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Thursday, May 30, 2013

Spatial economics

Richard Cantillon was also the founder of spatial economies, of the analysis of economic activity in relation to geographic space. In a sense, of course, mercantilists, by advocating a favourable balance of geographical trade, analysed (even if badly) economic activities to the extent that they crossed national borders. Spatial analysis, as Professor Hebert has pointed out, deals with distance (transportation cost, and its relation to prices as well as to the location of economic activities), and area (the geographical development and boundaries of markets). Cantillon not only developed location theory but integrated it into his general microeconomic analysis. In particular, he saw that the prices of produce, even when money and monetary prices were in equilibrium, would always be higher in the cities than in their place of production by an amount needed to cover the costs and risks of transport. In consequence, products that are bulky and/or perishable would be too costly or impossible to transport to the cities, and hence would be far cheaper at their places of production. Such products, then, would generally be grown in border areas around the cities, where the transport costs to the urban markets are not prohibitive. In manufacturing, furthermore, Cantillon saw that in cases where plants have to use bulky, low value-per-unit-weight raw materials, they would tend to locate near the output of such materials. For in that case it would be less costly to transport the less bulky, more valuable finished products to urban markets than to ship the raw materials.

On the location of areas of urban markets, Cantillon was highly suggestive, pointing out that it is far less costly for buyers and sellers to gather at one spot than to travel around the periphery seeking each other out and finding out the various prices that buyers were willing to pay or sellers were willing to accept. In modern terms, Cantillon might say that central markets develop naturally because they enormously lower the transaction, transport, information and other costs of trade.
While Cantillon, therefore, saw how markets and the location of economic activity were able to regulate themselves harmoniously, he was not a consistent free trader internally just as he was not in the foreign trade area. Internally, he held inconsistently that manufacturers needed ‘much encouragement and capital’ to find and invest in the optimum locations.

Austrian Perspective on the History of Economic Thought (2 volume set)

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