Hamlet without the Prince? How Spatial Economics Abandoned Monetary Analysis* David Bieri†1,2,3 1School of Public & International Affairs, Virginia Tech, Blacksburg, VA 24061, USA 2Department of Economics, Virginia Tech, Blacksburg, VA 24061, USA 3Global Forum on Urban & Regional Resilience, Virginia Tech, Blacksburg, VA 24061, USA Preliminary and incomplete draft This version: May 2019 Abstract From the local income effects of mortgage refinancing to the regional transmission of monetary policy via house price dynamics, the Great Financial Crisis has been a powerful reminder that money and credit—always and everywhere—matter greatly for the evolution of the space-economy. Yet, with the classical dichotomy still embed- ded firmly in its theoretical core, the contemporary canon of spatial economics (from urban economics to geographical economics and regional science) has little to say about monetary phenomena and their spatial consequences. Such a disengagement with regional aspects of money and credit represents a distinct break with the intel- lectual tradition of a long ancestry of spatial economists, stretching as far back as the seminal writings of Heinrich von Thünen’s. In this paper, I illustrate this contention by examining the monetary content of the work of August Lösch (1906–1945)—one of the founding fathers of modern spatial economics. Indeed, questions about the spatial neutrality of money, its institutional governance, as well as its endogenous creation, are central elements to his work. In this sense, I argue that Lösch—as a stu- dent of Walter Eucken’s, Arthur Spiethoff’s and Joseph Schumpeter’s—represents an important branch in the long lineage of 20th century Continental monetary thought. Yet such a pedigree notwithstanding, the current orthodoxy of spatial economics has now almost completely abandoned these very aspects of the Löschian system. I fur- ther argue that Lösch’s theoretical reflections on spatial aspects of money also reflect *Abstract prepared for the 23rd Annual Conference of the European Society for the History of Economic Thought (ESHET) in Lille, at Science Po Lille, on 23-25 May 2019. The title is inspired by Kregel’s (1985) classic paper and its lesser-known antecedent (Kregel, 1982). Preliminary and incomplete—Please do not cite without permission. †Corresponding author: School of Public & International Affairs, Virginia Tech, 140 Otey St. (Office 213), Blacksburg, VA 24601-0113, USA. Web: globalforum.vt.edu. Email: [email protected] (David Bieri). primary elements of a ‘credit view’ which was slowly establishing itself in the wan- ing years of the Weimar Republic. Indeed, Lösch’s treatment of money also forms a central pillar of his ambition to develop a ‘theory of the business cycle in space’ where the main focus is not on the location choice per se, but on the effects of the reciprocal links between trade flows and financial flows on endogenously determ- ined economic regions. In these aspects, Lösch relies mainly on Gottfried Haberler’s synthesis of international business cycle theory of the late 1930s, but also draws from Hans Neisser’s work on money and credit, particularly with regard to the impact of monetary policy on the business cycle. On these grounds alone, the lack of re- cognition of Lösch’s contributions to a spatially-oriented theory of money, let alone his (albeit rudimentary) attempt to link real and monetary elements in a synthesis of the theory of space with the credit theory—quite consistent with ‘Ohlin’s dream’— represents a historical curiosity, if not a puzzle. Spatial economics without Lösch’s monetary theory, then, appears indeed akin to Hamlet without the prince. Keywords: Monetary theory, spatial economics, credit view, hierarchy of money, neut- rality of money. JEL classification: G18, G28, E42, R1. “Das Geld nannte Schumpeter einmal eine kuriose Form der sozialen Abrechnung. In ihrer reinsten Ausprägung könnten wir uns diese Abrech- nung einfach über eine zentral Buchhaltung für die ganze Welt vollziehbar denken.” – August Lösch(1949, p.37) “Die geographischen Zinsunterschiede sind ganz allgemein ein Spie- gelbild der räumlichen Organisation des Bankwesens und der regionalen Strukturunterschiede der Wirtschaft.” – August Lösch(1940b, p.26) “[T]he true shifting of the price level occurs only with credit creation; that is, with a hierarchy of different kinds of money, whereas in a region with a uniform currency the price waves started by a shift in purchasing power necessarily suffice for transfer.” –August Lösch(1954, p.227) 1 Introduction The contemporary canon of spatial economics has enshrined the ‘classical di- chotomy’ in that it treats the spheres of money and production as analytically distinct.1 As such, spatial theory upholds the neutrality of money in its most basic quantity-theory position, suggesting it is only the absolute price level, not relative prices and interest rates, and hence real output, that is affected by changes in the quantity of money.2 Spatial economists thus tend to treat the monetary system as the proverbial veil that renders money and financial interrelations a source for short-term frictions at best, but not relevant to the determination of regional market (dis)equilibria. In short, real factors de- termine real regional variables. With monetary neutrality deeply embedded in its theoretical core, present-day mainstream spatial economics has little to say about money and its spatial consequences. Yet, such a disengagement with spatial phenomena of money and credit represents a break with the intellectual tradition of a long ancestry of spatial economists, stretching back almost two centuries to the seminal writings of Heinrich von Thünen and Wilhelm Roscher.3 Examining the monetary con- tent of the work of August Lösch (1906–1945)—arguably the most prominent 1In keeping with Blaug’s(1997) terminology, I use the term ‘spatial economics’ to refer to a broad body of subfields in economics, including urban and regional economics, regional science, and geographical economics. Walter Isard first introduces the expression ‘space-economy’ in his seminal QJE (1949) survey article of German location theory, bringing to the English-speaking literature a term that is clearly inspired by its German origin as Raumwirtschaft (cf. Weigmann, 1931; Hoover, 1938). See Meardon(2000) and Marchionni(2004) for the taxonomic subtleties in delineating the fields in the English-speaking literature, and Schmidt(2014) for those in the German literature. 2See Patinkin and Steiger(1989) and Klausinger(1990) for complementary overviews on the origins of the term ‘neutrality of money’. 3Detailed discussions of von Thünen’s monetary thought are the subject of Meltzer(1980); Gordon (1983); Blaug(1985); Neuberger(1997); Nellinger(2014). Roscher’s monetary writings are examined in Barkai(1989). 1 of the ‘younger’ German location theorists—I argue that his monumental Die räumliche Ordnung der Wirtschaft (Lösch, 1940b, 1944) contains overlooked spa- tial elements that are associated with credit theories of money, including the notion of monetary non-neutrality, and the observation that money is created endogenously in an institutional order that is inherently hierarchical.4 In important ways, Die räumliche Ordnung adumbrates, particularly in its second edition, central elements of a more comprehensive treatise on mon- etary problems that Lösch intended to deal with in “my book on money” (Lösch, 1944, p.ix) which—because of his premature death in 1945—only appeared posthumously as a manuscript fragment Die Theorie der Währung (Lösch, 1949).5 Mostly couched in terms of spatial aspects of the transfer problem, both Die räumliche Ordnung and Die Theorie der Währung repres- ent complementary elements of an ambitious theoretical attempt to realize ‘Ohlin’s dream’ in its entirety, i.e. the synthesis of real and monetary ele- ments of general equilibrium in the dynamic setting of the ‘space-economy’ (cf. Trautwein, 2014a,b). It is critical here that we distinguish between the explicit elements of ‘Ohlin’s dream’ (cf. Ehnts and Trautwein, 2012) and the more encompassing notion of ‘Isard’s dream’ of a General Theory that returns space to the core of economic analysis (cf. Fujita, 1999; Fujita and Krugman, 2004). Viewed in this light, one of Lösch’s most original theoretical innovations that gradually and consistently emerges over the course of his work is to present the eco- nomic analysis of regions with a setting of spatial (monetary) macroeconom- ics; in the Löschian framework, the endogenous location choices of economic agents give rise to differentiated regions which are linked via interregional trade and cyclical dynamics arise from the process of adjustments to balance- of-payment disequilibria that, in turn, emerge from transfers across space. A particular feature of this approach is the fact that it highlights the import- ance of inter-regional capital flows—an aspect of the region to which spatial economists have paid little attention since.6 Against the background of these largely ignored dimensions of Lösch’s work, I contend that the continued separation of monetary theory from price 4I will generally refer to the original German first and second editions of Die räumliche Ordnung der Wirtschaft (1940b; 1944). The English translation was published posthumously as The Economics of Loca- tion (1954), translated and edited by William Woglom with scientific input from Wolfgang Stolper, a fellow student of Lösch’s under Schumpeter at Bonn and lifelong close friend, the 1954 edition contains a number of (acknowledged) interpretational judgements by Stolper himself that give Lösch’s (monetary) message a particular ideational bent. 5Upon publication as an uncompleted manuscript in volume 62 of the Weltwirtschaftlichen Archivs in 1949, the editors translate Die Theorie der Währung as ‘Theory of Money’ and ‘Monetary Theory’ for the English summary that accompanies the document. By contrast, Stolper(2008) translates it as ‘Theory of Foreign Exchanges’ in keeping with the German distinction between ‘Geld’, ‘Kredit’, and ‘Währung’. 6Work in the Post Keynesian tradition by Dow(1986, 1987a, 1988) represents an important exception in this regard.