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1. Introduction
1
1. INTRODUCTION
This introduction describes the field of Regional Economics. Section 1.1 describes
the related disciplines. In Section 1.2 we discuss a number of fundamental spatial
concepts. Sections 1.3 and 1.4 sketches the history of Regional Economics briefly,
taking two classical theories as examples. Finally, Section 1.5 contains general
conclusions and an overview of the content of the book.
1.1
Borders of the discipline
Regional Economics deals with the allocation of economic activities over space.
Two aspects can be distinguished: the micro-aspect or location and the macroaspect or region. The former means the location of firms, households, and
individual consumers. The latter is the explanation of the distribution of economic
activities over spatial units like provinces or municipalities. A description like this
also matches the area of spatial economics, which can be considered to be
synonymous with regional economics.
Human Geography also deals with spatial aspects of economic activities,
called Economic Geography. However, the geographical approach differs from the
regional economic one. Geography is a more descriptive science than economics.
Of course, areas overlap to a great deal. Still, one could say that regional
economics is more deductive, whereas economic geography is more inductive.
In regional economics there are two streams: firstly, the mainstream
neoclassical approach and secondly, the institutional approach. The neoclassical
approach has a deductive and the institutional approach has an inductive character.
It is easy to see the old battle of methods in these two approaches. In fact,
institutional regional economics fits better in human geography, while the
neoclassical approach is without doubt a part of economics. Most of this book is a
product of the neoclassical approach to regional economics.1
Regional economics and economic geography are both sub-disciplines of
Regional Science. In regional science it is the use of space and not the discipline
that counts. It is interdisciplinary in nature. This implies that all disciplines that
deal with the use of space, like physical planning and civil engineering, are subdisciplines of regional science
Also the distinction between regional economics and International
Economics must be taken into account. According to Ohlin there is no essential
difference between the process of spatial division of labour within national
borders and the global division of labour between countries (Ohlin, 1933). The
title of his book "Interregional and international trade" clearly indicates that. A
similarity certainly is that both branches try to explain the spatial allocation of
economic activities. However, in regional economics the spatial units are the
regions within a country, whereas in international economics the countries are
1
For another interesting description of the area of ‘geographical economics’, see O’Sullivan (1981).
1. Introduction
2
considered in that role.2
A region is seen as a part of a bigger spatial unit, normally speaking a
country.3 This means that international economics also deals with monetary
subjects like the balance of payments and exchange rates, where regional
economics deals only with problems in the real economy. Further, regional
economics studies microeconomic themes like the locational behaviour of firms
and households, subjects that are not normally studied in international economics.
1.2
Spatial concepts
With "space" is meant here: the physical substrate of human actions. A space is
defined by dimensions. The value of a dimension is called a coordinate, and a
coordinate is measured in a distance unit (metre, mile etc.). Normally speaking,
regional economics deals with one or two dimensional spaces, whereas in other
sciences spaces with more dimensions also occur.
A unique combination of coordinates is called a location. An economic space
can be defined as a bounded space of locations that can be profitably used for
various purposes. These locations can be called scarce. By a scarce location we
mean a location suited for human actions, which bears a price or rent. The rent of
land can be defined as the net revenue per unit of time of a spatial unit. The
opposite of economic space is free space, which is space that does not bear a rent
and therefore is not interesting for a regional economist.
A route is the set of locations connecting two designated locations. Distance
is the length of a route measured in distance units. The spatial concentration of
production and consumption causes the need of the transportation of goods and
persons, and therefore transportation costs influence consumer prices.
A border is the set of locations that demarcates a bounded space. Finally, a
region is a bounded space that is part of a bigger space (e.g. a country). Some of
the concepts discussed are clarified by Figure 1.1. In order to classify regions the
EU uses the so-called NUTS-classification.4
2
A regional economist can sometimes study the relationship between regions in different countries.
This is of increasing importance, especially for the cross border interregional relationships within the
EU.
3
This needs not always be the case. Sometimes one speaks for example of the "Region South-East
Asia". In that case countries are part of a region and not the other way round.
4
See http://ec.europa.eu/eurostat/documents/3859598/6948381/KS-GQ-14-006-EN-N.pdf/b9ba3339b121-4775-9991-d88e807628e3 and
www.raumplanung.tu-dortmund.de/irpud/pro/ten/nuts_e.htm
1. Introduction
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dimension y
in km
country border
country
regional border
location B

region
location A
y-coordinate

x-coordinate
route
dimension x
in km
Figure 1.1: Spatial concepts.
The central object of regional economics is scarce (economic) space, which
means the set of locations, for which economic subjects are prepared to pay a
price (rent). Free space, that does not bear a rent, is not scarce and is therefore not
studied by a regional economist.
Apart from the above defined physical concept of economic space, one
sometimes speaks of economic space as a network of relations between economic
subjects.5 Physical locations and distances are not taken into account with this
concept. To avoid confusion we will use the term ‘economic network’ for this (e.g.
Lambooy, 1980).
We will conclude this section by indicating how the distance between two
locations is computed. In a one dimensional space only one coordinate is
necessary to indicate a location. Location A may be located at coordinate 5 km
where B is located at 10 km, then the distance between the two locations equals 5
km. In a two-dimensional space the distance between A and B is computed as
indicated in Figure 1.2.
5
This is a so-called topological space.
1. Introduction
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Figure 1.2: Distance between Location A and Location B.
For a two dimensional space we need two coordinates in order to determine
a location. Location A is located at (XA, YA); B at (XB, YB). The distance
between A and B can now be computed as follows:
AB 2  YA  YB    X B  X A  , so : AB 
2
1.3
2
YA  YB 2   X B  X A 2 .
Von Thünen's land rent theory
The land rent theory of Johann Heinrich Von Thünen (1783-1850) is generally
considered to be the start of regional economics. In 1826 Von Thünen published
his most important book titled "The isolated state in relation to agriculture and the
national economy". In the book he concludes that the growing of a crop depends
on the land rent per hectare generated by that crop and that this in turn depends on
the transportation costs of the crop to a central market place. Further, he sees that
as the distance to the market place decreases agriculture intensifies. In his work
von Thünen developed a deductive land use model. It is interesting to see to what
extent his model can still be used today.
To study that we will have to adapt the assumptions of the original model.
1. Introduction
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The distance to the market place must be interpreted as population density.6 The
idea behind this is that, statistically speaking, as the population density increases
the distance to a "central market place" decreases. Based on the adapted theory the
hypothesis to be tested then is: "as the population density increases, agriculture
intensifies, which means that the input of production factors per unit land (hectare,
acre) increases, thus increasing the output per unit land”. In Chapter 2, we discuss
this more extensively.
Generally speaking we can say that Von Thünen tried to explain the
productivity of land and the intensity of land use. The core of his theory is that
land will be used for the activity that generates the highest possible rent. This
result not only applies to the agricultural sector but can also be applied much
wider than von Thünen foresaw (Isard, 1956). Ceteris Paribus, Land rent and land
prices are influenced by the population density of an area.7 The pressure on open
space in densely populated areas will be high because of the expected high land
rents of productive land use alternatives (industrial areas, residential areas).
1.4
Weber's theory on location
The second example of a classic regional economic theory is the theory of location
developed at the beginning of the 20th century by Alfred Weber (1868-1958), the
less famous brother of Max Weber.8 Von Thünen worked in a period in which
agriculture was still the dominating sector in the economy. In the second half of
the 19th century the industrial sector became increasingly important in Germany.
General and regional economic theory was profoundly influenced by this
development. Therefore, Weber did not focus on the agricultural sector, but on the
optimum location of an industrial firm.
He put forward his theory in his book "Pure theory of the location of the
firm", in which he concludes that, when looking for a location, firms aim at
minimizing transportation costs (Weber, 1909). However, he also suggests that
firms may deviate from the location of minimum transportation costs if labour
costs on an alternative location are lower, as the benefits of the lower labour costs
may outweigh the higher costs of transportation. At present, this theory may partly
explain the relocation of industries from the traditional European and American
industrial countries to the emerging economies, i.e. the low wage countries.
6
The idea here is that, generally speaking, where population density is high, there are more
central market places then where population density is low. This means that, everything else
being equal, on average, in a densely populated area, the distance to a central market place
is smaller than in less densely populated areas. When growing, real world population tends
to spread over space in separate locations rather than concentrate in one single location.
7The
Latin expression "ceteris paribus" means "all other circumstances being equal".
8Alfred
Weber is considered to be the founder of the classical theory of location. However an
important part of his theory can be found in the work of Wilhelm Launhart, especially in his book
"Mathematical foundations of economics" (1885).
1. Introduction
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Another important aspect of Weber's theory is "agglomeration". This
points to the benefits of spatially concentrated firms. These benefits can be caused
by the common use of physical infrastructure (such as roads and cables) and also
by the common use of 'know how' and scientific knowledge. Further, producers of
semi-manufactured products can gain benefits (lower transportation costs, better
contacts with their customers) by locating near their customers. In the so-called
"new economic geography" these agglomeration benefits are indicated as
"external economies of scale".9 This can lead to a geographical concentration of
firms (Krugman, 1995). A famous example is the American Silicon Valley with its
information and communication technology (ICT) based industry.
External economies of scale cannot continue without limitation. As the
number of firms increases deglomerative forces develop. Land prices and wages
increase in the area, so that land intensive and labour intensive industries move
away from the ‘core areas’ to a location where the land prices and wages are still
moderate. In fact, this idea of deglomeration is the beginning of a spatial general
equilibrium theory.
Besides Weber, Marshall also dealt with the economic benefits of
geographical concentrations in his "Principles of Economics". Later, in the
1950's, Perroux with his growth pole theory and Myrdal with his principle of
"cumulative causation" examined it (Marshall, 1890; Perroux, 1950; Myrdal,
1957; Vanneste, 1967). In the 1960's and 70's the so called "growth pole" policy,
that was based on these ideas, became fashionable in Europe as a specific form of
regional policy (Klaassen, 1969).
The link between the growth pole theory and the theory of economic growth
led to a new idea about the character of economic growth: economic growth is a
spatially concentrated process. This implies that economic growth in a country
will always be regionally unbalanced. It is not clear why it took so long for this to
be recognized. Perhaps it was because of the more or less separate development of
general and regional economics. This separation ended with the so-called "new
economic geography" developed among others by Paul Krugman, who indicated
for example that rigorous modeling of agglomeration by means of the traditional
economic tools assuming perfect competition and constant returns to scale had to
fail.
The important insight into the inevitability of regionally unbalanced growth
will certainly have a profound impact on regional policies. Instead of trying to
achieve something in weak regions, policy should aim at regions in which the
chances for the development of a cluster (or growth pole) are good. Clusters can
be defined here as geographic concentrations of mutually dependent firms.
However, one has to realize that no two clusters are alike. The attempt to copy
successes from elsewhere is a recipe for disappointment. Regional policy must be
relatively passive here. This means that it should not try to create clusters out of
nothing. The planning of clusters is impossible, but the strengthening of existing
For an overview of the most important articles in the area of “New Economic Geography” see
Henderson (2005).
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1. Introduction
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tendencies toward the development of clusters is feasible. A cluster is not a public
but a market phenomenon. This marks the difference between the growth pole
policy from the past and the modern cluster policy.
1.5
Summary and preview
In this chapter the discipline of regional economics has been sketched. There is an
overlap between regional economics and economic geography. An important
difference between the two areas of study is the more qualitative and descriptive
character of economic geography compared to regional economics. Further, in this
chapter, some aspects of the history of regional economics have been described.
Von Thünen's land rent theory and especially Alfred Weber's classical location
theory are still important elements of modern regional economics. New economic
geography is based upon the latter. It is appropriate to mention here that, apart
from von Thünen and Weber, there are more founding fathers of Regional
economics. The ideas of a number of them will be dealt with later on in the book.
New economic geography is an attempt for bridging the gap between
general and regional economics. It can put an end to the artificial neglect of the
factor space in general economics. It is the aim of this book to diminish this
neglect. Further, this book concentrates on Europe. Examples and applications of
theories are mostly (but not always) related to European regions. The book is
organised as follows. Chapters 2, 3, 4, and 5 deal with land use theory, the theory
of location and their applications. Chapters 6, 7, 8, 9, 10, and 11 deal with
regional development theory and its applications.
Questions and exercises
1.1
a. What is the connection between regional economics and general economics?
b. What is the difference between economic geography and regional economics?
c. What is 'regional science'?
1.2
a.
b.
c.
d.
1.3
a. Give a short description of von Thünen's theory.
b. Indicate how land prices relate to land rent.
1.4
a. Give a short description of Alfred Weber's theory.
b. What is agglomeration?
c. What is deglomeration?
What is a location?
Give a definition of "space"?
What is "economic space"?
What is a "topological space"?