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The Spatial Non-Neutrality of 
Money and its Role in Löschian 
Economic Geography 
David Bieri 
Political Space Economy La...
Motivation 
• Nature of relationship between monetary and real sector as 
key distinction between schools of economic thou...
The fluttering veil 
“It is well that the people of the nation do not understand our banking and 
monetary system, for if ...
The fluttering veil 
Source: Del Negro et al. (2013)
The fluttering veil 
Source: Pozsar et al. 
(2013)
“Frontier finance” hypothesis 
Dynamics of the land-capital nexus 
are instrumental to a joint history of 
urban and finan...
“Frontier finance” hypothesis 
Source: Bunge (1971)
Circular flows: Neoclassical 
Synthesis Sources: LSE (1951), Punch 
(1954)
Post Keynesian monetary 
theory 
• Non-neutrality of money – “Money matters” 
– “Money production economy”, capitalism as ...
Treatment of money in regional 
analysis 
relative wages relative rents 
Employment, 
earnings 
Urban labour market 
Cost-...
Treatment of money in regional 
analysis 
relative wages relative rents 
Employment, 
earnings 
Urban labour market 
Cost-...
Treatment of money in regional 
analysis 
• Mainstream urban and regional economics is fully 
“neoclassical” (including NE...
Geographies of money – I 
• Little “monetary content” of contemporary economic 
geography, despite active research on fina...
August Lösch (1906—1945) 
• Studied under W. Eucken, A. Spiethoff 
and mostly J. A. Schumpeter 
• Formative Rockefeller Fe...
PK Institutionalism and MMT 
Joseph A. Schumpeter 
(1883–1950) 
John M. 
Keynes (1883– 
1946) 
August 
Lösch 
(1906–1945) ...
Schumpeter’s monetary theory 
“Event today, textbooks on Money, Currency and Banking are 
more likely than not to begin wi...
Schumpeter’s monetary theory 
• Long gestation period with many trials and misadventures 
– Das Wesen und der Hauptinhalt ...
German anticipation of the 
Keynesian revolution? 
• Hahn’s (1930) Theorie des Bankkredits and Lautenbach’s 
(1931) “Kredi...
Circular flows: Proto-Keynesians 
Source: Wagemann (1930)
Circular flows: Proto-Keynesians 
Source: Föhl (1937)
Löschian economic geography – I 
Source: Lösch (1954)
Löschian economic geography – II 
• Fragments of a spatial monetary theory (“Die Lehre vom 
Transfer – neu gefaßt” 1941;“T...
Löschian Economic Geography – 
III 
Source: Lösch (1940)
A tale of two hierarchies 
Source: Lösch (1949)
A tale of two hierarchies 
Source: Kircher (1962)
Regional flow of funds 
Source: Labasse (1974)
Regional flow of funds 
Source: Isard (1960)
Circular flows: Regional 
perspectives 
Source: Kircher (1962)
Towards a spatial “money 
view”? 
• Spatialisation of the hierarchies of money: 
– Gold, currency, deposits and securities...
Circular flows: Institutionalists 
Source: Copeland (1952)
Copeland’s money flows as electricity 
• Integration of “real” and “monetary” sectors, based on real 
world accounts gener...
PK Institutionalism and MMT 
• Dillard’s work (1980, 1987) on “money as an institution of 
capitalism” as starting point (...
Geographies of money – II 
• The trajectory of spatial development and the 
advancement of the monetary-financial system i...
REFERENCES – I 
Abel, Jason R. and Deitz, Richard. 2010. “Bypassing the Bust: The Stability of Upstate New York’s Housing ...
REFERENCES – II 
Kiyotaki, Nobuhiro and Moore, John. 1997. “Credit Cycles,” Journal of Political Economy, 105(2): 211–248....
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The Spatial Non-Neutrality of Money and its Role in Löschian Economic Geography

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Money and Economic Theory session at 12th International Conference

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The Spatial Non-Neutrality of Money and its Role in Löschian Economic Geography

  1. 1. The Spatial Non-Neutrality of Money and its Role in Löschian Economic Geography David Bieri Political Space Economy Lab, University of Michigan 12th International Post Keynesian Conference September 2014
  2. 2. Motivation • Nature of relationship between monetary and real sector as key distinction between schools of economic thought. • Spatial consequences of money generally not considered. • Three broad contributions: – Spatial aspects of the non-neutrality of money matter for Post Keynesian monetary theory (additional help in the “escape from the confusion of the Quantity Theory”). – Monetary content of August Lösch’s spatial system is overlooked in economic geography (“NEG” and “EG proper”). – Lösch’s spatial monetary theory is consistent with monetary aspects of Post Keynesian Institutionalism (“towards a spatial money view”).
  3. 3. The fluttering veil “It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution by tomorrow morning.” Henry Ford (1922)
  4. 4. The fluttering veil Source: Del Negro et al. (2013)
  5. 5. The fluttering veil Source: Pozsar et al. (2013)
  6. 6. “Frontier finance” hypothesis Dynamics of the land-capital nexus are instrumental to a joint history of urban and financial development: • Co-movement of capital flows and changes in the urban functional hierarchy • Inextricable linkage between the process of financialisation and urban form • Flow of mortgage credit, land-use change and the morphological transformation over the cycle of the Housing Boom and Housing Bust
  7. 7. “Frontier finance” hypothesis Source: Bunge (1971)
  8. 8. Circular flows: Neoclassical Synthesis Sources: LSE (1951), Punch (1954)
  9. 9. Post Keynesian monetary theory • Non-neutrality of money – “Money matters” – “Money production economy”, capitalism as system of finance, denies barter illusion of pure exchange economy – Money not simply a pure numéraire, importance of money contracts with “price stickiness” a natural outcome – Monetary equilibrium: No exogenous shocks in credit economy, low elasticity of production and substitution, relevance of Schumpeter’s distinction between “Real Analysis” and “Monetary Analysis” • Endogenous money – Kaldor-Moore radically endogenous money dissolves LP theory (horizontalist vs. structuralists  Goodhart, 1989) – “Political endogeneity” of money, but IR with “policy or institutional exogeneity”
  10. 10. Treatment of money in regional analysis relative wages relative rents Employment, earnings Urban labour market Cost-of-living Real estate, housing market Amenities Geography, environment, local public goods, infrastructure, culture real income expenditure Regional employment share Migration, job creation, firm formation Monetary sector Money supply, credit intermediation, liquidity preference, interest rates, exchange rates
  11. 11. Treatment of money in regional analysis relative wages relative rents Employment, earnings Urban labour market Cost-of-living Real estate, housing market Amenities Geography, environment, local public goods, infrastructure, culture real income expenditure Regional employment share Migration, job creation, firm formation Monetary sector Money supply, credit intermediation, liquidity preference, interest rates, exchange rates Inflation price level of labour and current output Interest rates price level of capital assets
  12. 12. Treatment of money in regional analysis • Mainstream urban and regional economics is fully “neoclassical” (including NEG or “geographical economics”) • Economic geography is steeped Marxian political economy (largely without M–C –M’ or MELT) • A case of “Hamlet without the Prince”? Mostly, but there are important exceptions: – Regional differentials in the cost of credit (Lösch, 1954) – Keynesian theory of regional financial markets (Dow, 1986) – A Post Keynesian perspective on the relation between banking and regional development (Chick and Dow, 1988)
  13. 13. Geographies of money – I • Little “monetary content” of contemporary economic geography, despite active research on financialisation • Marxian and other classical approaches focus on accumulation – Spatial re-switching of capital (Harvey’s “spatial fix”) – Sheppard and Barnes’ (1990) The Capitalist Space Economy: Geographical Analysis after Ricardo, Marx and Sraffa • Re-theorise “real-financial linkages” by spatialising the Post Keynesian approach to monetary theory – Circular cumulative (spatial) causation and financial instability, not accumulation (Kalecki & Kaldor meet Minsky) – Inherent hierarchy of money matters for the hierarchy of spatial development (Knapp meets Lösch)
  14. 14. August Lösch (1906—1945) • Studied under W. Eucken, A. Spiethoff and mostly J. A. Schumpeter • Formative Rockefeller Fellowship in US, key observations on spatial nature of prices • “Economics of Location” (1940, 1954): – Standard theory as special case of space economy – Economy organised around three poles: Human activity, production process and location choice – Space as disequilibrating variable
  15. 15. PK Institutionalism and MMT Joseph A. Schumpeter (1883–1950) John M. Keynes (1883– 1946) August Lösch (1906–1945) Hyman P. Minsky (1919 – 1996) John R. Commons (1862–1945) Wesley C. Mitchell (1874–1948) Alvin H. Hansen (1887– 1975) Morris A. Copeland (1896–1989) Post Keynesian Institutionalism: “Flow of “Spatial Non-Neutrality of Money” funds” “Financial instability” “Spatial price waves, hierarchy of money” Edgar M. Hoover, Jr. (1907–?) Walter Isard (1919–2010) Wassily W. Leontief (1906– 1999) Harvard, early 1950s Kiel Institut für Weltwirtschaft , late 1920s U. Michigan, 1930s
  16. 16. Schumpeter’s monetary theory “Event today, textbooks on Money, Currency and Banking are more likely than not to begin with an analysis of a state of things in which legal tender “money” is the only means of paying and lending ... it may be more useful […] to look upon capitalist finance as a clearings system that cancels claims and debts and carries forward the differences – so that “money” payments come in only as a special case without any particularly fundamental importance. In other words: practically and analytically, a credit theory of money is possibly preferable to a monetary theory of credit.” – Schumpeter (1954, p.717)
  17. 17. Schumpeter’s monetary theory • Long gestation period with many trials and misadventures – Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie (1908), attempts to overcome fissures of the “Methodenstreit” – Das Wesen des Geldes (1970) • Standard approaches to monetary theory are missing: – Determinants of money demand, money supply – Money and real sector interaction, monetary policy • Walrasian GE beginnings abandoned, later emphasis on “institution of money”: – Sociology of money, institutions for social accounting, Money creation by banks – Nature of money, theory of price level, theory of money process and functions of the money market
  18. 18. German anticipation of the Keynesian revolution? • Hahn’s (1930) Theorie des Bankkredits and Lautenbach’s (1931) “Kreditmechanik” and Föhl’s (1937) Geldschöpfung und Wirtschaftskreislauf as pre-Keynes Keynesian flow of funds theories – Endogenous credit money – Credit creation with limited effect on money creation – Moderated crowding-out effect of credit creation • Stützel’s (1958) Volkswirtschaftliche Saldenmechanik (balance of payments mechanics) as pre-cursor to Post Keynesian stock-flow consistent (SFC) modelling? – Importance to the “survival contraint” (cf. Minsky) • Guarding against the “Manichaean tendencies” of economics (Kindleberger, 1999)
  19. 19. Circular flows: Proto-Keynesians Source: Wagemann (1930)
  20. 20. Circular flows: Proto-Keynesians Source: Föhl (1937)
  21. 21. Löschian economic geography – I Source: Lösch (1954)
  22. 22. Löschian economic geography – II • Fragments of a spatial monetary theory (“Die Lehre vom Transfer – neu gefaßt” 1941;“Theorie der Währung” 1949) • Monetary-financial arrangements matter for spatial development – Importance of capital flows throughout the urban hierarchy – Spatial relationship between financial and institutional functions (e.g. differential spatial dependence of IR and FRB discount rate) – Functional and institutional variation as influential pathway for real-financial linkages (e.g. regional version of “transfer problem”). • Money and credit are fundamentally hierarchical in nature – All money is credit money in a hybrid system with public and private money (“inside” vs “outside” money) – Spatial system is not only hierarchical in finance, but also hierarchical in power.
  23. 23. Löschian Economic Geography – III Source: Lösch (1940)
  24. 24. A tale of two hierarchies Source: Lösch (1949)
  25. 25. A tale of two hierarchies Source: Kircher (1962)
  26. 26. Regional flow of funds Source: Labasse (1974)
  27. 27. Regional flow of funds Source: Isard (1960)
  28. 28. Circular flows: Regional perspectives Source: Kircher (1962)
  29. 29. Towards a spatial “money view”? • Spatialisation of the hierarchies of money: – Gold, currency, deposits and securities – Balance sheets, market makers: Central bank, banks (small and big), dealers and money funds – Prices: Exchange rate, par, interest rate • Spatial hierarchy of money is dynamic across the economic cycle, expanding and contracting in quality and quantity (cf. Mehrling 2012)
  30. 30. Circular flows: Institutionalists Source: Copeland (1952)
  31. 31. Copeland’s money flows as electricity • Integration of “real” and “monetary” sectors, based on real world accounts generated by different sectors. • Replacing hydraulic model of money supply (stock of water, flows through pipes, or held in reservoirs by banks) with model of money as electricity. – Borrowing sectors acquire funds, lending sectors acquire assets in form of promises to pay – No (strict) conceptual separation between supply of and demand for money – Crediting of an account simultaneous generates debit to another account (“ […] just as is the switching on of an electrical appliance and the draw upon electrical capacity” [Mayhew, 2011]) • Consistent with endogenous money
  32. 32. PK Institutionalism and MMT • Dillard’s work (1980, 1987) on “money as an institution of capitalism” as starting point (Marx, Veblen, Mitchell, Copeland, Keynes and Minsky). • Some consensus that emergent PKI consensus includes shared approach to MMT (Whalen, 2013; Nesiba, 2013) • Monetary content of Löschian economic geography as spatial “brigde” between Institutionalism, Schumpeter and Keynes.
  33. 33. Geographies of money – II • The trajectory of spatial development and the advancement of the monetary-financial system is a joint historical process. • Money and credit are always and everywhere fundamentally hierarchical in finance and power; all money is credit money. – Spatial circuits characterized by a rapid evolution in bank complexity and the growing importance of “murky finance” (shadow banking). – Hybrid system that is part public (“outside money”, a net asset to the private sector) and part private (“inside money”). – Money and finance are non-neutral with regard to space, principally because the institutional arrangements of financial regulation matter for how the spatial economy evolves. The flow of funds
  34. 34. REFERENCES – I Abel, Jason R. and Deitz, Richard. 2010. “Bypassing the Bust: The Stability of Upstate New York’s Housing Markets during the Recession,” FRBNY Current Issues in Economics and Finance, 16(3): 1–9. Adrian, Tobias, and Hyun Song Shin. 2010. “The Changing Nature of Financial Intermediation and the Financial Crisis of 2007–09.” Annual Review of Economics 2(1): 603–18. Barr, Nicholas. 1988. “The Phillips Machine.” LSE Quarterly 2(2): 322–35. Bieri, David S. 2009. “Financial Stability, the Basel Process and the New Geography of Regulation.” Cambridge Journal of Regions, Economy and Society 2(2): 303-331. Bieri, David S. 2013. “Form Follows Function: On the Relationship between Real Estate Finance and Urban Spatial Structure.” CriticalProductive 2(1): 7–18. Bunge William Wheeler, Jr. Fitzgerald: Geography of a Revolution. 2nd ed. Athens, GA: University of Georgia Press. City of Detroit. 1945. An Illustrated Story of the First Half-Century of Public Lighting in Detroit, 1895--1945. Fifth Annu. Detroit, MI: Public Lighting Commission. Conzen, Michael P. 1975. “Capital Flows and the Developing Urban Hierarchy: State Bank Capital in Wisconsin, 1854–1895” Economic Geography 51(4): 321–338. Copeland, Morris A. 1952. A Study of Moneyflows in the United States. Cambridge, MA: National Bureau of Economic Research. Del Negro, M.; Eusepi, S.; Giannoni, M.; Sbordone, A.; Tambalotti, A.; Cocci, M.; Hasegawa, R. & Linder, M. H. 2013. “The FRBNY DSGE Model.” Discussion Paper, Federal Reserve Bank of New York. Denis, Hector. 1904. Histoire Des Systèmes Économiques et Socialistes. Paris: V. Giard & E. Briére. Diamond, Douglas W. and Dybvig, Philip H. 1983. “Bank Runs, Deposit Insurance, and Liquidity,” Journal of Political Economy, 91(3): 401– 419. Dillard, Dudley. 1980. “A Monetary Theory of Production: Keynes and the Institutionalists,” Journal of Economic Issues,14(2): 255–272. Dillard, Dudley. 1987. “Money as an Institution of Capitalism ,”Journal of Economic Issues, 21(4):1623–1647. Föhl, Carl. 1937.Geldschöpfung und Wirtschaftskreislauf. Munich: Duncker und Humblot. Harvey, David. 1985. “The Urbanization of Capital: Studies in the History and Theory of Capitalist Urbanization.” In Baltimore: John Hopkins University Press, 1–31. Ingham, Geoffrey. K., Kain, John F. and Ginn, J. Royce. 1972. The Detroit Prototype of the NBER Urban Simulation Model, New York: Columbia University Press. Isard, Walter. 1960. Methods of Regional Analysis. Cambridge, MA: MIT Press. Jevons, W Stanley. 1884. Investigations in Currency and Finance. London: MacMillan and Co.
  35. 35. REFERENCES – II Kiyotaki, Nobuhiro and Moore, John. 1997. “Credit Cycles,” Journal of Political Economy, 105(2): 211–248. Kircher, Harry B. 1962. “The Geography of Financial Agglomeration in the United States.” Phd Dissertation, Clark University. Labasse, Jean. 1974. L'Éspace Financier: Analyse Géographique. Paris: Armand Colin. Lefebvre, Jean-François. 1970. La Révolution Urbaine. Paris: Gallimard. Lösch, August. 1940. Die räumliche Ordnung der Wirtschaft: Eine Untersuchung über Standort, Wirtschaftsgebiete und internationalen Handel . Jena: Gustav Fischer. Lösch, August. 1940. Geographie des Zinses. Die Bank, 33:24–28. Lösch, August. 1941. “Die Lehre vom Transfer – neu gefaßt.” in von Zwiedineck-Sündenhorst, O. and Albrecht, G. (Eds.) Abhandlungen Jahrbücher für Nationalökonomie und Statistik, Jena: Gustav Fischer, Band 154: 385—402. Lösch, August. 1949. “Theorie der Währung: Ein Fragment,“ Weltwirtschaftliches Archiv, 62: 35–88. Lösch, August. 1954. The Economics of Location, New Haven: Yale University Press. Mayhew, Anne. 2011. “Money as Electricity,” Journal of Cultural Economy, 4(3): 245 – 253. Minsky, Hyman P. 1992. “On the Non-Neutrality of Money,” Federal Reserve Bank of New York Quarterly Review 18(1): 77–82. Minsky, Hyman P. 2008. Stabilizing an Unstable Economy. New York: McGraw Hill. Pozsar, Zoltan, Tobias Adrian, Adam Ashcraft, and Hayley Boesky. 2013. “Shadow Banking.” Federal Reserve Bank of New York Economic Policy Review 19(4): 1–17. Schumpeter, Joseph A. 1954. History of Economic Analysis, New York: Oxford University Press. Studenski, Paul. 1958. The Income of Nations: Theory, Measurement, and Analysis Past and Present. New York: New York University Press. Thompson, G F. 1998. “Encountering Economics and Accounting: Some Skirmishes and Engagements.” Accounting, Organizations and Society 23(3): 283–323. Tobin, James. 1958. “Liquidity Preference as Behavior Towards Risk,” Review of Economic Studies, 25(3): 65–86. Wagemann, Ernst F. 1930. Economic Rhythm: A Theory of Business Cycles. 1st ed. New York, NY: McGraw Hill. Wagemann, Ernst F. 1940. Wo Kommt Das Viele Geld Her? Geldschöpfung Und Finanzlenkung Im Kriege. Düsseldorf: Völkischer Verlag GmbH. Whipple, Fred H. 1889. Municipal Lighting. Detroit, MI.

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