Method of Regional Analysis_an Introduction to Regional Science

Method of Regional - Regional Science Reprints#3 Methods of Regional Analysis an Introduction to Regional Science by WALTER ISARD in association

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Unformatted text preview: Regional Science Reprints #3 Methods of Regional Analysis: an Introduction to Regional Science by WALTER ISARD in association with: DAVID F. BRAMHALL GERALD A. P. CARROTHERS JOHN H. CUMBERLAND LEON N; MOSES DANIEL 0. PRICE EUGENE W. SCHOOLER PROGRAM IN URBAN AND REGIONAL E STUDIES - CORNELL UNIVERSITY ITHACA, NEW YORK {5"‘1 . I ' I, 'L'/‘ "“4 . A 7 "V I I , \ , ,- t , I L, V , . : IV {I I 157 Chapter 6 Regional Cycle and Multiplier Analysis' A. INTRODUCTION In planning the utilization of the resources of a region and its economic development, we cannot be satisfied with data on (1) population, current and future, and migration estimates; (2) Gross Regional Product, regional income, income per capita, income distribution by class of family, com- modity trade balance, and Rest of the World account; (3) current money and commodity flows, capital movements, reserve ratios, balance of pay- ments position, and similar items. We must probe more deeply and consider other basic factors. Of these, one is the cyclical sensitivity of the mix of industrial activities which may be incorporated in a development plan, and beyond this of the region itself. Historically, many regions of the world and of the United States and other nations have experienced severe ups and downs in their growth. A part of these fluctuations are undoubtedly associated with the dynamics of capitalistic development and probably are unavoidable in a free or partly controlled enterprise system. However, it is the belief of many that another part of these fluctuations are avoidable and that a study of strategic factors generating such fluctuations is of great value. For example, in area development studies we frequently encounter the view, sometimes only implicitly, that it is desirable to proceed with a program of development at a slower pace, or to set goals for development which are not as high as can be obtained, if in the process of transition the severe ups and downs of the regional economy can be avoided. Whatever the view expressed, clearly a development policy for a region should consider the cyclical implications of such a policy. Other things being equal, it is generally more desirable to develop an industrial mix whose cyclical tendencies tend to balance out or at least do not intensify each other. Thus, one valuable avenue of inquiry has been concerned with the industrial composition of regions and the cyclical fluctuations of different types of industries, especially as they may offset each other. This type of investigation has particular bearing on policy with respect to ‘ Section B of this chapter was written with Leon N. Moses, sections C and D with Eugene W. Schooler, and the Appendix with David F. Bramhall. 158 “soft spots” and “depressed areas” within the national economy. As we dig into the materials on the oscillations of different types of industry, we become aware of their different impacts on regional cycles. We discover that in the short run at least certain industries are basic, particularly those that serve national markets. Their fluctuations lead to fluctuations in local income, which in turn induce fluctuations in retail sales and various service trades, which lead to still more indirect fluctua- tions. In short, the fluctuations of basic industry have a multiplier effect. Recognition of this multiplier effect has led to a second type of study, the economic base study, or the study for cities and regions of basic-service ratios, that is, of the ratio of employment (total or change in total) in basic activities to employment in nonbasic activities, or in short, of regional multipliers. I A far-sighted resources development analyst, although he may be con- cerned with a particular region, investigates further. Regions are not isolated entities. They are interrelated. To any given region are ’trans- mitted the ups and downs of regions which are its neighbors. Therefore, the analyst wants to employ an interregional framework. He wants to know something about the cyclical sensitivities of other regions and the ways in which their cycles may be spread to his own region. He recognizes the fact that the next region’s imports are his region’s exports, that in effect a system of regions exists. Hence a third type of study which is of value concerns the sensitivity of difl‘erent kinds and types of regions, with particular emphasis on fluctuations in exports and imports, that is, on the contractions and expansions of the economic bonds which link regions. This type of study leads to a more precise, but at the same time more theoretical, formulation of multiplier effects and of the mechanisms by which cycles are spatially transmitted within the system of regions. It centers around the interregional trade multiplier, a concept closely akin to Keynesian doctrine. Beyond these areas, the regional investigator probes into the relationship of regional cycles to national cycles. He is fully aware that national conditions bear heavily on regional developments. Many of the forces which interplay to determine national conditions are outside the scope of regional analysis and lie in the traditional realm of business cycle theory. These shall not be discussed in this book. Yet he is also aware that because nations are composed of regions, regional development programs and conditions can influence in part national fluctuations. After all, statistic- ally speaking, national cycles are weighted averages of regional cycles. Therefore, the regional analyst may be interested in a fourth type of study, one less theoretical than the third, which collects, processes, and interprets data on a multiregional as well as a national basis, or which digs deeply into the historical framework in order to unearth the several strategic sets of regional and national factors, and the important sequences of reper- 159 cussions which they have generated within and between the several regions of the national economy. He thereby gains deeper insights into the interrelations of regional and national cycles and thus greater understanding of both. B. INDUSTRIAL COMPOSITION AND REGIONAL CYCLES In the United States, research into the regional aspects of business cycles began when there was already a good deal known about the re- sponsiveness of individual industries, such as steel, and groups Of in- dustries, such as durables and nondurables. Therefore one of the first types of study, which is still being fruitfully pursued, is to examine the extent to which the different cyclical patterns of areas can be attributed to the industrial composition variable.1 The over-all procedure is to com- pare by regions the timing, duration, and amplitude of cycles in each of a number of key sectors—such as retail sales, employment, bank debits, and power sales. For example, Neff and Weifenbach2 investigate the cyclical experience of several major cities which are different in industrial composition and which exhibit different degrees of industrial diversity. Major cities are considered relevant regions for analysis, since they exemplify functional specialization and contain large-scale cyclically vulnerable businesses. Furthermore, they are frequently breeding grounds of major innovation and changes in the rate of investment. Even if they do not play a major role in originating cyclical impulses, they are certainly sensitive barometers of the cyclical forces transmitted through their intricate financial and industrial structures. Neff and Weifenbach reach several conclusions which they are obliged to qualify in many respects.3 When fluctuations are severe they find no major differences among the several areas in timing of cycles during the period 1919—1945. Only when fluctuations are small do they find wide differences in peak and trough dates, but even then the distribution of the areas from earliest to latest differs from one minor cycle to another. There is a faint suggestion, however, that Cleveland and Detroit, areas with heavy concentration of durable goods production, do tend to lead the others. This finding, although tenuous, does lend a bit of support to the thesis that, because durable production industries are most sensitive to the cycle,4 regions possessing heavy concentrations of such industries tend to I I The part of the pattern that cannot be attributed to the industrial composition variable may be ascribed to within-industry differences among regions, differences which are presumably due to difl'erences in other regional characteristics. 2 P. Neff' and A. Weifenbach [52]. Also see P. Nefi' [51]. 3 [52], ch. 8. 4 According to this thesis durable-goods production tends to be more sensitive 160‘ respond first to changes in stimuli. Although the several areas exhibit variations in the duration of their fluctuations, these variations do not follow any regular pattern. No area can be singled out as having cyclical phases of the longest or shortest duration: As for cycle amplitude, again the experiences of the areas suggest that there is little if any direct and simple association of industrial pattern with relative amplitude.5 Other studies seem to support the view that regional variations in cycles cannot be attributed solely or even largely to differences in industrial composition.6 One of these, for example, investigated unemployment rates during the recession period 1949—1950 for a sample of eleven impor- tant manufacturing industries chosen for their homogeneity and presence among all census regions.7 It found that, in general, regional differences because, among other reasons, the income elasticity of demand for durables tends to be much higher than for nondurables, a point to be discussed more fully below. 5 As Neff' and Weifenbach state: “Pittsburgh, relatively constant in size and in con- centration in producers’ durable goods, does not generally have abnormally severe cyclical swings. Los Angeles, growing rapidly, and like Chicago in its diversity, failed to show evidence of comparative stability and resembled Pittsburgh in its response to cycles more than any other area. Cleveland likewise differs from Los Angeles in nearly every respect except the intensity of its business cycles. Only in Detroit did industrial pattern invariably reflect itself in measurably different cycles, and here the influence of its one great industry, automobiles, is sufficient to affect noticeably not only the real series but also debits and store sales” ([52], p. 193). 6 It should be mentioned that there is some disagreement about the nature of the differences that exist among regional cycles. For example, Williams claims that existing studies have not clearly demonstrated, as some interpreters believe they have, that significant differences do exist between regions at the turning points of major cycles. Williams suggests that differences which are noted result from the use of imperfect statistical techniques. He questions whether important differences can exist in turning points of regional cycles in the United States in view of the extremely close ties of these regions made possible by modem means of communications and transportation and of the rapidity with which impulses sprwd. However, Williams does recognize major differences in the amplitude of regional cycles. Contrary to Neff, he finds that these differences are related to industrial com- position, in particular to the per cent of manufacturing wage earners in nondurables production (R. M. Williams [76]). ' ' Supporting Williams’ position are recent findings by George H. Borts. In examining manufacturing employment in 33 states, 1914—1953, Borts observes significant differences in the amplitudes of the cycles experienced by states. He notes that these differences can be explained to a significant degree by industrial composition, the states subject to most cyclical variation being characterized by a high proportion of durable-goods manufactures (G. H. Borts [9]). A somewhat different point of view is taken by Simpson. He finds that the direction and amplitude Of income changes are different among regions. He also finds some sup- port for his hypothesis that “On the upturns, the expanding regions usually lead and the contracting ones lag, while on downturns, the contracting ones lead and the expand- ing ones lag" (P. B. Simpson [62], p. 45). 7 J. W. Garbarino [21]. 161 in these unemployment rates for a given industry were greater than dif- ferences in these rates among the industries of a given region. Put another way, the limited data of this study suggest that if we wish to estimate the unemployment rate for an industry in a region, we would on the whole obtain a better approximation by using the average unemploy- ment rate in the region than by using the average unemployment rate for the industry in the nation as a whole. Another type of classification considered meaningful for regional cycle analysis distinguishes between growth and nongrowth regional situations. A typical argument claims that during a depression investment opportuni- ties in areas of high-growth potential pile up so that, when a change in the national climate of anticipations occurs, it is quickly followed by a flood of new investment in these areas. The rapid rise in their incomes and out- puts often attract migrants. These migrants represent an increase in the labor supply which keeps wages from increasing as quickly as they might otherwise and which may forestall bottlenecks. Further, new population will encourage expansions in residentiary industries, particularly con- struction. And so forth. In examining arguments such as that advanced in the previous para- graph, Nel’f and Weifenbach found that for their urban areas, each taken as a whole, “high rates of growth do not guarantee either unusually long or unusually short cycles . . . nor does a decline in growth seem to affect the length of cycles.” 3 Also, Kidner found a high degree of similarity in the cyclical fluctuations of California (an area of high growth) and of the United States.9 However, Kidner did observe one important difference. Although experiences of the United States and California are very much alike in the contraction phase, “there is an apparent tendency for economic activity in California to recover from business depression more rapidly and more fully than is true for the United States as a whole.”10 This latter phenomenon occurs even though, according to Kidner, there is similarity throughout the entire cycle between United States and California in business anticipations and in the direction of change in general busi- ness activity. One explanation of the contrasting comparative behavior 3 [52], p. 192. 9 In general, the greatest dissimilarity is found in comparisons of minor cycles, a finding consistent with Nefl"s and Weifenbach’s conclusions. Minor fluctuations of a region, Kidner feels, may be largely determined by the composition of its economy. “In a major cycle, however, the effect of national policy, and the consequences of sharp expansions or contractions in employment and investment resulting therefrom for the nation, may be sufficiently powerful to overcome the influences of regional differences in structure and to impose a high degree of similarity on the cyclical behavior of the whole country” ([41], p. 113). In examining unemployment rates in the United States and California, Gordon found there, too, similarity of short-run cyclical experience ([28], ch. VII, IX). 10 F. L. Kidner [41], p. 114. 162 in the contraction and expansion phases, which is consistent with the argument stated earlier, is the following. During periods of contraction no significant investment is undertaken anywhere in the economy. Therefore a high-growth regional economy is hit as hard as others. However, during revival, when new investments are initiated, relatively greater expansions tend to take place in areas of rapid secular growth (such as California), for then the existence among regions of differential profitabilities in investment opportunities can lead to differential recovery experiences. 11 Hence, we are led to conclude from the limited materials which are ‘ statistically valid12 that cyclical responsiveness of any given region cannot be divorced entirely from its industrial composition and from its secular trend position. The per cent of a region’s activities in durables, the presence of growth industries in its industrial mix, the diversity of its industrial structure, the sensitivities of each of its individual production lines, the direction and rate of change of its underlying secular position are all factors to be considered in the formulation of policy for the region and in the programming of its development. Yet, until considerably “Another related point made by Kidner is worthy of note. In discussing the hypothesis that diversification leads to less intense cyclical fluctuations, he notes that “mere diversification, in any case, is no guarantee of stability. The relevant question has to do not with the existence of highly specialized industrial development and the consequent dependence upon one or a few principal industries, but rather it has to do with the particular composition of industrial activity in the region covered. Particular types of specialization might yield better promise of stability than a random diversifica- tion” ([41], pp. Ill—112). He illustrates with California materials. - 12 Numerous questions may be raised regarding the validity of the statistical materials developed and the research methodologies adopted in the several studies on regional cycles. For example, with regard to amplitude what statistics should be studied? Most authors have concentrated on the absolute changes, but there is much to be said for Vining's contention that for a group of regions closely knit together by a system of modern communication and transportation facilities differences in rates of change are the more significant. If absolute changes are to be used, the difficult question arises whether it is meaningful to decompose time series into seasonal, cyclical, and trend movements. If so, still another basic question regards the procedure for isolating cyclical movements. As is well known, injudicious (and even at times judicious) trend removal can alter the timing, duration, and amplitude of cycles; it can make cycles appear where there were only changes in the rate of increase or decrease in the original data, and it can also suppress actual cycles in the processing of the data. Very often the use of linear trends is parti- cularly questionable. Even the use of the meticulously developed procedures of the National Bureau of Economic Research whereby trend removal is generally avoided is open to serious question, especially in the measurement, identification, and comparison of regional cycles where the several regions are subject to significantly different secular rates of growth. There is also the additional basic question of what specific series to employ to reflect the cyclical experiences of a region. Recognition of these and many other problems regarding statistical procedures and data point up the important need for further research in this area. 163 more research is conducted to clear up the clouded picture thus far presented, we must rely heavily on intuition and sound judgment in evalua- ting the cyclical implications of the industrial composition and growth variables. '3 C. REGIONAL MULTIPLIERS: THE ECONOMIC BASE TYPE Another type of regional analysis which is closely linked to regional cycle studies concerns regional multipliers. This analysis stresses the inter- relations of sectors within a regional economy and the spread of impulses originating in any one sector to all other sectors either directly or indirectly. Such spreading in essence has a multiplying result. Through the con- tinuous back and forth play of forces (or round-by—round process of inter- action), such spreading leads to a series of effects on each sector, including the original one, although these effects need not always be in the same direction and of significant magnitude. The relevance of multiplier 13 Of interest here is the forthcoming study by G. H. Borts [9]. Observing that industrial composition fails to explain entirely cyclical behavior for states, Borts stan— dardizes states. Specifically he constructs a series showing the cycle the United States as a nation would have experienced if each national industry were given the weight it has in a particular state. That is, for each state he produces a hypothetical nation which in industrial structure is a replica of the state. Comparison for each state of the derived cyclical behavior of the hypothetical nation with the actual cyclical behavior of the state yields fruitful hypotheses. Borts finds that almost always the states whose actual growth rates increased over a relevant sequence of time periods had less amplitude than industrial composition (i.e., their standardization as hypothetical nations) would suggest; whereas the states retarded in growth had more amplitude than industrial composition would suggest. Borts claims that “retardation may be regarded as a dis— continuity in the growth trend. States which retard have lower relative growth rates than previously. This may be indicative of the appearance of unprogressive firms, high-cost production facilities and local cost characteristics which inhibit growth at the old relative rate. These conditions will cause industries in the region to have sharper cyclical amplitudes than their national counterparts. Conversely, acceleration may indicate the appearance of cost characteristics which stimulate growth. Under this argument the characteristics which change the growth ranking will also change the cyclical behavior of the affected states.” A related study, which does not differentiate between secular and cyclical position of regions, attempts to explain shifts in regional income in terms of changes in four factors: (1) value added by manufacture, (2) value of agricultural crops and government pay- ments, (3) value of mineral production, and (4) property income. For any given region two aspects of change are considered in each of these categories. One is the change in the relative position of the region within a category. The other is the change in the relative importance of the category in accounting for total national income. Hence if a region has obtained an increasing share of the total value added by the nation’s manufactures, and if value added by manufactures has represented an increasing per cent of national income, the region’s income can be expected to have increased on both scores. See P. Simpson [62], pp. 26—38. it should be kept in mind that frequently in studies which attempt to “explain” regional cycles and shifts, it is as important to investigate “residuals” as it is to identify the eti‘ects of “explanatory” variables. 164 studies for programming regional development is obvious. It neatly points up how growth in one sector induces growth in another. The rele- vance of such studies for understanding regional cycles is also obvious as soon as we recognize that some impulses may be positive, others nega- tive; some expansionary, others deflationary. Regional multiplier analysis can be designed to handle any number of variables. Yet, the more variables a design encompasses, the more difficult it is to leave the conceptual stage and derive results of direct usefulness. The most comprehensive regional multiplier analysis to yield quantitative results of some value is that associated with the use of the interregional input-output technique to be discussed at length in Chapters 8 and 12. In contrast, the most simple and straightforward type of regional multiplier analysis is associated with economic base studies. These latter studies for the most part avoid the interregional variable and employ a very gross industrial classification. 14 The economic base type of analysis distinguishes between basic (primary) industry and service (nonbasic or residential) industry. This distinction is in keeping with a premise that has been increasingly taken as a point of departure for regional study. This premise states that the reason for the, existence and growth of a region—whether it is a community or a small resource area at one extreme or a huge metropolitan or resource region at the other extreme—lies in the goods and servicesit produces locally but sells beyond its borders. These “basic” activities not only provide the means of payment for raw materials, food, and manufactured products Whidh'the region cannot produce itself but also support the “service” activities,.which are principally local in productive scope and market areas.15 , It was not until the late 1930’s that attempts were made to measure quantitativelythe basic and service components of individual urban or regional economies. Homer Hoyt developed the idea of a “basic-service 1‘ Among some of the better Writings-"On the economic base are R. B. Andrews [4, 5]; J. W. Alexander [1, 2]; H. Blumenfeld [8]; Federal Reserve Bank of Kansas City [18] ; B. Barford [6]; M. C. Daly [16]; University of New Mexico [70]; Cincinnati City Planning Commission [15]; G. Hildebrand and A. Mace, Jr. [31]; H. Hoyt [33]; A. M. Weimer and H. Hoyt [75], ch. 18; C. L. Leven [4.5, 46]; J. M. Mattila and W. R. Thompson [48]; H. M. Mayer [49]; R. L. Steiner [63]; W. F. Stolper and C. M. Tiebout [65]; C. M. Tiebout [67, 68]; E. L. Ullman [69]; A. W. Wilson [77]; R. W. Pfouts [55]; M. D. Thomas [66]; R. W. Pfouts and E. T. Curtis [57]; and V. Roterus and W. Calef [60]. '5 This conception of the economic primacy of a city‘s exports has existed for many years. (For a synopsis of the historical development of the concept, see J. W. Alexander [1], pp. 247—250.) Depending on the approach taken by the analyst, the concept may appear to be neomercantilistic, stressing the need for exports (export balances) to sup- port local service activities; or it may seem to support the free trader, emphasizing the inability of a community to be self-sufficient and thus its need for specialized exports to pay for all its required imports. (See H. Blumenfeld [8], pp. 118419.) 165 ratio.” This ratio purports to describe either (1) the proportion between to‘iairemployment in a city’s basic or export activities and total employment in its service or local activities ; 0r (2) the proportion between the increase in employment in a city’s basic or export activities and the increase in its service or local activities.16 From the data required to compute this basic-service ratio, a regional multiplier is easily calculated. This multi- plier is equal to total (or increase in) employment in both basic and service activities divided by total (or increase in) basic employment. For example we present in Table 1 a relevant classification of the data required for the calculation of basic-service ratios and regional multipliers for the city of Wichita, Kansas. The unit of measurement is employment. TABLE 1. WICHITA EMPLOYMENT, 1940 AND 1950, CLASSIFIED BY THE TYPE or MARKET SERVED Market Served Regional, National. and Local World Employment (Service) (Basic) 1940 1950 1940 1950 1940 1950 Total 52.091 88.575 37,148 59.325 14.943 29.250 Agriculture 4.074 3.276 1.109 1.442 2.965 1.834 Total non-agricul- tural 48.017 85.299 36.039 57.883 H.978 27.416 Mining 925 '971 50 7| 875 900 Construction 2.837 7.297 2,837 7.297 — - Manufacturing 8.692 23.931 2.705 4.605 5.987 19.326 Food and kin- dred producn 2.624 3 243 1.232 1,193 1.392 2,050 Textile mill products 16 53 I6 53 — v Apparel 146 205 — — 146 205 Fumitur'e 135 459 HS 459 - - \ - Printing 1.208 1,714 686 1,211) 522 514 a Chemicals 172 242 - - 172 242 Petroleum 572 548 — — 572 548 Metals 985 1,973 - - 985 1.973 Machinery 637 1.857 - — 637 1.857 Transportation equipment 1.561 11.937 — — 1.561 11.937 Other manufac- turing 636 1.700 636 1.700 a - Transportation. communications. - public utilities 4.473 6,833 3.752 5,576 721 1.257 Wholesale Irnde 3.003 4.616‘ 1,498 2,774 1.505 1.842 Retail trade l0.216 16,542 8,617 14.509 1.599 2.033 Finance. insurance. and real estate 3.115 4.118 . 2.729 3.447 386 671 SerVice 12.105 16.711 11.2“) 15.324 905 1.387 Public administra- lion 1.765 3.437 1.765 3.437 e v Industry not re- ported 886 843 886 843 - — —-————_—.__—.—____ Source: Federal Reserve Bank of Kansas City [18], p. 4. Data based on Census of Population, 1940 and 1950. 16 Hoyt’s initial hurried studies led him to conclude that the ratio in all cities would ordinarily be one to one. Later he discovered through more thorough and compre- hensive studies that the basic-service ratio varies markedly among cities. For a resumé of the experiences and circumstances which influenced Hoyt in this development, see R. B. Andrews [5], May 1953, pp. 163—165. 166 Total employment for years 1940 and 1950 is listed in the first two columns, by industry. For each industry the total figure is broken into two parts. That part which produces for and caters to the local market is classified as service activity and is noted in the middle two columns of Table 1. That part which produces for (is oriented to) the regional, national, and world markets is classified as basic and is noted in the last two columns. From the materials of Table l we may calculate both basic-service ratios and regional employment multipliers. In Table 2 the basic-service ratios are calculated on the basis of total employment in 1940, total employment in 1950, and change in employment in 1940—1950. The corresponding regional employment multipliers are simply the ratio of the total employ- ment to basic employment (or change in total employment to change in TABLE BASIC-SERVICE RATIOS AND MULTIPLIERS, WICHITA Regional Basic-Service Employment Ratio Multiplier 1. Based on total employ- 14,943 = 1.2 5 3.5 ment: 1940 37,148 ' ' 2. Based on total employ- 29,250 = 1.2 0 3.0 ment: 1950 59,325 ' ' 3. Based on change in em- 14,307 = 1.] 6 2.6 ployment: 1940—1950 22,177 ' ' _—______________________—_____——— basic employment), that is, unity plus the basic-service ratio. It is to be noted that different ratios and multipliers obtain, depending on both the selected key year and the method of computation. That method based on change in employment is generally considered to yield the more relevant results, although it is generally recognized that the type of computation employed should depend on the nature and purpose of a particular study. Some analysts have made extensive use of the employment multiplier concept for projection purposes. By evaluating future prospects of ex- pansion in the basic activities of the cities and regions they study, and then applying the employment multipliers derived from the basic-service ratios relating to existing industrial composition, they have forecast future expansions in total employment. By the use of employment-to-population ratios, these forecasts are often extended to include the future population that could be supported by the total future employment opportunities.17 (Thus this procedure represents one of the many indirect methods of pro- jecting population and migration after allowance for other factors, which may be used to supplement the direct techniques discussed in Chapters 2 and 3.) 17 R. B. Andrews [5], May 1953, p. 163. 167 Other analysts have been more cautious about employing the multiplier concept. Many urban and regional economic base studies have had the more limited objective of an improved understanding of the economic composition of the city or region and of its relations with other cities and regions.18 Whether the basic-service ratio (already designated in the literature by several different terms) and the associated “simple” regional multiplier are employed for description alone, or are adapted for projection and prediction purposes, numerous limitations are involved in their use. These limitations are both technical and conceptual. We now turn to a discussion of them.19 18 For example, Alexander asserts that the division of a city‘s economic activities into export and local categories illustrates a “space-relationship ” and is thus of more interest to geographers than traditional urban livelihood structure studies. He points out several ways in which the basic-service concept can' aid in an understanding of cities: I. The concept brings into sharper focus the economic ties of a city or region to other areas. Further, the composition of a city’s or region’s basic activities may be quite different from that of its total economic structure. Since it is the basic activity which is important to the economic existence and growth of the city or region, the explicit, identification of such activity is significant for analysis and for distinguishing between types of regions. 2. The concept makes possible a more satisfactory classification of cities in terms of regional function. Certain basic activities express a city’s service to its surround- ing region; by reference to these activities a city can be better classified as com- mercial, industrial, or governmental. 3. The concept provides a new and important method of classifying individual businesses. For example, two firms might be engaged in manufacturing, but because of the location of their markets, one could be basic and the other service (J. W. Alexander [1]). In a recent study, Alexandersson employs the dichotomy of city-forming and city- serving production. The former produces for markets outside the city’s boundaries, whereas the latter produces for the city’s own inhabitants. He estimates the per cent of total employment of a city which must be engaged in the city-serving portion of any industry as that per cent engaged in the given industry in that city which is at the 5 per- centile mark when all cities are ranked according to the percentage of their employment occurring in the given industry. The amount by which a city’s percentage of employment in the given industry exceeds this benchmark measures the extent to which the industry is city-farming for the given city (G. Alexandersson [3]). In this manner, Alexandersson derives a basis for classifying cities by several criteria. However, the significance of this basis of classification is to be seriously questioned in view of the discussion of this and succeeding chapters. ‘9 A rather complete discussion of these limitations may be found in R. B. Andrews [5] upon whose work we draw heavily. It is significant to note that Andrews after com- pleting an extensive survey and evaluation of economic base theory concludes that "the deepest meaning and utility of the ratio theory lies in its dynamics. For it is from an understanding of dynamics that the city planner can not only predict the action of his economy in differing circumstances but can also take steps toward more effective guidance and control,” ([5], Feb. 1955, p. 52). Another balanced discussion of the basic-service ratio as a tool for description and analysis may be found in M. D. Thomas [66]. 168 1. TECHNICAL DIFFICULTIES One of the chief technical problems the analyst must face in constructing basic-service ratios concerns the selection of a unit of measurement. Up to now, almost all actual economic base studies have used employment (number of jobs) as such a unit. This partly reflects the fact that employ- ment figures are easier to obtain than are data relating to any other possible unit of measurement. Also, total employment and its breakdown by occupation and industry are generally considered significant economic magnitudes with which planners and policymakers must be concerned. Nevertheless, employment as a unit of measure of a community’s basic and service components has drawbacks. First, data on number of jobs do not catch the significance for total expansion of different wage levels in different industries or activities. For example, the same increases in employment for two industries paying significantly different wages lead to different secondary (multiplier) efl‘ects.20 Second, employment data do not reflect the expansionary effects which result over a period of years from changes in physical productivity. Associated with little or no change in employment in basic industry can be considerable expansionary effects resulting from the increase in productivity in these industries.21 These difficulties can be overcome to some extent by the use of total payrolls as a unit of measurement. In fact, some studies have employed payrolls as a weighting factor, or at least as a check on conclusions reached from employment data. The use of payrolls as a sole unit of measure, however, is limited by the fact that payrolls give no direct evidence of the actual number of jobholders in any given industry, and that changes in the general price level may vitiate any period-by-period comparison. A significant drawback of both employment and payrolls as units of measurement is their failure to indicate either precisely or crudely the influence of “unearned” income (primarily property income and income payments from governmental agencies) on a community’s basic-service ratio. At least one study has attempted to remedy this defect by comput- ing a basic-service ratio based on estimates of income payments to individuals in the Tucson, Arizona, metropolitan area.22 Admittedly, the estimates were subject to considerable error. The fact, however, that the “unearned” income made up nearly 20 per cent of total estimated income payments is significant because of the very magnitude of the figure.23 Clearly, deeper insight into the character of an area’s economic support can be obtained when employment data are supplemented by income data.“ 20 R. B. Andrews [5], Feb. 1954, p. 53. \ 21 Idem. 22 A. W. Wilson [77]. Still another unit of measure which can be used is “value added.” For a discussion of the virtues of this unit, see C. L. Leven [45, 46]. 23 A. W. Wilson [77], pp. 3—4. ‘ . 24 It should perhaps be pointed out that in the Tucson case the actual numerical 169 Another bothersome technical problem is that of identifying basic and service components.25 In most of the actual economic base studies which have been made, the practice with respect to commercial or industrial firms has been first to divide them into those that are wholly basic, those that are wholly service, and those that are “mixed.” For example, in the Wichita study, the aircraft firms were considered wholly basic, the con- struction industry wholly service, and wholesale and retail trading firms mixed.26 Once the decision is made to consider a firm entirely basic or service, there is no further problem involved in allocating its employment, payroll, or whatever the measurement unit may be, to the basic or service category. It is in connection with the “mixed” class of firms that the serious allocation problems arise. In many studies of large metropolitan regions the ultimate basis for determining the basic and service components of mixed industries is some form of location quotient (or concentration ratio). This is true of the Wichita study, in which for each industry the per capita employment in Wichita is divided by the per capita employment in the United States.27 . Ratios greater than unity were taken to indicate an export or basic industry ‘ and the amount by which the ratio exceeded unity to indicate the extent to which total employment or payroll is basic.28 As indicated in Chapter 5, the unqualified use of location quotients (or concentration ratios), whether for allocation or other purposes, makes implicit assumptions. It assumes that, with reference to the mixed industry, local patterns of use and habits of consumption are the same as average national ones, and that all local demands are served by local production. Clearly there are many instances in which either or both of these assumptions are erroneous; The author of the Wichita study examined each miXed industry to determine whether there were local deviations from average national consumption patterns and, if so, modified accordingly the allocation of an industry’s employ- n‘ient.29 However, the resulting modifications are not without question. Further, there are situations where adjustment of the location quotient is extremely difficult, if at all pOssible. For example, how treat a situation where the entire output of a firm or industry ’is “exported,” although a values of the basic-service ratio (and therefore the derived multiplier) were not much different when calculated on the basis of employment. of earned income payments, or of all income payments. However, it does not follow that these values will not differ significantly for other regions or cities. 25 See R. B. Andrews [5], May 1954, pp. 164—172. 26 Federal Reserve Bank of Kansas City [18], p. 3. 27 Also, the location quotient used involved the comparison of Wichita’s percentage share of each industry with its percentage share of United States population. For de- finition of location quotient, see Chapter 5, section B. 28 For an excellent detailed discussion of the construction and implications of con- centration and similar ratios, see J. M. Mattila and W. R. Thompson [48]. 29 Federal Reserve Bank of Kansas City [18], p. 3. 170 substantial quantity of the same or similar product is “imported” and consumed locally? USe of an unmodified location quotient in such an instance would lead to an overestimate of local or service employment.” It is pOSsible to utilize an alternative approach to the problem of identify- ing basic and service components. Instead of allocation on the basis of concentration ratios, empirical information with respect to the location of each firm’s market may be USed. For example, if it is known that 70 per cent of a firm’s sales are to Customers outside the community and 30 per cent to local customers, at first flush it appears logical to allocate 70 per cent of the firm’s employment or payroll to the basic category and 30 per cent to the service category. This approach is often used in combination with the concentration ratio method. For example, in the Wichita study, the allocation of certain mixed industries as well as the determination of in- dustries wholly basic and wholly service was partly based on available empirical data on sales, markets, etc. However, some economic base studies employ the empirical firm-by-firm approach exclusively.31 In- formation regarding each firm’s proportions of export and local sales is obtained, usually by personal interview or questionnaire, and these pro- portions are applied to the firm’s total employment or payroll to determine the basic and service components. There are a number of limitations to this method.32 For anything but small communities, the firm-by-firm canvass (which has also been suggested in connection with social account- ing studies) becomes tedious and time consuming as well as expensive.33 Furthermore, the method is necessarily dependent on the estimates of firm officials or on firm sales records, both of which may often be inaccurate with respect to the destination of the firm’s sales. If the questionnaire method is used, the problem of inadequate number or quality of returns often arises. A problem that applies particularly to retail stores is the inability to distinguish accurately on-Ehe-spot sales to residents and nonresidents of the community. This difficulty may assume major pro- portions if the community attracts large numbers of tourists, to whom sales logically constitute exports and thus reflect basic activity. 3° A related technical difiiculty is associated with the choice of a relevant industrial classification. If a very fine breakdown of industry is used, many activities (such as transistor production and uranium mining) will be highly localized and among areas exhibit a wide range of location quotients. If a rather gross breakdown of industry is employed, general activities (such as manufacturing and trade) will be less localized and among areas exhibit a much narrower range of location quotients. 31 For example, see 1. W. Alexander [2]. 32 See J. W. Alexander [1], p. 259; R. B. Andrews [5], May 1954, pp. l68—l70; and H. Blumenfeld [8], pp. 120—121. 33 However, when in addition to an economic base study a team of investigators contemplates several other types of studies (such as regional income, social accounting, commodity flow, input-output, and industrial complex), most of the expense of a firm- by-firm canvass can be shared. 171 A more fundamental difficulty inherent in the firm-by—firm approach—— one that should be considered as much a conceptual as a technical defect— exists because of the indirect and linked nature of modern production. In any large city or region there are likely to be independent, specialized firms whose products are sold almost exclusively to other firms in the same city to be incorporated into finished products for export. Strict applica- tion of the firm-by—firm approach would result in the employment of the specialized firm being assigned to the local or service category. On the other hand, if the manufacture of the specialized intermediate product occurs in a division or subsidiary of the final producer, the associated employment will be classified as basic, since it contributes to the final product which is sold outside the community. Clearly, some adjustment must be made to take account of such “linked” activities.34 It seems apparent that if most of the specialized firm’s product becomes an integral part of a final product which is almost entirely exported, the firm’s employ- ment should be considered basic, regardless of the fact that its sales are all local. However, there are cases which are not so clearcut. Andrews cites the example of coal mined locally and sold for fuel to a local steel producer exporting finished steel. Is the coal mine a basic or a service activity?35 And what of the electric power company and the telephone company that serve the steel mill and the coal mine? Ullman points out that “It might of course be argued that if foundries serving local export industries are classified as basic . . . then drug store clerks or lawyers serving the same industry should also be considered basic and that even the drug store clerks serving lawyers who serve basic industry should be basic, etc.” 36 It should be noted that the location quotient method of identification avoids some of the questions which emerge because of linked activities. If a high ratio of concentration is associated with the steel industry in a community and if this steel industry is the chief customer of the local coal mining industry, coal mining will probably be associated with a quotient greater than unity, although its entire sales may be local. On the other hand, unless steel making and coal mining specifically require in large quantity the services of lawyers and drugstore clerks, those activities will tend to reflect average population needs and be associated with quotients not too much greater than unity. It is evident that differences in methods of basic and service component identification and in methods of dealing with such questions as linked activities can cause significant variation in the computed basic-service ratio, and thus in any derived multiplier value.37 This question of methods 34 In the Wichita study an industry is considered basic if it serves in the area another industry principally of the export category. 35 R. B. Andrews [5], Aug. 1954, pp. 267—268. 35 E. L. Ullman [69]. 37 In addition to the more or less general technical problems already discussed, any specific study is likely to run into a number of special or particular problems. Examples 172 is also tied to the conceptual problem of determining the appropriate type of multiplier, which will be discussed later. Still another issue turns around the delineation of the geographic area for which a base study is to be made. This is a complex problem which has been extensively discussed elsewhere.38 It is apparent, however, that the area chosen should form a region meaningful in terms of the study. Hence, the choice of the area depends on the purpose of an investigation and the character of regional ties as well as on practical considerations of data availability, of the possibility of delimiting labor market areas, and similar matters. It should be fully appreciated that the analytical proce- dures, the resulting numerical values of the various ratios, and the con- clusions of a study may certainly be greatly affected by the base area boundaries chosen}9 2. CONCEPTUAL DIFFICULTIES Attention is now turned to difficulties of a more fundamental nature—— difficulties inherent in the economic base and regional multiplier concepts themselves and in their use for projection purposes. It can perhaps be generally agreed that a careful economic base study contributes to an understanding of the functions of the various economic components of a city or region. In particular, it identifies and highlights the export activi- ties, which to a greater or lesser extent are necessary for the existence of the city or region. This also helps to point up the city’s or region’s economic are how to treat schools and universities and local and nonlocal government activities. The “products” of universities and government activities are not sold on the market; hence there can be no ratio of export to local sales. However, it is possible to identify the source .of support for such nonmarketed activities, for example, taxes in the case of government work and state—supported schools, and to determine how much of that support comes from inside and how much from outside the community. Another specific problem relates to the commuter. This problem arises because basic data may be available only for communities or regions defined by arbitrary or economically artificial boundaries, or because the community or region being studied is itself economically artificial. The principal difficulty involved is that of obtaining an accurate estimate of commutation into and out of the area. For further discussion see R. B. Andrews [5], Aug. 1954, pp. 261—269 and H. Blumenfeld [8], p. l25. 38 R. B. Andrews [5], Nov. 1954, pp. 309—319. 39 V. Roterus and W. Calef [60] neatly indicate how the definitions of both basic and service employment, and hence the basic-service ratio, change as an analyst pro- ceeds from one extreme of a crossroads hamlet to the other extreme of the nation. Taking the hamlet as an area for analysis, the investigator must classify employment in the hamlet's tavern, filling station, and grocery store as primarily basic (export). These activities, however, must be classified as service as soon as the relevant area of analysis is expanded to embrace the township within which this hamlet is located. And in turn, the basic (export) employment of the township becomes primarily servxce activity as successively larger areas of analysis are defined. . . . Finally, practically all activity becomes service activity when the nation is viewed as the {eleth area for analysis. . / 173 connections with and services to other cities and regions.40 However, the present discussion is concerned not with these static or descriptive aspects but with the use of the economic base and regional multiplier concepts in a dynamic setting for projection. (Supplementary discussion of the im- plications for an economic base study of a city’s position within an evolving hierarchy of central places is presented in the Appendix to the chapter.) The use of a multiplier to estimate the results of future changes in basic activities of a city or region is an attempt at prediction. This prediction is based on past or present data and is subject to error because of future qualitative changes in social, technological, and economic conditions, the influences of many of which cannot be crudely, let alone precisely, esti- mated. One of the least troublesome changes to identify is the general increase in productivity which makes possible the support of more and more service-type activities.“ This will apply to a growing national economy generally and therefore to a greater or lesser extent to regions within it. Along with the broad productivity increase associated with national economic growth, there will be changes in locational factors aflecting any particular region. These changes may tend to make it either more self- sufiicient or more specialized. For example, as the population of a com- munity grows, it provides a constantly growing local market. This tends 40 It must be emphasized that even in a static sense an economic base study falls far short of the goal of complete economic understanding of a city or region. Blumenfeld points out that the preoccupation with export activities leads to virtually complete dis- regard of the other side of the trade coin—imports. Thus the picture of the city’s or region’s ties with outside areas is really only half a picture. See H. Blumenfeld [8], pp. 121-123. With reference to planning or policy measures, the economic base study probably tends to direct attention to the prospects of growth or decline in specific export in- dustries. A better procedure would be to analyze the general locational and other advantages which the area possesses and all the possible industries which could benefit from these advantages. Furthermore, imports should be scrutinized in order to deter- mine the conditions or circumstances which would allow an advantageous shift from imports to local production. Blumenfeld criticizes the fundamental nature attributed to exports by the terms “base” and “basic.” He contends that although export industries and activities are to some degree necessary to the community’s existence, it is wrong to consider each specific export industry as basic, because there is always the possibility that in time any industry may decline and disappear and its place be taken by a new industry. Furthermore, any export industry is dependent on the existence of the organized community with its labor pool, its transport and communications network, and the whole complex of local income- generating activities. Thus the city or community itself and its local activities are “basic” and the export industries “serve” the community by furnishing means of payment for needed imports. See 1-1. Blumenfeld [8], pp. 130—132. Also, refer to C. M. Tiebout [67], R. L. Steiner [63], R. W. Pfouts and E. T. Curtis [57], and R. B. Andrews [7] for relevant discussion. 41 R. B. Andrews [5], May 1955, pp. 149—150. 174 to encourage the local development of a succession of industries which are significantly affected by economies of scale, and whose products must be imported until the community’s eflective demand reaches a size large enough to absorb the output of an economic-size unit of production. On the other hand, improvements in transport technology and, in general, in production technology will in some industries tend to expand the market of producers having access to superior sources of raw materials or other productive factors. From location analysis, increasing geographic specialization and interdependence may be anticipated. As a consequence, some regions will gain, others lose. In any event, the basic-service ratio for any region will tend to change over time in a manner reflecting the operation of these and many other location forces. Aside from the fact that in the future a region may not experience modifications of its economic framework similar in type and character to what occurred in the past, there is yet another reason why the region’s over-all basic-service ratio at any one time is quite likely to be inaccurate as a basis for computing a multiplier value. This is a result of the fact that the change in volume of service activity associated with a change in basic activity is typically not an instantaneous but a delayed reaction. At any given time, the over-all ratio may well be influenced (distorted) by recent changes in basic activity whose multiplier effects have not yet appeared. This difficulty can be resolved in some measure by calculating the basic- service ratio from data showing changes in basic and service activity totals over a period of time. From an ideal standpoint, this period of time over which past changes are computed should be chosen so as to include as few of the complicating influences mentioned earlier as possible. Some analysts might argue that since many such complicating influences are long~run in 'character, it would seem that relatively short “undisturbed” periods are best. However, in the Wichita study, multiplier values com~ puted for periods less than ten years in length show a range of variations wide enough to render them Virtually useless for purposes of prediction.“2 In short, the difficulty of this argument may be summarized as follows : in order to be conceptually valid, a multiplier derived from a basic-service ratio must be considered as a short-run phenomenon, yet evidence shows that it needs a comparatively long time to work out."3 But let us ignore these general equilibrium difliculties. Postulate a community in which all long-run influences are unchanging and in which ‘2 For the period 1940—1950 the regional employment multiplier was 2.55. For the periods 1939—1944 and 1939—1948, the same multiplier was approximately 1.2 and 3.0, respectively. These different values for the multiplier reflect the highly fluctuating character of employment in aircraft and the relatively stable character of employment in service activities (Federal Reserve Bank of Kansas City, [18], pp. 4—7). 43 In this connection, also see J. Gillies and W. Grigsby [26] and the discussion in the Appendix to this chapter. 175 the effects of increases in basic components are fully worked out. Assume that the unit of measurement to be used is employment, and that adequate data are available to show changes in employment in each industry or activity during recent years. There are still difficulties facing the analyst, whether he uses the firm-by-firm approach or the location quotient (concentration ratio) method. An economic base multiplier derived by a strict application of the firm- by-flrm method can be claimed to be a combination of two types of multi- pliers, which at times are rather difficult to unravel. The first type of multiplier is determined by the extent to which the final export products contain or utilize intermediate products locally manufactured ; for example, in the case cited of a local steel producer exporting finished steel, it would take into account the coal mined locally which was used to produce this steel plus the electric power required both to mine the needed coal as well as to produce the steel plus lawyer services required in connection with the production of these outputs, plus . . . etc. The second type of multiplier is the Keynesian-type multiplier dependent on changes in local income flows and determined by the consumption habits of employees of the export industry, of the intermediate industry, and of the service industry; for example, it takes into account that part of coal production, steel produc- tion, lawyer services, and other products and services demanded by con- sumers as a result of the new income generated by the export of steel and by the production of goods and services technically required to produce that steel, Although an economic base multiplier derived by the strict application of the firm-by-firm method maybe claimed to be a combination of two types of multipliers, the economic base multiplier associated with the location quotient method embraces only one type of multiplier, namely the Keynesian-type multiplier. But this statement is true only if we assume that accurate adjustment is made for all local deviations from national averages and that, if products are produced locally, local demands for such products will be supplied from local production.44 The analyst using the firm-by-firm method can eliminate the first of its two multiplier components by determining the extent of linked activities and considering local intermediate linked components as basic to the same extent that the final products represent basic activity. This procedure in effect provides one logical basis for attacking the problem discussed earlier of identifying the basic (export) and service (local) components of any given activity. The part of any activity that is linked technologically or productionwise to export trade is classified as export. The part of an 44 However the multiplier is calculated, its value will partially reflect over the observed period any increases or decreases in local investment activity. For the multiplier to be what it is represented to be in economic base studies, one more additional assumption must be made, namely, that the rate of local investment remains constant over the period. 176 activity that can be linked to export trade only via household income and demand and local capital formation is classified as local.45 (As will be evident when we discuss the interregional and regional input-output tech- niques in Chapter 8, the former part, that is, the technologically linked part, can be determined via a round-by-round iteration with a structural matrix from which the household and capital formation sectors have been excluded“) Thus, that part of the lawyer’s activity required to service that part of the electric power activity required to mine that part of the coal required by that fraction of steel activity producing for export trade is to be classified as export activity. In contrast that part of the lawyer’s activity required to service that part of a drugstore operation, or for that matter of any activity directly oriented to local household demand and local capital investment, must be classified as local (service). Thus, those ' parts of activities directly serving the demands of householders employed in exporting activity are still designated as local (service).47 . Although it is possible for the analyst using the firm-by-firm method to eliminate the first of its two multiplier components by considering local intermediate-linked components as basic (export) activity, it does not follow that this step is desirable. Aside from the difficulties of determining intermediate linkage, the analyst who uses the firm-by-firm approach does. so partly because he is convinced of the primacy of export activities. He would doubtless consider linked intermediate activities as results of the production and exports of the final products and thus may not wish to allocate linked activities to the basic category. He may consider the double multiplier as the more relevant. It is quite likely that one important use of this “double” multiplier or any other regional multiplier is to apply it to proposed or potential em— 45 This basis of classification is consistent with a theoretical framework which con- siders household demand and local investment as determined to a large extent endo- genously and export trade as determined to a large extent exogenoqsly. There are, of course, other possible procedures for_classifying local investment activity and those parts of other activities linked with local investment. Each procedure tends to yield a different value for the Keynesian-type multiplier. For some further relevant discussion see the following section. Note that this basis of classification cuts through the inconsistency'posed by the following two statements: (1) all of any given activity may be classified as oriented to export trade, since all activities are mutally dependent, and any one in its entirety may be linked with export activity; and (2) all of any given activity may be classified as oriented to local trade, since again all the given activity may be linked with others which directly serve local needs. 46 In practice, a complete round-by-round iteration is seldom required. Frequently, an interation of a relatively few rounds plus approximation of subsequent rounds will suffice. The parts of activities not linked through production to export activity can readily be determined residually. 47 For an actual determination of the export and local parts of activities of a region, see C. L. Leven [46], Part ll. 177 ployment increases in specific export industries in order to estimate the effect on total employment. (We assume that the major difficulties in- volved in making reliable projections of specific basic activities have been "met, partly through the use of techniques to be described in subsequent chapters.) For example, if a firm which exports automobile accessories triples its plant size and employment, what will be the resulting total increase in employment? The multiplier presumably provides a basis for such an estimate. The difficulty is that the multiplier value is an average and does not necessarily apply to any specific export activity. Industry A may import all its inter- mediate products, whereas industry B may purchase all its intermediates locally. Thus the appropriate multiplier to apply to an increase in B’s employment would be considerably larger than the one to apply to an identical increase in A’s employment. This illustrates the limitation of applying an essentially averaging technique to situations involving only one or a few individual components of the average.48 A similar difficulty arises if an attempt is made to apply an economic base multiplier derived by the location quotient method to specific industry employment increases. 'In this method the problem of the nature of in- dividual linkages is bypassed. But by so doing there is no way of deter- mining the linked basic employment increase associated with an increase in employment in a particular final expo‘rt activity. Using the same illus- tration as before, although the multiplier value would be the same for A as for B, the multiplicand (the magnitude that is to be multiplied) should be considerably larger for B than it is for A since it should include the increase in employment to produce the intermediate goods for B. One way to approach this troublesome problem of individual linkages Would be by use of the concept of value added loCally’. In the illustration, the sales value of B’s extra output less the value of any extra imported intermediates could be compared to the same thing for A’s extra output. Industry B, involving more linkages, would show a higher amount than A. If it were, say, twice as much, the multiplier or multiplicand, depending on the method, could be estimated at twice as much for B as for A. Of course, the problem remains of estimating the actual numerical values. Possibly this could be accomplished by comparing the value added per worker in A and B with an average or over-all value added per worker which would be associated with the average or over-all computed multiplier or multipli- cand.49 Admittedly, this approach to the problem encounters additional 43 The misleading effects of averaging also crop up in comparative analysis. Evidence indicates that multiplier effects of an industrial expansion vary not only by type of industry but for any given industry by type and size of region in which expansion takes place. Among others, see H. Blumenfeld [8] and E. L. Ullman [69]. Also see the discussion in the Appendix to this chapter. 49 In this connection see C. L. Leven [44], pp. 369—37 1, [45]. 178 difficulties. For one thing, value-added figures are affected by many more factors than volume of employment. Furthermore, this approach requires considerably more empirical data on product interconnections, commodity flows, and trade balances than are ordinarily available in an economic base study. It could very well be argued that if such data were available, a better and more direct way to approach the whole problem would be to set up interregional input-output tables to be discussed later. These tables would greatly facilitate tracing the effects of individual changes, whether in basic or service activities. It is quite evident from this discussion (which covers only some of the more important shortcomings and problems in economic base study and its associated regional multiplier analysis) and from the supplementary discussion in the Appendix to this chapter that a regional multiplier de- rived from the basic-service ratio of an economic base study has a strictly limited degree of usefulness and validity.50 As an instrument for projec- tion, it can be used only under certain ideal conditions. Even then, it can give no more than an average or approximate value. This is not to deny that the economic base study itself is useful. Its value, particularly in a static, descriptive sense, has already been pointed out. The analyst, however, should realize its limitations and should be especially cautious about extending its application to include the computation of regional multipliers for projection purposes. Above all, he should supplement its use with other forms and types of regional analysis. And without question he will have to consider at least implicitly a framework to account for interregional relations in order to catch interregional “feedback” effects. D. THE INTERREGIONAL TRADE MULTIPLIER Economic base studies have not been quite as circumscribed in concep- tion as depicted in the previous section. Many of them have adequately, recognized the close connection between the forces governing interregional trade and those affecting the expansion and contraction of a given region. However, it must be said that economic base studies, almost by definition, have placed chief emphasis on the local area. In contrast stand the interregional trade multiplier studies. They have focused on interregional factors, frequently to the neglect of forces internal to a region. In their treatment of regions which are “open” economies they have given primary attention to the transmission to other regions of impulses emitted at any local level via changes in imports, exports, invest- ment, consumption, and income. Direction and intensity of transmission, the nature of carrier industries and interregional interindustrial relation- 50 It is not surprising that statistical tests applied to economic base hypotheses fail to support such hypotheses, particularly when these hypotheses are narrowly construed. For example, see R. W. Pfouts [56] and R. W. Pfouts and E. '1“. Curtis [57]. 179 ships, the cyclical and secular sensitivities of different types of import and export mixes have been topics of particular concern. When compared with studies of the regional multiplier derived via the economic base concept, investigations into the interregional trade multiplier can be said to be theoretically more precise and to involve a much greater use of mathematical functions. Unfortunately, empirical work on interregional trade multipliers, although promising considerable fruit, has been scanty. The basic elements of an interregional trade multiplier are certain Keynesian-type relations.51 A region’s income, Y, is typically defined as (1) Y=l+E+C—M where I is the region’s investment expenditures, C is its consumption expenditures, and E and M are its exports and imports respectively.52 If we now distinguish between imports of consumption goods (MC) and im- ports of investment goods (M,) where M = M, + M,, and if we consider the average propensity to consume local goods, namely, the ratio of con- sumption expenditure on local goods to local income, that is, (C — MC)/ Y, 3““ La_§__fia_£(1,a_ ,_, Y —Y. Y—Y C ‘1“ q where p is the average propensity to consume, and q is the proportion of local consumption expenditures accounted for by imports of consumer goods. If we now posit that only consumer goods are imported so that by definition M = M, (and M i = 0), and if we divide equation 1 through by Y, and as given by equation 2 substitute p(1 — q) for (C — M)/ Y, we obtain I + E (3) 1= Y +p(1—q) If we transpose to the left the second term on the right, and let l—p(1—q)=l/k,wefind l_I+E_ — —— , or (4) k Y Y = k(I + E) In this oversimplified formulation k is the interregional trade multiplier. It is an “average” multiplier. It indicates the multiple regional income is of the sum of regional investment and exports.53 51 For some account of the development of the foreign trade multiplier, with which our interregional trade multiplier is almost identical, see J. S. Chipman [14], pp. 13~15. 52 [n this and the following two paragraphs we draw heavily upon R. Vining [72], pp. 212—218. 53 Generally involved in this formulation are the equilibrium equality of savings plus imports to investment plus exports, and the assumptions that consumption is a well- behaved function of income and that consumption goods import is a well-behaved function of total consumption. 180 A similar procedure can be followed to derive the “ marginal” multiplier. It can be shown that (5) A Y = k’A(I + E) where k’ = 1/[1 — p’(1 —- q’)]. Here k’ is the “marginal” multiplier, p’ is the marginal propensity to consume (dC/d Y), and q' is the marginal rate of change of imports of consumer goods with change in total consumption (nd/dC).54 Equation 5 purports to indicate the change in regional in- come resulting from (and as a multiple of) a change in regional investment, exports, or both. A more rigorous statement of the interregional trade multiplier relation explicitly recognizes and allows for imports of investment goods, desig- nated as M ,. Since the import of an investment good substitutes for the regional production of such a good, such an import must be subtracted from regional investment if the expansionary eifect of regional investment on regional output and incOme is to be identified. Hence, in these equa- tions I — M i should be substituted for 1. Further, the reciprocal relations of regional imports and exports must be introduced. In a world of many regions, region A’s imports serve to stimulate the expansion of other regions since these imports are the exports of these other regions. As the incomes of these other regions rise, so do their imports from A which, being exports from the standpoint of A, serve to stimulate A’s economy, and so forth. This modification necessitates a distinction between exports of investment goods E, and exports of con- sumption goods E, where E = E,- + EC, since these two types of exports when considered as imports into other economies have differential im- plications for these other economies. Unlike the first approximative formulation given in equations 1—5, in which the exports of a region are considered an independent or autonomous magnitude, this more rigorous formulation postulates that a region’s exports are a function of the incomes of other regions, and that these incomes are influenced by the imports of the region under consideration, which in turn are a function of its own income. Thus, the multiplier effect of, say, an autonomous increase in a region’s home investment will be influenced not only by its own savings (consumption) and import functions but also, via indirect effects on its own exports, by the savings and import functions of other regions.55 54 The marginal propensity to consume local goods is therefore 12’ (l —-q’). 55 For an example, see L. Metzler [50]. Also see the discussion of sector multipliers (although without reference to regions per se) in R. Goodwin [27], J. S. Chipman [l3], and W. Beckerman [7]. An interesting two-region model of this sort has been developed by Fouraker. Dis- tinguishing between autonomous and induced investment, and assuming that a region’s imports of consumption goods, imports of investment goods, savings, taxes, and in- duced investment are each a simple linear function of the region’s Gross Product, Fouraker derives the following multipliers: 181 There are many types of interregional trade multiplier formulations which are possible. Each involves its own particular emphasis on the several variables, parameters, and types of functions already alluded to and others not mentioned.“ Clearly, the choice of any specific formula- tion depends very much on the nature of the region or regions under investigation, the character of the problems on hand, and the specific objectives of the inquiry. But whatever the region(s), the problems, and the objectiVes, it is well to recognize that many of the functional relation- ships involved are extremely difficult to estimate empirically.S7 Hence, the chief use of the interregional trade multiplier, at least in its more rigorous formulations, is as an aid in reaching certain qualitative con- clusions about the long- or short-term behavior of different types of regions. For example, “under given conditions, an increase in region A’s home investment would tend to stimulate local industry more than would be the case for a similar increase in region B’s home investment,” or "‘becausc of the character of region C’s exports and imports, region C is likely to be more affected by national economic fluctuations than region D..! The first multiplier refers to the effect on its Gross Product of a change in autonomous investment in the first region; the second multiplier refers to the effect of the same change on the second region’s Gross Product. (if the two regions constitute the nation, the sum of the two multipliers refers to the effect of the same change on Gross National Product). In these equations, where subscripts refer to the relevant region, s is equal to the sum of the marginal propensity to save, to import consumer goods, to import investment goods, plus the effective tax rate and minus the marginal propensity to invest (induced); and m is equal to the sum of the marginal propensities to import consumer goods and to irnport investment goods. See L. Fouraker [19], pp. H-l to H-3. 55 For example, Chipman has developed a set of biregional multipliers which apply to the efiect of not only a change in autonomous investment (as Fouraker’s do), but also a change in the savings function, or in the induced investment function, or in the import function. Further, Chipman has formulated generalized multisector multipliers (I. S. Chipman [l4], chs. 4—6). Another construction of considerable interest is Simpson’s. His construction im- plicitly assumes that changes in a particular region’s imports will have a negligible effect on the incomes of other regions, and that the given region’s exports are thus an autono- mous magnitude. Further, it sets the value of imports of consumer goods in fixed proportion to the value of consumer goods consumed and produced at home, and the value of imports of investment goods in fixed proportion to the value of investment goods produced and used at home. For full details, see P. B. Simpson [62], pp. 78—80. Also see R. M. Williams [76], pp. 47-48; R. W. Pfouts [561;]. Gilbert [25]; and J. V. Krutilla [42], pp. 126—132. 5" Vining states that he originally hoped to utilize regional multipliers to predict short-run regioml business changes but became much less hopeful after encountering th measurement problems involved. As he put it, “even though the functions involved 182 In exploring this qualitative phase of interregional trade multiplier ' analysis, Vining has found the ratio of the marginal to the average multi- plier useful as a measure of the relative stability of a region, that is, 1:, O, 1-p(1~q) k 1 - p’(1 — 4’) This measure indicates the relative change in income for a given relative change in net investment plus exports,58 that is, in I -— M,- + E, which we shall henceforth designate as R. Accordingly, the more of its con- sumer goods a region imports, that is, the greater is q, the larger will be 1 — p(1 -— q), and thus the greater will be the relative change in income in response to a given relative change in R (that is, in net investment plus exports). Also, the less a region’s short-run income demand elasticity for its imported consumption goods, the less will be q’, the smaller will he 1 — p’(l — q’), and thus the greater will be the relative change in income per given relative change in R. Finally, of direct bearing on these two relations is a third, namely, the greater the income demand elasticities of other regions for a given region’s export commodities, the greater the rela- tive change in the given region’s R in response to a given relative change in national income.59 The full implications of this type of qualitative analysis can be best illustrated by Figure 1 which has been developed by Vining. This figure portrays fluctuations in income for an hypothetical natiOnal economy and for each of its four constituent regions. Two of these regions, namely regions I and III, were given structural features which lead to relative instability of income as the regions react to changes in investment; the other two, namely regions 11 and IV, were given a structure which con:- tributcs to relative stability of income.60 The critical significance of regional structure and the obvious value to a regional analyst of knewins the particular structure of his region are evident. could be so formulated as to provide the requisite short-run stability in time, it is difficult to conceive of the range of statistical error being narrowed to useful dimen- sions” ([72], p. 212). 53 Such a measure for an interregional system is comparable to Keynes’s measure of relative stability, namely, ‘2' 1_£ Y r 717’ °‘ 1 dd 7 —d_)" for a closed economy. 59 R. Vining [72], pp. 213—215. Also for the use of this measure in interpreting actual experience of regions, see R. Vining [72], pp. 217—218, and [7]], especially pp. 66— 68. Generalizations similar to Vining’s are contained in Williams {76], p. 48. 5° For full details on this model, see R. Vining [73], pp. 93-97. 183 In another connection, Fouraker has examined general economic in- stability among regions which may result from the growth of an under- developed region. With a biregion model, he suggests that the tendency of underdeveloped regions to place chief emphasis on the growth of home industry as their incomes expand may lead to their having negatively sloped import functions. Where these regions have as neighbors more mature regions (with positive import functions), it is possible for an in- crease in the incomes of underdeveloped regions to set off a cyclical process of income expansion and contraction in all regions.61 Despite the recognition that the primary use of interregional trade multiplier studies is to arrive at general, qualitative conclusions, some Donors 5,000 4,500 4,000 3,500 1,400 1,300 1,200 1,100 900 800 700 012 3 4 5 6 7 8 910111213141516171819202122232425262728 Period _ Rune scale Figure 1. Income payments received in each of the four regions and the “total economy " for a four—region hypothetical model. Source: R. Vining [73], p. 95. empirical estimation has been attempted. For a few agricultural regions in Arkansas, for which it was rather legitimate to use models in which 61 Of course, the possibility of such cycles, as well as their behavior patterns, depends on the various average and marginal propensities discussed. For fuller discussion, see L. Fourakcr [19]. 184 exports are considered an autonomous variable, Vining was able to collect (and estimate) sufficient data to arrive at multipliers of approximately 2. In making such a computation for the Pine Bluff region, Vining had to subtract from the census data on the per cent of total employment engaged in agriculture that part (an estimate) producing output consumed on the farm, and that part (another rough estimate) producing for the local market. To the remainder had to be added the per cent of total employ- ment engaged in lumbering from which had to be subtracted that part producing for the local lumber market. Next, an allowance had to be made for those engaged in miscellaneous export activities, in order to arrive at the over-all per cent engaged in export activities. Additionally, an estimate had to be made of those engaged in home investment. Finally, employment estimates had to be converted into value of output estimates.62 The procedure just described illustrates the point that because the re- levant functional relationships are extremely difficult to estimate, the analyst must use an indirect approach; he must compare, ex post, magni- tudes of total employment or product value with employment or product value associated with exports and home investment. But this is essentially the same procedure as is used in economic base studies. It leads to an estimate of the numerical multiplier value but furnishes the analyst little additional understanding of the many complex economic relationships behind that value. The method itself is subject to most of the practical and conceptual difficulties discussed in the previous section on regional multipliers derived from economic base studies ; these difficulties we need not repeat here. Furthermore, the analyst must explicitly face the problem of estimating both autonomous and induced home investment. In the terminology of economic base study, he must include in “basic activity” autonomous home investment production or employment as well as pro- duction or employment in the export industries. In this sense the inter- regional trade multiplier as derived a la Vining is superior to the regional multiplier derived by an orthodox economic base study.63 This superiority becomes especially marked when it is appreciated that for some, if not many, regions a significant and perhaps major portion of local investment may be considered autonomous. Indeed, it is logical to expect that under 62 Vining emphasizes that his estimate of a multiplier value of 2 is of the roughest nature and is intended merely to illustrate the possible order of magnitude. of the multiplier for a rural region. P. B. Simpson ([62], pp. 79—80) estimates the multiplier value for a “fairly small region" in an even rougher fashion. He states that the pro- pensity to save, q,, for such a region can be taken as 0.25, and that 0.5 may be considered a typical value for the propensity to import, q,. These values substituted into his multi- plier expression give it a numerical value of 2. 63 If an economic base study employs the firm-by-firm method of analysis, typically all local investment activity is assigned to the “service” category. If it employs the location quotient method, only that portion of the region‘s home investment above the national average is assigned to the “basic” category. 185 certain conditions exports themselves depend partially and indirectly on local investmentfi4 Presumably some method could be developed to identify and measure the employment or production representing both autonomous and induced local investment.65 Once developed, it might be considered as merely a modification or adjustment of the procedure of the economic base study. Ultimately, the analyst might combine the export and autonomous local investment figures and compare the sum with the remaining amount (covering local or service and induced local investment employment) to secure the basic-service ratio, from which the multiplier value could be derived. However, this modification cannot be achieved without considerable difficulty; and the hazards of applying an over-all‘multiplier value to esti- mate the effects of a change in a particular export industry or activity mount in number. In addition to the hazards due to different degrees of economic linkage associated with different activities, there are hazards arising because other types of linkage must be considered. As an instance, an expansion in the output of an export industry may directly stimulate investment expenditure by one or more of its local suppliers. Con- comitantly, investment expenditures by these same suppliers may be in- directly induced (via either effective or anticipated demand or both) by the rising level of income caused by the increased exports. But how deter- mine the amount of home investment which is induced? This problem becomes particularly perplexing when we recognize that the behavior of induced investment generally, to say nothing of its variation in individual cases, is one of the complex relationships which help determine but are not explained by an empirically derived over-all multiplier value. One final point. The calculation of the ratio of the sum of export and autonomous local investment employment to total employment yields an average multiplier only. A marginal multiplier would of course be more useful for predicting short-run changes and cyclical movements, but such a multiplier cannot be inferred from average data. As already intimated, the average and marginal propensities to import are likely to be quite different.66 64 See the interesting discussion by C. M. Tiebout [67], and D. C. North [53]. 65 Vining’s method for the Pine Blufi‘ region case was merely to assume that local investment would not exceed roughly triple the value of local construction. Since construction in the region accounted for 3 per cent of total employment, it was estimated that total local investment would amount to 10 per cent of total employment and Gross Regional Product (R. Vining [72], p. 216). 66 For example, although Vining estimated the average multiplier to be approximately two for both his Pine Bluff and Fayetteville regions, his analysis of the character of economic activity in each region and application of the generalizations cited in the text led to the conclusion that the Fayetteville region would have considerably more short- run income stability than the Pine Blufi‘ region. This illustrates the fact that regional 186 Figure 2. Frequency distributions of _annual income payments by state expressed as percentage gains or losses relative to m income payments in year preceding. \. r,” Mal-run or "Iris Source: R. Vining [74], p. 199. cyclical forces from region to region, from region to nation, and from nation to region. There are several studies which have probed in these directions and which involve a type of framework of general value to regional analysis. Some of these studies have explored that direction (already noted) which tends to view the nation as the sum of a set of regions, and at least partially to explain the behavior of the national economy in terms of the behavior of its component regional economies.67 Noteworthy in this connection is certain work by Vining which is closely linked to his theoretical and empirical work already reported in the previous section.68 As an instance, Vining has put forward the hypothesis that for a given year the national rate of change of income (a magnitude significant from both a secular and cyclical standpoint) may be validly conceived as a mean (weighted or, for approximative purposes, unweighted) of the rates of change of income of the several regions which comprise the nation. These latter rates of change form a frequency distribution which “appear to have a characteristic shape suggestive of a logarithmic normal curve.”69 Further, such a frequency distribution of regional rates of change behaves at least somewhat systematically over the business cycle. This point tends marginal multipliers differ in value from the corresponding regional average multiplier but, of course, it does not help in estimating the value of the marginal multipliers. 67 If we pushed this approach to the extreme, we would consider the behavior of the ultimate components of an economy, namely the individual firms and households. 68 Also see P. B. Simpson [62], ch. 5; W. Isard and G. Freutel [40]; and P. Nefi" and A. Weit‘enbach [52]. 69 R. Vining [74], p. 212. 187 to be illustrated by Figure 2 (taken from Vining) where states are con- sidered to be regions.70 Along the horizontal axis is measured percentage gain or loss of income over the preceding year; and along the vertical axis is measured number of states. Hence the height of any bar indicates the number of states experiencing the corresponding percentage change for the specified year. As Vining observes these frequency distributions over the years, which by themselves are enlightening, he finds evidence in support of an hypothesis, namely that . . . so long as income is decreasing at an increasing rate (for example, as was the case from 1929 through 1932) we should expect the distribution of income by regions expressed as percentages of the preceding period to have a negative skew. As the rate at which income is declining itself begins to decline, the skew of these link-relatives should become positive. This positive skew should prevail throughout the phase during which the rate of decline is diminishing and should continue, as the diminishing rate of decline merges into an increasing rate of increase, throughout the period of this expanding rate of increase. As the rate of increase begins to decline. the skew of the link-relatives should again become negative, continuing so through the period of the increasing rate of decline . . . .71 Vining has pushed his inquiry much farther. Recognizing the inade- quacy of employing states as regional units, he has, after observing the cyclical behavior of each state, attempted to consolidate states to form more meaningful regional units than states alone constitute.72 He finds that certain groups of geographically contiguous states can be found where the states within any group behave cyclically in a fairly uniform fashion, which fashion difl‘ers from group to group. For example, one group may respond more violently to cyclical impulses than another; a third group may consistently be sensitive on the downswing but insensitive on the upswing, etc. Further investigation uncovers interesting connections with materials discussed in the preceding sections. The group of states consisting of Arkansas, Mississippi, and Alabama, states which show greater rates of increase in income in years of rising national income and larger percentage 70 R. Vining [74], p. 199. See also other statistical materials contained in this article. 71 R. Vining [74], pp. 197—200. In addition his statistical findings suggest “that secular changes may take place that alter the extent of the variation of the regional rates around the national rate of change, but that, given an economic structure, a functional relationship exists between the magnitude of the dispersion and the magnitude of the rate of change” (p. 212). Also in this connection see F. A. Hanna [30]. 72 As Vining well recognizes, the most meaningful regions will have boundary lines which need not, and typically will not, coincide with political boundary lines. Also the size of these regions may range from exceedingly small areas to multistate groupings, depending on, among other factors, the objectives of an inquiry. 188 declines in years of falling income—and which therefore fall in the tails of the frequency distributions depicted in Figure 2—tend to produce com- modities for export, for example, cotton and lumber, which have high income elasticities of demand. The relatively violent fluctuations of the incomes of these states are therefore consistent with the reasoning behind the interregional trade multiplier, and also with the logic of the economic base approach since these export industries would be considered basic. A second group of states consisting of New York, Massachusetts, Rhode Island, and New Jersey73 are economically relatively diversified. They tend to be self-sufficient and tend to export products with relatively low income elasticities of demand. Their fluctuations of income tend to be mild, as interregional trade multiplier analysis and industrial composition analysis would suggest. Still a third group of states consisting of Indiana, Ohio, Michigan, Illinois, and Pennsylvania possess economies which concentrate much more on a few dominant industries, particularly in- dustries that are heavy and put out durable producers goods such as industrial equipment. The amplitude of the income fluctuations of this group of states tends to be greater than that for the preceding group, as our several types of analyses would suggest." Such findings, which Vining would insist are only tentative, strongly point up the fruitfulness of a combined national and multiregion approach to the collection, processing, andinterpretation of various sets of data significant for the study of cyclical behavior.” Further, they suggest the desirability of applying more formal variance analyses to such sets of data. Aside from the increased understanding of one’s region which comes when a regional analyst views and interprets its cyclical behavior in the light of the behavior of other regions of the nation, knowledge and insight into the behavior of the national economy can be greatly enhanCed through observing and interrelating the behavior of its parts. Another type of study which has an empirical bent and which is of general value to the regional analyst attempts to trace out in a much less formal and more historical manner the repercuSsions of an impulse or set of impulses. These repercussions spelled out in terms of specific incidents and decisions may be studied intensively and in great detail with reference to the cyclical behavior of a given region and perhaps by comparison with the nation.76 Or these repercussions may be investigated in a multiregional framework wherein the transmission of impulses from one region to another may be emphasized. In the latter connection such concrete events 73 Connecticut’s behavior conforms partly to the pattern of this group and partly to the pattern of a third group mentioned later. 74 See R. Vining [71], pp. 62-66. 75 Vining has also systematically examined data on bank debits. See [73]. 76 Among others, excellent illustrations of this type of study are M. S. Gordon [28]; F. L. Kidner [4]]; and P. B. Simpson [62]. 189 as the settlement of the West, the construction of the Erie Canal, the dis- covery of gold, railroadization, etc., may be studied. Often the analysis is preSentcd in Schumpeterian terms.77 For example, transport development as it has affected the cyclical be- havior of the several regions of the United States and of the nation has on several occasions been studied. Empirical materials on outbursts of con- struction of transport facilities have been assembled.78 The national data on such construction have been broken down regionally in some instances. Doing so points up (1) the interrelations of the development of a new region (i.e., penetration into new space) and the growth of already settled areas; and (2) certain necessary sequences in the development of each region and the nation. In the United States, outbursts of construction of transport facilities have typically been vast in magnitude. This has been the result of, among other factors, the relatively large size of a minimum unit of transport construction, in particular of a railway, and the financial character and the 77 Closely related to this type of study are hypotheses which might attach causal significance to Space itself or to certain regional factors in generating both regional and national cycles. From investigations that have been undertaken, it would appear that for the most part space per se is a passive factor in generating cycles. However, because movement in space does involVe overcoming physical resistance as well as a time cost, the space factor does condition in a major way and sets important restraints on the operation of various causal factors, and thus can theoretically have a significant influence on the timing, severity, and length of cycles among regions. Of interest, too, are hypotheses which suggest that certain types of regions tend to generate cyclical disturbances. As already noted, P. Neff and A. Weifenbach [52] stress the significant role played by major urban regions. As Nefi‘ states: “Only with the modern city and attendant high specialization and large size of business units did the inherent instability which we call business cycles appear. In view of the coincident development of cycles and of large urban masses, it may well be that impulses originating in cities and transmitted to other parts of the nation sometimes constitute the causes of cycles” ([51], p. 105). Such an hypothesis is not inconsistent with the regional multiplier and interregional trade multiplier analysis already discussed, since with the growth of urban economies has come marked increase in the absolute and relative magnitude of regional exports and interregional trade within the United States. This hypothesis is also consistent with the reasoning of some who put great emphasis on the role played by very sensitive centers of reaction. These centers, responding strongly to impulses afi‘ecting the level of operation of their industries, in turn radiate to both neighboring and distant regions with whom they have import-export ties a set of impulses which are in turn transmitted (although constantly dampened by the friction of distance) back and forth among all regions, at times being magnified by these sensitive centers of reaction. Unfortunately, Neff and Weifcnbach were not able to process in an appropriate fashion the time series data for cities (classified by sizes) and their hinterland areas, and to conduct other inquiries to test their hypothesis, although some of their findings such as those on the Detroit area are suggestive. 73 Among others, see N. J. Silberling [61], ch. IO, and W. Isard [39]. 190 speculative practices of the United States economy.79 But whatever the causal matrix of such outbursts, these outbursts have in turn led to severe ups and downs of the regional and national economies and of interregional trade. Such consequences could have been anticipated. Major railroad development implies marked reductions in transpOrt costs. Such reduc- tions lead to the reallocation of market areas, the revaluation of existing resources, and redistribution of industrial production to the benefit of the most efficient and best-located firms. Greater industrial concentrations emerge in the favored regions, which in turn generate mass production economies and still greater extension of the market areas of the best locations, and hence still further selection between superior and inferior sites, trade centers, and nodes. When transport facilities penetrate new space, new resource deposits become economic to exploit, which may lead to revolutionary changes in the world supply of primary goods. Such opening up of new regions and capitalizing opportunities for profitable local operations sets oil" a process of expansion for the whole economy wherein all regions may gain and be stimulated into expansion, although to different extents. ln the new region opportunities for export cause an influx of new labor from other regions. The settlement and urbanization phenomena in the new region entail the creation of a host of other economic activities, both residentiary and import. Social overhead investment is required in huge amounts and is largely imported. All this in turn affects other regions, their patterns of export, their industrial structures, their rates of growth, etc., the particular manner in which any one region is affected depending on the ways in which its resources both directly and indirectly complement the resources of the new region.80 The study, through data collection, processing, and interpretation, of the ways in which these forces pervade the multiregion economy can be very illuminating, both in the expansionary phase and later in the contrac- tionary phase. Unfortunately, relatively little empirical study tracing these effects through the interregional matrix of the United States economy has been undertaken. Facts on transport development have been linked to facts on migration, on residential and industrial building, on population numbers and urban growth, on iron and steel production, and on output of other major industries. But such linkage has been done mostly on a national level.81 Much more should be done on the multiregional level.82 79 See N. J. Silberling [61]. 80 For a more complete description of types of effects, see D. C. North [54, 55], and N. J. Silberling [61]. More theoretical discussion of the implications of transport cost reduction are contained in W. H. Dean, Jr. [17], E. M. Hoover [32], and W. Isard [39]. 81 For example, see N. J. Silberling [61], W. Isard [35], C. and W. Isard [34], and H. Hoyt [32]. 32 As an instance, it has been suggested that the 18 to 20-year cycle which New England experienced in the last quarter of the nineteenth century in her physical development (building, urban expansion, population growth, etc.) was in large part due to impulses 191 Similarly with major developmental factors other than transport. They, too, should be investigated in a multiregional framework if we are better to understand the regional and national fluctuatiors of the past and anticipate those of the future. Such studies, with a heavy historical bent, could fruitfully complement the more formal, multiregional empirical studies employing variance analyses and other advanced statistical techniques. They could complement, too, those studies discussed in other chapters as well as the studies that center around the industrial composition of regions and the different cyclical sensitivities of industries; and they could provrde firmer groundwork for estimating regional multi- pliers when projections are required, and for anticipating interregional impacts of concrete developments and specific programs of regions via the interregional trade multiplier. F. SOME REMARKS IN EVALUATION The seemingly diverse slants at regional cycle and multiplier analysis presented in this chapter—the industrial composition, the economic base, the interregional trade multiplier, and the statistical-historical slants— are more basically interrelated than has been made explicit. Each after all constitutes a look at one or more facets of the functioning and structure of a systems complex. This complex of systems may be viewed either horizontally as an intricate network of regions, each in itself a system, or vertically as a nonadditive overlay of interregional systems of money flows, commodity flows, population flows, industrial locations, etc., reflecting the spatial configuration of resources, technological development, etc., and such motives as efficiency and welfare. However conceived, each slantevaluated in this chapter yields a very imperfect look. The industrial composition slant primarily focuses on a single region; it fails to recognize the interregional system, viewing as an undifferentiated mass the regions external to the one being studied. Further, this slant treats the industries of a region as independent units, or at least without setting forth in quantitative terms their interrelations. Hence, it is not surprising that a look at a region without consideration of its bonds to the several regions of a system and without explicit consideration of its internal interindustry linkages is not too satisfying. Certainly if we are to under- stand (and explain) better the timing, duration, and amplitude of a region’s cycles, our analysis must come to grips with interindustry linkages within both an industrial and interregional system—as interregional and regional input-output, industrial complex and location analysis, interregional linear programming, and other techniques would have us do. Progress in the stemming from the railroad development of the rest of the country, particularly of the West. New England’s manufactured exports and employment opportunities mounted and lapsed with expanding and contracting markets elsewhere. (See W. Isard [38].) 192 direction of integrating the industrial composition approach with one or more of these techniques is to be desired. The industrial composition approach suppresses interindustry linkages. The economic base—regional multiplier approach does not. But the gains scored by the latter approach are in large part nullified by the loss of detail stemming from the high degree of aggregation in this approach. True, the twofold classification of industries in terms of those whose output and employment are exogenously determined83 and those whose output and employment are endogenously determined 84 is useful. It does point up an important causal relation (process). But it is questionable whether this procedure does so in the proper fashion, as is evidenced by the debate on the definition of the dichotomy : “ basic” and “service.” And although the identification and estimation of the impact of exogenously determined sectors on endogenously determined sectors is valuable, nonetheless the level of aggregation at which this estimation is performed in economic base analysis suppresses the intricate structure and fabric by which decision-making units and groups of units are linked within a region. At most, only when crude, hurried research is required can the use of the economic base-regional multiplier approach be justified as more than a descriptive device. As with the industrial composition slant, movement in the direction of integrating with other techniques is to be desired. The economic base—regional multiplier approach is deficient not only because it embodies a high degree of industrial aggregation but also be- cause it fails to recognize explicitly the interregional system and the non- homogeneous character of the outside world. This existence of nonhomo- geneous regions within a system is, however, clearly appreciated by the interregional trade multiplier concept. In this sense, such a concept adds another dimension to analysis and is much more intellectually satisfying than the simple economic base multiplier. But intellectually satisfying as it may be, to date it has yielded few morsels of empirical food. The Keynesian-type functions are not easily approximated. And like the economic base approach it manipulates large aggregates of decision- making' units and conceals vital detail. It lacks the fine knit of inter- regional input-output, industrial complex, interregional linear program- ming, commodity flow investigations, and of potential interregional money flow and social accounting studies. Yet the conceptual framework of the interregional trade multiplier does uncover a basic structure of motives-— motives governing decisions by consumers, businesses, governments, and other units. Further, these motives are regionally differentiated within the system examined. Synthesis of this conceptual framework with the por- tions of the interregional fabric that can be encompassed by the type of 33 That is, by forces outside the framework of the region being studied. 34 That is, by forces within the framework (model) of the region being studied. 193 studies already alluded to in this paragraph provides a major challenge to regional scientists and other analysts. Some of the dimensions of this challenge will be indicated in later chapters. Finally, there is the rich and relatively untapped potential for significant regional analysis oriented to the broad sweeping historical process. Whether this analysis involves either statistical or nonstatistical study of regions as an evolutionary system, it is able to probe into the interplay of forces on a time scale denied the more careful, detailed quantitative approaches and the more theoretically precise conceptual frameworks. In the historical dimension, these latter approaches are severely circum— scribed and cannot achieve that kind Of fruitful weighing and evaluation of forces possible from the careful, thorough, yet selective long-run study of the diverse factors affecting the dynamic path of the system. Studies such as interregional input-output, interregional linear programming, etc, cannot attain the insight into the future provided by the long-run associa- tions and cause-and-efl‘ect hypotheses unearthed by sophisticated historical analysis. The desirability of synthesis is once more obvious. APPENDIX ECONOMIC BASE AND CENTRAL PLACE THEORY It was pointed out in the concluding section that one Of the major short- comings of eConomic base studies is their failure to look outside the city or region and consider the city or region as occupying a position in an existing hierarchy of cities and regions. The development over the last two decades of central place theory highlights this deficiency. As noted in Location and Space-Economy, a meaningful system Of regions, such as comprises the United States, or a large homogeneous territory such as Southern Germany, may be conceived as patterned and structured. Within the system, there is a definite and regular ordering of cities (or regions). Such an ordering may range from hamlets (cities Of the first order) through villages, towns, . . ., and regional cities up to primate cities (cities of the nth order) such as New York and London. Each order has associated with it a specific spatial spread of hinterland (tributary area). The hinterland of a city in any given order fully contains the hinterlands of a finite number of cities of the next lower order (which have smaller size hinterlands). Moreover, corresponding to each order there is both a definite number of functions which each city of that order performs and a population size typical for each city of that order. The theoretical underpinnings for such a system were first developed by LOSch. These and additional theoretical materials together with empirical findings Of Lbsch, Christaller, and others have been covered in Location and Space-Economy.85 Since the publication of this book, further empirical materials and perceptive schema have been developed. Carruthers has developed empirical 35 W. Isard [37], pp. 11—12, 17—19, 42—50, 58-60, 68—70, 143—144, 152—154, 239- 242, 270—280. These pages cite the relevant works of Lbsch, Christaller, Bogue, Hawley, Hoover, Ullman, Vining, and Zipf. Also see W. L. Garrison and B. J. L. Berry [24]. 194 materials for service centers in England and Wales.“ Garrison and Berry have statistically verified the existence of a three-order hierarchy of central places in Snohomish County, Washington.87 Their findings lend additional statistical refinement to certain of the central place hypotheses advanced by Brush “3 and Brush and Bracey,89 based on data for cities in south'western Wisconsin and Southern England. Among the perceptive materials which best indicate the relation of economic base to central place ordering are those developed by Philbrick.90 First, Philbrick distinguishes between seven broad categories (orders) of functions. These are graphically depicted in Figure A-l. The first~order category covers consumption which is conducted in the household establishment (residential E. CONTRG. 5. EXCHANGE 4. ruusmpumr / s. / muss“; ' z. { nun. l. // conswcn Figure A-l. Seven-fold hierarchy of nested functions corresponding to seven nested orders Of areal units of organization. Source: A. K. Philbrick [58], p. 92. unit). The second-order category covers retail trade, the third—order wholesale trade, etc. Finally, the seventh-order category covers leadership. Correspond- ing to each order of function is an order in the hierarchy of nodal points (re- gions). As already indicated the household establishment, the first-order central place, performs the first and only the first category of functions (i.e., consump- tion). The second-order central places are clusters of retail (including service) activities, such as primarily characterize villages and hamlets. Within the hinter- land of each second-order central place are a finite number of first-order-establish— ments. The third-order central places are clusters of not only retail activities but also wholesale activities; they embrace a finite number Of second-order places as well as a finite number of first-order places. And so forth. Finally, the seventh-order central place, of which there is only one, is a cluster of leadership activities as well as all other (lower-order) functions. Its hinterland covers the entire system Of cities (regions) and thus includes a finite number of each of the lower-order central places. 86 l. Carruthers [12]. 87 W. L. Garrison and B. J. L. Berry [22, 23]. 33 J. E. Brush [[0]. ‘9 J. E. Brush and H. E. Bracey [ll]. Also see F. H. W. Green [29]. 9° A. K. Philbrick [58, 59]. 195 An idealized conception of this sevenfold nested areal hierarchy of economic functions and central places is presented in Figure A-2. In this figure, each central place of a given order is defined to contain four Central places of the next lower order. The figure is self-explanatory. Although an idealized framework facilitates understanding, the real test of the value of a conceptual framework is its empirical significance. Philbrick has studied carefully available data on the number and types of functions performed by various cities of the United States. Some of his empirical findings are neatly summarized in Maps A-1 and A-2. Map A-l covers part of the system of central F'gure A'2~ CENYEIS or seven: NESTED CUHULAYIVE: - ~ FUNCTIONS AND TNEIR: An idealized seven-fold nested 59;. Am; ' ' . CONSUIINO . areal hierarchy of economic 6 “TN: functions. ' INOLESALE 3 @ruusuwuzur © exam“: 3 CONTROL . '_ Kama-sum; A. K. Philbrick [58}, p. 93. " ‘ Source: NUMBER Of FOCAL-ARIA UNITS AND CENTERS I ORDERS AND FUNCTION! 01¢" Funellon Numiu on" Funetlon Numb": l cousuumo 9.09s 4 ruusmn. u EXCNANGE ll couriwL a LEADERSHI' I z RETAlL LOK‘ I 3 VNOLESAL‘ 256 7 places in the United States, namely the eastern United States. The seventh-order central place (New York City) is indicated. The sixth-order central place, Chicago, is also noted. (New York City performs the sixth-order function for the East as well as seventh-order functions for the entire system; Los Angeles, the third of the sixth-order central places for the United States, is not shown on this map.) The several fifth-order central places, fourth-order central places, and the basic rail interconnections between higher-order central places are also depicted in Map A-l. Map A-2 presents for a selected portion of the United States system the pattern of second-order, third-order, and fourth-order central places. In addition, the third-order and fourth-order central places are classified by types of third-order functions. In light of the theoretical, perceptual, and empirical materials developed here and elsewhere, the simple outlook of economic base studies is to be seriously questioned. For one thing it is clear, as noted in Location and Space-Economy, that associated with a statistically regular hierarchy of cities must be a statistically regular hierarchy of commodity flows as characterized by both average length and 1 volume of flow. The export-import relations of cities in the different orders of the hierarchy must therefore differ both in volume and average length of com- modity flow. Therefore it is to be expected that the structure of the internal economy of cities will differ according to order in hierarchy. To each order of city will correspond a different set of activities producing for export. These activities will require different inputs from other activities and generate different G) FOUIYM-OIKI MAJOR RAIL LIN! SHOW '01!" Map A-l. \ / / x i \ “FIN-ORDER IIXYM ORDEIA SEVENTH WI . c: MAL runes canny,.~"' Ivomi l Areal functional ll nus ioo" organization in the eastern United States. Source: A. K. Philbrick [59], p. 330. amounts of value added and income; that is, they will have different “double” multipliers or Keynesian-type multipliers. Such different multipliers may be expected to obtain, even when it is recognized that there are many resource- oriented functions (such as mining, electroprocess activities, recreation, and textiles) and other activities whose location central place theory cannot explain. When the locations of such functions and activities are superimposed on the areal pattern of central-place-type functions,91 there exists little, if any, theore- tical or empirical basis for anticipating that these differences in multipliers will be eliminated. Among some central places, differences in multipliers may be narrowed or even eliminated; but among other central places differences in multipliers may be expected to be intensified. When it is also recognized that at any given point of time a city or region occupies a position within a dynamic system whose spatial structure is under- going constant change, the economic base multiplier may also be expected to be subject to constant change. Simply put, growth of an hierarchy of regions implies changing economic base and basic-service ratios for these regions.92 91 For example, refer to W. Isard [37], pp. 57—60, ch. 11. 92 Particularly illuminating on this point is J. R. P. Friedman [20]. See also E. E. Lampard [43], the comment on Lampard’s paper by W. Stolper [64], and C. H. Madden [47]. 197 o SECOND-ORDER CENTRAL PLAC 8 E O “flimmnfl‘c” I GROCERY WOLESALINO DAILY NEWSPAPER COUNTY IEAT INDUSTRIAL SUPPLY AI PAPER MERCHANTS C 3 MERCHANT WHOLESAle 2 IN ISO CENSUS AND c PG’ULATION OVER 5,!»0 #69: v'éifilrii’fLim NARWARE VNOLESAL INC ORUO WNOLESALI N6 SERVICES ALLIED TO TRANSPORTATION SHOE AND LEATHER WHSG. MAJOR STEEL WARENSG. 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