The Spatial Non-Neutrality of

Money and its Role in Löschian

Economic Geography

David BieriPolitical Space Economy Lab, University of Michigan

12th International Post Keynesian Conference

September 2014

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”).

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)

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 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

“Frontier finance” hypothesis

Source: Bunge (1971)

Circular flows: Neoclassical

SynthesisSources: LSE (1951), Punch

(1954)

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”

Treatment of money in regional

analysis

Employment,

earnings

Urban labour market

Cost-of-living

Real estate, housing

market

Amenities

Geography,

environment, local

public goods,

infrastructure, culture

Regional

employment

share

Migration, job

creation, firm

formation

relative rentsrelative wages

expenditure

real income

Monetary sector

Money supply, credit

intermediation,

liquidity preference,

interest rates,

exchange rates

Treatment of money in regional

analysis

Employment,

earnings

Urban labour market

Cost-of-living

Real estate, housing

market

Amenities

Geography,

environment, local

public goods,

infrastructure, culture

Regional

employment

share

Migration, job

creation, firm

formation

relative rentsrelative wages

expenditure

real income

Monetary sector

Money supply, credit

intermediation,

liquidity preference,

interest rates,

exchange rates

Inflationprice level of labour and current output

Interest rates

price level of capital

assets

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)

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)

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

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)

Morris A. Copeland

(1896–1989)

Wesley C. Mitchell

(1874–1948)

Post Keynesian Institutionalism:

“Spatial Non-Neutrality of Money”“Flow of

funds”

“Financial

instability”

“Spatial price

waves, hierarchy

of money”

Edgar M. Hoover,

Jr. (1907–?)Walter Isard

(1919–2010)

Alvin H.

Hansen (1887–

1975)

Wassily W.

Leontief (1906–

1999)Harvard, early

1950s

Kiel Institut für

Weltwirtschaft

, late 1920s

U. Michigan,

1930s

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)

Schumpeter’s monetary theory

• Long gestation period with many trials and misadventures

– Das Wesen und der Hauptinhalt der theoretischenNationalökonomie (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

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)

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;“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.

Löschian Economic Geography –

III

So

urc

e: L

ösch

(19

40

)

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

– 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)

Circular flows: Institutionalists

Source: Copeland (1952)

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

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.

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

shapes economic space accordingly.

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