromell,

(London)

498

A., xiv

Eggers, 21n.

85n., 89

Eikstedt, E.

R., 409

J.

403n.

E.,

Dorner, Z. G., 332n.

Bolton, C. W., 499T.n.

Bowers,

R., 28n., 250n.

Doxiades, 441 n.

Bohnert, 348n.

v.,

380n.

d.,

Dietzel, K., 420n.

Boggs-Bowman, 45 In.

Bortkiewicz, L.

S.

Dickinson, R.

332n.

F.,

v.

Dedi, L., 448n., 450

D., 229n., 403n.

J.

132n., 133n.

Dannenbauer, 342n.
Dean. W. H., 29n.

Beaver, 218n.

Beckerath, H.

70, 272n.

Culemann, C,

xiv

H.

v.,

213n., 246n.

Bruning, K., 346n., 383n.

Ellis,

Buchman,

Engelbrecht, T. H., 51, 364n., 376n., 477

21, 377n., 379n.

S.,

322n.

Biicher, K., 104n., 393

Englander, O.,

Bulow,

Erlenmaier, A., 183n.

F.,

349n.

Burger, H. O., 196n.

Eucken, W.,

Bums, A.

Evans, xiv

R., 164n.

8,

45n., 46

xiv, 123n., 198n., 332n.

Everett, H., 380n.

Caldwell,
Carr. G.

S.
J.,

A., 416n.

Fawcett, C. B., 445

424n.

Fetter, F. A., 403n., 478, 479

Cassels, J. M., 482n.

Cauchon, 443n.
Chamberlin, E. H.,
74,

108n.,

109n.,

Feucht, O., 353n.

xiv, 64n., 66, 69, 72,

112n..

120n.,

Fezer, H., 396n.

Fischer, W., 346n.

205n.,

Fisher, Irving, 491

340n.

57

The Economics

5i8
Florence, P.

369T.

S.,

Isenberg,

Ford, Henry, 472, 473

195n.,

xvii,

269n.

218n.,

346n., 353n., 369n., 373, 409

Friederici, G., 355n.

Friedrich, C.

G.,

of Location

C, 223n.

Iversen,

18n.

J.,

Jackson, Colonel, xiv

Frisch, R., 120n.

Jacobs, A., 477n.

Furlan, V., 21 In.

Jaeger, W., 449n.

Garey, L.

F.,

481n.

Jahn, G., 455n.

Garver, xiv
Jefferson, M., 392, 393n., 394

Geer, Sten de, 35n.

Gibrat, R., 434n.

Kanzig, W., 118n.

Gillman, 90

Karger, K., 454n.

Gini, C., 336n.

Kann,

Goodrich,

Kapferer-Schwenzner, 428n.

C.,

216n.

Gras, N. B., 104n., 386n.

Kautz, E. A., 81n.

Keir, M., 172n., 473n.

Haase, A., 85
Haberler, G.

346n., 348n.

F.,

xiv,

v.,

158n., 229n., 233n.

309, 328, 335n., 344n., 364, 380n., 426n.

Kendall, H. M., 403n.

Keynes,

M.,

J.

S.,

S.

107n.,

Krzyzanowski, W., 41 In.

viii

E., 294n.,

Hartsough, M.

L.,

Kuhne,

468n.

G., 403n,

Kulmer,

218n.

Hartung, 446n.

A., 426n.

Lagger, L. de, 393n.

Hasenclever, C., 380n.

Lane,

Haufe, H., 114n., 258n.

Lardner, D., 174n.

Haushofer, K., 218n., 339n.

Launhardt,

Heberle, 174n.
C.,

J. J.,

461n.

W.,

503n.

Lehmann-Lenoir,
Lenschow, 171n.,

Heiser, 346n.

Leontief,

Hellpach, W., 192n., 246n.

Liebe, H., 485n.

Herberts,

J.

H., 252n., 484

List,

Herrenberg, 400
P.,

F.,

9,

18,

F.,

W. W.,

Friedrich,

31

336n., 355n.
ix,

xiv,

17n., 51n.,

183n., 201n., 203n., 209n., 251n., 320n.,

324n., 335n., 338n., 339n., 340n., 350n.,

357n., 506n.
107n.,

141n.,

Lowe, 490

147n., 212n., 377n., 405n.

Lubin,

L., xiv

Hotelling, H., xiv,

6, 72ff.,

162

International Magazine

^x

J.,

380n.

Lutz, F. A., 285n.

McCarty, H. H., 366n., 389

A., 355n.

International Labor Office, 492, 494

W.

198n.

Losch, A., 46n., 118n., 147n., 165n., 182n.,

Hoffsommer, H. C., 405n.

Holmes, W. G., 365
Hoover, E. M., xiv, 47n.,

H.

76,

Lofke, H., 415n.

461n.

Hoff^r, C. R., 439n.

Horn, Charles

lOOn.

Lively, C. E., 183n.

195n., 454

Hinrichs, A.

7,

114n., 162, 166n., 174n., 175n., 186

Hegel, 93, 358n.

Isard,

104n.,

Koster, xvii

379n., 473n.

Hansen, Alvin,
Harris,

Koch, H., 88n.

331n.

J.,

Hall, F.

Innis,

315n.

Klopper, R., 453

130n.

R.,

Haring,

Hesse,

308n.,

Keyser, E., 81n., 441n.

Haenelt, D., 356n.

Hapke,

Heer,

251n.,

viii,

339n., 363n., 494n.

491

Company, 396n.

McGregor, xiv
McGuire, C.

E.,

Machlup,

260n.

F.,

xiv

Name

Index

519

McKenzie, R. D., 104n., 213n., 412, 413,

439n.

120n.,

166n.,

162,

173n.,

183n.,

184n.,

185n., 188, 207n., 261, 377

MacPherson, L.

G., 378n.

Paullin, 365n.

Miidge, W., 331n.

Pavlovsky, G., 36, 51n., 338n., 428n., 505n.

Malthus, Th. R., 262

Mangold, W., 449n.

Peter, H., lOOn.

Peelers, M., 378n.

Marchi, Francesco de, 44 In.

Petersen, A., 46n.

Marquardt, H.,

Pfannschmidt, M., 349n., 377n.

62n., 63n.

Marshall, A., 364n.

Pfeifer, G., 334n., 355n.

Marshall, H., 207n., 384n.

Philip, K., 243n.

Maunier, R., 430n.

Pirath, C., 37, 174n., 183n., 428, 455n.

Mayer, H. W., 457

Powell, xiv

Mecklenburg, G., 159n.

Predohl, A., 20n., 24n., 28n., 33n., 92n.,

Meinhold, H., 350n.

166n., 201n., 257n.,

Mellerowicz, 369n.

Preiser, E., 196

Metzdorf, M., 334n.

Priebe, H., 65n., 195n.

Meuriot, M.

Puttkammer, W.,

Meyer,

F.

P.,

438n.

Rath, 402n.
Ratzel, F., 82n.,

K., 35 In.

192n.,

198n., 201n.,

197,

443n.

Meynen, 355n.

Rechenberg,

Michels, R., 194

Miksch,

L., 332n.

Millard,

J.

F.,

370n., 408, 440n.

Regul, R., 403n., 424n., 451n.

Reilly,

W., 396n., 397, 401n., 404n.

W.

410, 411, 412

J.,

Riedl, R., 45 In.

Mills, F. C., 463n., 484n.

Riefler,

Mitze, W., 236n., 246n.

W.,

xiv, 463n., 464n., 468n., 470,

471, 473, 474n., 476

Moller, H., 120n., 159n.

Rist, Charles,

Molyneux, P., 504n.

Moody's Manual, 466n., 467, 468
Morgan, J. P., 47 In.
Moulton, E. S., 217n., 366n.

484n.

Ritschl, H., 28n., 104n., 177n.

Robinson,

A., 28n., 250n.

Robinson,

J.,

66,

109n., 150n., 152n.

Rockefeller Foundation, xiv

Miiller, K. V., 246n.

Rohm,

Miiller-Miny, H., 381n.

H., 67n.

Ropke, W., 177n.

Rolph, J. K., 440n.

Muller-Wille, 381, 382

Miinter, G., 441n.

Rompe,

Munzinger, A., 65n., 400, 402

Muhs, H.,

xvii, 346n.

W., 281n., 285n., 290n., 298n.,

320n., 322n., 323n.

Meyer,

403n., 490n.

378n.,

495n.

Roos, Charles, xiv, 458T.n., 460n., 461n.

xvii, 346n.

Roosevelt, F. D., 460

Myers, L., 502T.n., 503n.

Rostovtzeff, M., 201n.

Neue

Riihl, A., 45n., 416, 490n.

Zilrcher Zeitung, 445

Neupert, 393n.

New

Sanderson, D., 417

York Times, 483

Schaffle, 41 In.,

Niemeyer, 443n.

496

Scheu, E., 403n., 412n.

Odum, H. W.,

504n.

Ohlin,

x,

B.,

ix,

24n.,

Schiller, Friedrich,

103,

104n., 223n.,

Schiller, O., 216n.

252n., 307n., 309n.

Schilling, A., 166n.

Olin, F. W., xiv

Schlie, A., 340n.

O'Neill, L. J. 157n., 477n.

Palander, T.,

ix,

Schiller, K., 357n.

18,

19,

Schlier,

22n.,

28n.,

73,

O.,

177n.,

183n.,

369n., 431n., 433n., 438n.

218n.,

258n.,

The Economics

520

Thiinen,

Schmidt, H., 113

Schmidt-Friedlander, R., 402n.
Schmitz,

45,

173n.

J.,

H.

J.

Tintner, G., 107n.

Schmoller, G.

Triffin, R., 254n.

104n.

v.,

Triggs, H.

Schneefuss, 187n.
92n.,

62n.,

E.,

5,

7,

9,

8,

104n.,

130,

13,

36,

133n.,

376n., 380n., 381n., 402, 453

Schmolders, G., 332n., 349n.

Schneider,

ix,

v.,

46n., 50, 51, 85,

of Location

107n.,

108n.,

Turner,

443n.

J.,

F. J., 355n.

120n., 162. 299n.

Uebler, 440n.

Scholte, W., 338n.

Schultze, J. H., 90n.

Schulz-Kiesow, P., 170n., 177n., 183n.

Schumacher, H.,

Schumann, H.
Schumpeter,

ix,

xiv,

21n., 218n., 351n., 352n.

J.,

Uthwatt report, 348n.

380n.

A.,

J.

380n., 501n.

J.,

Umlauf,

Urdahl, T. K., 157n., 477n.

21, 379n.

J. v.,

Uhlig,

64n., 237n.

Vance, R.

504n.

B.,

Schuster, E., 69, 72

Veit, O., 338n.

Schwalm, H., 446, 450n.

Viner,

Schwenkel, 352n.

Vleugels, W., 450n.

Scott report, 348n.

Volz, W., 446, 450n.

108n.

J.,

Seidler, G., 158n.

Seyfried, E., 382

Wagemann,

Siebrecht, 402n.

Waldschiitz, E., 383, 449n.

H. W.,

Singer,

Walras,

150n., 434f.

Smith, A., 46n.

6, 76, 78, 170n., 194n., 337n.,

414
Spengler,

xiv, 335

J. J.,

Spiethoff,

Arthur,

ix,

xiv,

343n.,

358n.

Stackelberg, H.

v.,

120n., 184n., 443n.

18,

164n.,

19,

24,

20,

179n.,

186,

382, 383

Wehner, B., 443n.

Weigmann, H., 349n.
Wende, G., 45 In.
Wentzel, R., 443n.

Wiedenfeld, K., 194n., 339n.

Wiesener, Diplomatvolkswirt,

Stamp, 218n.
Steinbeis, F.

v.,

195n., 331n., 334, 357n.

Wilcox,

Stewart, xiv

Willeke, E., 194

Stewart, Mrs.

G.

S.,

J.,

Winkler,

Sulzbach, W.. 198n., 210n., 281n., 336n.

xv,

195n.,

W., 182n.

W.

E.,

F.,

396

130n.

Working, H., 480

Stockmann, G., 195n.

vii,

S.

Williamson,

xiv

195n.

xvii, 453n.

Wilbrandt, R., 242

Steinhagen, E., 417

Swabia,

9.

Whittlesey, Ch. R., xiv, 297n.

453n.

Stigler,

5,

92n.,

261, 330, 338n.

Weh, Max,

198n., 202n.

Sombart, W.,

163n., 226

ix,

29,

25, 27, 28,

Smith, G. H., 354n.

J.,

ix, x, 92,

Weber, Alfred,

Sisam, C. H., 112n., 434n.

Solch,

H., 381n.

Wright, 365n.

196, 492

Young, xiv
Taussig, F. W., xiv, 502n.

Terborgh, G., viii

Teubert, xvii, 450n.
Thaer, A.

v.,

5 In.

Thompson, Donald, 465n.

Thompson, J. W., 395n.
Thompson, T. E., 371n.

Zapoleon, L.

B.,

242n.,

427n.,

478,

479,

490n., 501n.

Zeuthen, 120n.

Zimmerman, C., 169n., 439n.

Zimmermann, E. W., 178n.,
Zipf, G. K., 436f.

223, 416n.

Date
Returned

Due

FEB 2 4

tQ<

^FEI^feiaafe
.^lA.

Due
Due

Returned

UI^IVERSITY OF FLORIDA

lEbE DM3TEEflS