WEBVTT NOTE 9.04. The Economics of Location and Spatial Relations 1 00:00:00.000 --> 00:00:08.240 4. The Economics of Location and Spatial Relations 2 00:00:08.240 --> 00:00:14.540 One very popular subdivision of economics has been international trade. In a purely 3 00:00:14.540 --> 00:00:20.520 free market such as we are analyzing in the bulk of this work, there can be no such thing 4 00:00:20.520 --> 00:00:29.080 as an international trade problem, for nations might then possibly continue as cultural expressions 5 00:00:29.080 --> 00:00:36.120 but not as economically meaningful units. Since there would be neither trade nor other barriers 6 00:00:36.120 --> 00:00:43.480 between nations nor currency differences, international trade would become a mere appendage 7 00:00:43.480 --> 00:00:50.840 to a general study of inter-spatial trade. It would not matter whether the trade was within or 8 00:00:50.840 --> 00:00:58.280 outside a nation. The laws of the free market that we have been enunciating apply therefore 9 00:00:58.280 --> 00:01:05.520 to the whole extent of the market, that is, to the world, or the civilized world. 10 00:01:05.520 --> 00:01:11.320 In the case of a completely isolated country, the laws would apply throughout that area. 11 00:01:11.320 --> 00:01:17.680 Thus, the pure interest rate will tend to be uniform throughout the world. 12 00:01:17.680 --> 00:01:24.000 Prices for the same good will tend to be uniform throughout, and therefore, so will wages for 13 00:01:24.000 --> 00:01:26.860 the same type of labor. 14 00:01:26.860 --> 00:01:33.340 Wage rates will tend toward uniformity for the same labor in different geographical areas 15 00:01:33.340 --> 00:01:40.140 in precisely the same way as from industry to industry or firm to firm. 16 00:01:40.140 --> 00:01:47.060 Any temporary differential will induce laborers to move from the low to the high wage area 17 00:01:47.060 --> 00:01:54.060 and businesses to move from the latter to the former until equilibrium is reached. 18 00:01:54.060 --> 00:02:00.540 Once again, just as in the more general case considered before, workers may have particular 19 00:02:00.540 --> 00:02:07.560 positive or negative attachments toward working in a certain area, just as we saw they may 20 00:02:07.560 --> 00:02:11.180 have toward working in a certain industry. 21 00:02:11.180 --> 00:02:16.980 There may be a general psychic benefit from living and working in a certain place, and 22 00:02:16.980 --> 00:02:22.380 a psychic disutility involved in working at some other location. 23 00:02:22.380 --> 00:02:29.180 Since it is psychic, not money, wage rates that are being equalized, money wage rates 24 00:02:29.180 --> 00:02:36.940 will be equalized throughout the world plus or minus negative or positive psychic attachment 25 00:02:36.940 --> 00:02:38.980 components. 26 00:02:38.980 --> 00:02:45.620 That the prices of each good will be uniform throughout the world rests on a precise definition 27 00:02:45.620 --> 00:02:48.180 of the term good. 28 00:02:48.180 --> 00:02:53.260 It is, for example, that wheat is grown in Kansas and that the bulk of the consumers 29 00:02:53.260 --> 00:02:55.620 of the wheat are in New York. 30 00:02:55.620 --> 00:03:03.580 The wheat in Kansas, even when ready for shipment, is not the same good as the wheat in New York. 31 00:03:03.580 --> 00:03:11.180 It may be the same physical-chemical bundle, but it is not the same good vis-à-vis its 32 00:03:11.180 --> 00:03:14.880 objective use value to the consumers. 33 00:03:14.880 --> 00:03:21.980 In short, wheat in Kansas is a higher stage capital good than wheat in New York, when 34 00:03:21.980 --> 00:03:26.680 the consumer is in New York rather than in Kansas. 35 00:03:26.680 --> 00:03:31.660 Transporting the wheat to New York is a stage in the process of production. 36 00:03:31.660 --> 00:03:38.680 The price of wheat in Kansas will then tend to equal the price of wheat in New York, minus 37 00:03:38.680 --> 00:03:44.500 the necessary costs of transport from Kansas to New York. 38 00:03:44.500 --> 00:03:50.500 What determines how people and businesses will be distributed over the face of the Earth? 39 00:03:50.500 --> 00:03:55.780 Obviously, the major factor is the marginal productivity of labor. 40 00:03:55.780 --> 00:04:01.380 This will differ from location to location in accordance with the distribution of natural 41 00:04:01.380 --> 00:04:08.220 resources and the distribution of capital equipment inherited from ancestors. 42 00:04:08.220 --> 00:04:13.700 Another factor influencing location will be positive or negative attachments to certain 43 00:04:13.700 --> 00:04:43.700 The Theory of Money and Credit 44 00:04:43.700 --> 00:05:00.700 The production of raw materials and foodstuffs cannot be centralized and forces people to disperse over the various parts of the earth's surface and joins also upon the processing industries a certain degree of decentralization. 45 00:05:00.700 --> 00:05:08.700 It makes it necessary to consider the problems of transportation as a particular factor of production costs. 46 00:05:08.700 --> 00:05:17.700 The costs of transportation must be weighed against the economies to be expected from more thoroughgoing specialization. 47 00:05:17.700 --> 00:05:30.700 In considering the location of industry, entrepreneurs must account for costs of transportation from raw material sites to the centers of consumer population. 48 00:05:30.700 --> 00:05:36.700 Certain areas of the world will tend to have higher costs of transportation than other parts. 49 00:06:06.700 --> 00:06:21.700 For the same products, Alaskan consumers must be willing to pay higher prices in Alaska than in San Francisco, even though purchasing power and prices are uniform throughout the world. 50 00:06:21.700 --> 00:06:29.700 As a result, the cost component for anyone working in Alaska will be a certain positive amount. 51 00:06:29.700 --> 00:06:37.700 Because of the transport problem, the same money wage in Alaska will buy fewer goods than in San Francisco. 52 00:06:37.700 --> 00:06:44.700 This increased cost of living establishes a positive cost component in the wage, 53 00:06:44.700 --> 00:06:53.700 so that for similar labor, a worker would require a higher money wage to work in Alaska than elsewhere. 54 00:06:53.700 --> 00:07:07.700 If the costs attached to a geographical area are particularly high or low, a positive or a negative cost component will be attached to the wage rate in that area. 55 00:07:07.700 --> 00:07:14.700 Instead of saying that money wage rates for the same type of labor will be equalized throughout the world, 56 00:07:14.700 --> 00:07:21.260 World, we must say rather that there will be a tendency for equalization of money wage 57 00:07:21.260 --> 00:07:30.680 rates plus or minus the attachment component, and plus or minus the cost component for every 58 00:07:30.680 --> 00:07:33.500 geographic area. 59 00:07:33.500 --> 00:07:40.080 The purchasing power of the monetary unit will also be equalized throughout the world. 60 00:07:40.080 --> 00:07:44.720 This case will be treated in Chapter 11 on money. 61 00:07:44.720 --> 00:07:51.420 The tendency of an advancing market economy, of course, is to lower transportation costs, 62 00:07:51.420 --> 00:07:56.680 that is, to increase labor productivity in the transport field. 63 00:07:56.680 --> 00:08:03.220 Other things being equal, then, the cost components tend to become relatively less important as 64 00:08:03.220 --> 00:08:05.940 the economy progresses. 65 00:08:05.940 --> 00:08:13.540 We have seen that a good must be considered as homogeneous in use value and not in physical 66 00:08:13.540 --> 00:08:21.060 substance. Wheat in Kansas was a different good from wheat in New York. Some economists 67 00:08:21.060 --> 00:08:27.700 have taken the law that all goods tend to be uniform in price throughout the world economy 68 00:08:27.700 --> 00:08:35.140 to mean that all physically homogeneous things will be equal in price. But a difference in 69 00:08:35.140 --> 00:08:42.500 In position with respect to consumers makes a physically identical thing a different good. 70 00:08:42.500 --> 00:08:48.760 Suppose for example that two firms are producing a certain product, say cement, and that one 71 00:08:48.760 --> 00:08:52.740 is located in Rochester and one in Detroit. 72 00:08:52.740 --> 00:08:58.140 Let us say that the bulk of the consumers of cement are in New York City. 73 00:08:58.140 --> 00:09:06.620 Let us call the cement produced in Rochester C.R. and the cement produced in Detroit C.D. 74 00:09:06.620 --> 00:09:13.580 Now in equilibrium the price of C.R. in New York City will equal the price of C.R. in 75 00:09:13.580 --> 00:09:19.580 Rochester plus the freight cost from Rochester to New York. 76 00:09:19.580 --> 00:09:26.520 Also in equilibrium the price of C.D. in New York City will equal the price of C.D. in 77 00:09:26.520 --> 00:09:31.520 in Detroit plus the freight cost from Detroit to New York. 78 00:09:31.520 --> 00:09:37.520 Which cement prices will be equal to each other in equilibrium? 79 00:09:37.520 --> 00:09:42.040 Many writers maintain that the price of CR in Rochester 80 00:09:42.040 --> 00:09:46.400 will be equal to the price of CD in Detroit. 81 00:09:46.400 --> 00:09:52.600 That is, that the mill prices or the FOB prices of cement 82 00:09:52.600 --> 00:09:57.520 will be equal in each of the two localities in equilibrium. 83 00:09:57.520 --> 00:10:00.160 But it is clear that these writers have adopted 84 00:10:00.160 --> 00:10:04.440 the confusion of treating good in the technological 85 00:10:04.440 --> 00:10:07.960 rather than in the use value sense. 86 00:10:07.960 --> 00:10:10.560 This error lies at the root of attacks 87 00:10:10.560 --> 00:10:14.940 on the basing point system of pricing in some industries. 88 00:10:14.940 --> 00:10:18.960 The critics assume that uniform pricing of a good 89 00:10:18.960 --> 00:10:27.320 means uniform pricing at the various mills, whereas it really implies uniform delivered 90 00:10:27.320 --> 00:10:33.920 prices of the various firms at any given consumer center. 91 00:10:33.920 --> 00:10:41.320 We must, in short, take the point of view of the consumer, the man who uses the good, 92 00:10:41.320 --> 00:10:43.980 and he is in New York City. 93 00:10:43.980 --> 00:10:49.980 From his point of view, cement in Detroit is a far different good from cement in Rochester 94 00:10:49.980 --> 00:10:55.960 since Rochester is closer to him and freight costs are greater from Detroit. 95 00:10:55.960 --> 00:11:04.380 From his point of view, the homogeneous goods are CR in New York City and CD in New York 96 00:11:04.380 --> 00:11:05.620 City. 97 00:11:05.620 --> 00:11:13.120 Wherever it comes from, cement at the place where he must use it is the homogeneous good 98 00:11:13.120 --> 00:11:19.240 for the Consumer Therefore, in equilibrium, it is CR in New 99 00:11:19.240 --> 00:11:27.120 York City that will be equal to CD in New York City, and these are the delivered prices 100 00:11:27.120 --> 00:11:30.320 of cement to the consumer. 101 00:11:30.320 --> 00:11:37.640 For purposes of simplification, we have omitted the consumers in Rochester, Detroit and elsewhere, 102 00:11:37.640 --> 00:11:40.760 but the same law applies to them. 103 00:11:40.760 --> 00:11:52.200 For consumers in Rochester and Detroit in equilibrium, P CR in Rochester equals P CD in Rochester, 104 00:11:52.200 --> 00:12:00.600 and P CR in Detroit equals P CD in Detroit, etc. 105 00:12:00.600 --> 00:12:07.920 Substituting this equality in the equations, we see that it implies that the price of CR 106 00:12:07.920 --> 00:12:15.360 in Rochester plus freight cost from Rochester to New York will equal the price of CD in 107 00:12:15.360 --> 00:12:20.360 Detroit plus freight cost from Detroit to New York. 108 00:12:20.360 --> 00:12:26.440 The freight costs at any time are readily calculable, and Ceteris Paribus, they will 109 00:12:26.440 --> 00:12:29.200 be greater for longer distances. 110 00:12:29.200 --> 00:12:36.000 In other words, in equilibrium on the free market, the price of CR in Rochester is equal 111 00:12:36.000 --> 00:12:47.000 is applicable to the price of CD in Detroit, plus the differential in freight costs for the longer as compared to the shorter distance to the consumer. 112 00:12:47.000 --> 00:13:01.000 Generalizing, the mill price of cement at a shorter distance from the consumer will equal the mill price of cement at the longer distance plus the freight differential. 113 00:13:01.000 --> 00:13:17.000 This is applicable not only to cement, but to every product in the economic system, and not only to products serving ultimate consumers, but also to those to be consumed by lower-order capitalists. 114 00:13:17.000 --> 00:13:36.500 In proportion as firms are more distantly located from the consumer, they will then not be able to remain in business unless their average costs at the mill are sufficiently lower than those of their competitors, to compensate for the increased freight costs. 115 00:13:36.500 --> 00:13:52.000 This is not, as might be thought, a penalty on the technological superiority of the distant firm, for the latter is inferior with respect to the important economic factor of location. 116 00:13:52.000 --> 00:14:03.500 It is precisely this mechanism that helps to determine the location of firms, and assures that firms will be economically located in relation to the consumer. 117 00:14:03.500 --> 00:14:16.500 The influence of the location difference factor in the price of a product will, of course, depend upon the proportion that freight costs bear to the other costs of producing the good. 118 00:14:16.500 --> 00:14:20.500 The higher the proportion, the greater the influence. 119 00:14:20.500 --> 00:14:29.500 A firm with a location closer to the consumer market, therefore has a spatial advantage conferred by its location. 120 00:14:29.500 --> 00:14:37.500 Given the same costs in other fields as its competitors, it earns a profit from its superior location. 121 00:14:37.500 --> 00:14:44.500 The gains of location will be imputed to the site value of the ground land of the plant. 122 00:14:44.500 --> 00:14:49.500 The owner of the site obtains its marginal value product. 123 00:14:49.500 --> 00:14:55.860 Therefore, gains to a firm resulting from improvement in locational advantage, as well 124 00:14:55.860 --> 00:15:03.420 as losses resulting from a locational disadvantage, will accrue as changes in ground rent and 125 00:15:03.420 --> 00:15:10.220 capital value to the owner of the specific site, whether the owner be the firm itself 126 00:15:10.220 --> 00:15:11.500 for Someone Else.