THE THUNEN MODEL AS A PARADIGM FOR RURAL DEVELOPMENT
By Professor James Hite1999
Introduction
In the late twentieth century rural economies around the world are in a state of transition. Historically, rural places depended upon one of more of the primary industries for their economic bases. Although there has been an outflow of people from rural to urban places for at least a thousand years, these primary industries required, until the last half of the present century, that large amounts of labor remain available in rural areas. But the technological change of the last hundred years has drastically reduced the need for labor in primary industries and left more and more rural residents without a source of livelihood. A huge rural-to-urban migration, beginning first in the United States after World War II, but now evident in much of the world, has spawned urban congestion and concomitant socio-political problems.Even if there were no concern with the well-being of people in rural places, rural-to-urban migration means that the well-being or urban peoples requires an understanding of the essential workings of rural economies. A scientific interest in the economics of rural development exists, particularly within agricultural economics, and it has given rise to scholarship that provides some useful insights. But that scholarship is plagued by a certain fuzziness and inconsistency in definitions that are symptoms of a serious underlying epistemological deficiency [Nelson, 1984; Deaton and Weber, 1988; Deaton and Nelson, 1992]. Much of that deficiency, in turn, can perhaps be laid to economists' (at least those in the Anglo-American tradition) lack of concern with space.
Yet being rural, first and essentially, has to do with geography, i.e, with location of particular regions in space. Once that self evident fact is recognized, the work of Thunen becomes of interest as a possible source of the much needed paradigm for rural development scholarship. If modern economics began with Adam Smith, modern location economics began with Thunen, and it is to Thunen we first look for the most basic analytical model of the interplay between markets, production, and geography.
All this means that if rural development scholarship needs a paradigm, the Thunen model must be the first candidate considered. In this paper, I will attempt a critical consideration. The section that follows is devoted to definitional issues in translating the Thunen model into a vehicle for analyzing rural economies. I will then deduce the characteristics of a rural economy that seem to follow logically from the Thunen model and compare those deduced characteristics with those that are empirically observable in the economies of places that are generally considered (within the meaning imparted by everyday use of the term) to be rural. Finally, I will consider both the analytical power and the analytical limitations of the Thunen model for furthering a body of knowledge that has practical usefulness in framing for rural development policy.
Being Rural as Being Remote
The most fundamental definitional problem in rural development scholarship concerns what it means to be rural.As was noted above, it is apparent that being rural has something to do with geography. When one speaks of a thing as being rural, one means it is associated with some place, or set of places. A rural development scholarship that ignores the geographic essence of rurality misses that which defines the focus of study.
But what kinds of places are rural? Most particularly to our concerns here, what kinds of places are rural in the Thunen model?
For most of human history, that which was rural was the countryside, and it is with reference to the countryside that most dictionaries still define rural. Yet that is a definition that has been out-moded by the automobile. The automobile, and perhaps to a lesser degree, the airplane, gave rise to a new urban geography that disperses cities horizontally. This new urban form breaks up the countryside and surrounds it. Traditional rural land uses like farming exist side-by-side and interspersed with traditional urban land uses like residential sub-divisions and manufacturing.If the countryside is what is rural, it is a different countryside than that which has traditionally been associated with being rural.
On a deeper level, a rural place, or region, is one that is not urban. Indeed, rural can have no meaning without reference to urban. We do not even need the word, rural, if there are no urban places. Rural areas come into existence in any meaningful way only when there are towns and cities that can be defined as urban. Rural must be defined by what it is not. What is rural is the residual space that is not urban [see Guttenberg, 1988]. Thus the most basic understanding of a rural economy is to be found in a simple model of a single urban center and its rural hinterland.
And thus we come to Thunen. It would seem to make sense to construe as rural such places as are remote from the single city on Thunen's isolated plain. Rurality is synonymous with Thunen remoteness and is, at least potentially, measurable along some vector of economic distance.
If such a definition be accepted, however, it must follow that since some places are more remote than others, some places are also more rural than others. However measured, there are degrees of remoteness and degree of rurality. Since economic distance refers to the costs of overcoming the friction of space, being rural means operating under the economic disadvantage of having to overcome costs that are lower in other places that are less rural. And since the costs of overcoming distance are not forever fixed, and indeed, are radically altered by innovations in transport and communications, the degree of remoteness --- i.e., rurality --- shifts through time in ways that dictate the economic opportunity set of places on Thunen plain.
Prototypical Thunen Economy
In this section I will argue that the Thunen model in its simplest form is sufficient to explain the principal observed characteristics of the economies of places usually considered rural.What are the characteristics of a rural economy? Deaver [1992] identifies three defining characteristics of rural economies, one of which is remoteness. The other two --- small-scale, low-density human settlements, and a high degree of specialization --- can be shown, with the help of the Thunen model, to be logical implications of remoteness itself.
Consider, first, the observation that rural economies are characterized by small-scale, low-density human settlements. The Thunen model explains quite well why the intensity of land use on a homogeneous plain declines as distance from the single city increases. The realized (i.e., shipping-point, or net-back) price declines with remoteness from the city market, and hence the marginal revenue from working a site declines with remoteness as well. Similarly, to the extent that inputs must be purchased in the central city and carried by some means to the work site, input costs rise with distance, or remoteness.
The familiar marginal cost-marginal revenue calculus of neoclassical economics would predict lower density settlements as remoteness increases because the optimum output per unit of land areas declines with remoteness. Remote places can support population densities equal to that of non-remote places only if the per residents of the remote places are willing to accept lower real per capita incomes.
Now consider the matter of specialization of rural economies. It might be argued that scale economy problems inherent in remoteness are what give rise to cities, and that cities are a social innovation for realizing more of the economies of scale (both internal and external). Those industries that do not realize minimum long-run average total costs at output levels which can be absorbed by purely local demand have strong incentives to seek out that site which will minimize remoteness from the smallest population required to absorb such output levels. And to the extent that there are external scale economies, they will have incentives to agglomerate together at a single site like Thunen's city. Other places will lack these possibilities of internal and scale economies, and the more remote those places on the Thunen plain, the more the lacking. Thus, because of scale economy problems, remote places with sparse populations cannot support an economy of many sectors. That, too is evident from study of the Thunen model, albeit by borrowing some insights from Losch.
There is another, very important, implication of the Thunen model for rural economies, and one not noted by Deaver: Rural economies are high risk economies.
These high risks are perhaps most dramatically illustrated if we focus upon the economic frontiers that occur on the Thunen plain. These frontiers divide zones where rents are maximized by different types of economic activities. But they are not static. Either changes in market prices in the center city or changes in the costs of overcoming distance cause these frontiers to shift. And since change is commonplace in markets, the frontiers are always in some state of flux.
At the remote places within any given Thunen zone, there is considerable risk that specialized assets will be rendered reduced in value because of a shift in the Thunen frontier that throws such places into the next most remote zone where they are sub-optimal for that activity which maximizes rents.
As a general rule, these risks can be managed, and rational expectations models allow for them to be discounted in the investments decisions for specialized assets installed in any given place on the Thunen plain. Yet that does not negate the fact that such risks exists, nor that they are relatively higher the more remote a location is within a given Thunen zone, and the more remote a zone is on the Thunen plain.
Just as importantly, however, these risks increase almost to levels of Knightian uncertainty if markets are perturbed by profound Schumpeterian innovations. A producer near the Thunen frontier between production zones for A and B can usually bet that if the frontier moves unfavorably to his assets, it will be only a matter of time until it swings back in a favorable direction. But if the old market equilibrium is destroyed by Schumpterian innovation, all the frontiers are wiped out and, after what may be a rather chaotic period, a new set of frontiers emerge that need not have any resemblance to that which previously existed.
Shumpeterian innovation does, in fact, occur in a capitalist economy. That means there is some risk (should I say uncertainty?) that specialized assets, particularly relatively immobile ones, installed at a particular remote place will be heavily depreciated in use value by such innovations. Moreover, because of the small-scale nature of remote settlements and the specialized nature of production, there will be a thin local salvage market for such assets. To the extent the risks are understood, they can be expected, as recently shown by Chavas [1994] , to inhibit investment of either equity or debt capital in remote ---i.e., rural --- places.
The condition that exists when the use value of an asset is less than its acquisition cost but greater than its salvage value has been defined as "asset fixity", a subject that has been of considerable interest to agricultural economists needing to explain persistent over-production problems in agriculture [Galbraith and Black, 1938; Johnson, 1958; Edwards, 1959; Johnson and Quance, 1972]. A conceptually similar condition in non-farm industries has been labeled "asset specificity" by Williamson [1989], who relates it to transaction costs. Both have the same effect in that they inhibit rapid adjustments to changing market signals. When these concepts are imposed on the Thunen model, it becomes clear that asset fixity problems are likely to intensify with remoteness on the Thunen plain and cause the remote places to adjust more slowly to innovations than less remote places. Put in Marshallian terms, it implies that the short run is longer in remote, or rural places, than in less remote places.
I do not have the leisure here to pursue this line of reasoning further. Suffice it to say that the Thunen model, even in its simplest form, used in conjunction with familiar instruments in the economists' analytical tool box, leads us to some very general hypotheses about rural economies that, if accepted, have profound implications for the rural development. Testing these hypothesis is difficult because the real world from which empirical observations must be drawn is much more complicated than the simple world of the isolated plain postulated by Thunen. The trick is to deduce hypothesis that are testable with available data, and while such tests are unlikely to be straightforward, devising them should not be beyond human cleverness. Critical Assessment
Much of what we observe empirically in rural economies is explainable by a simple version of the Thunen model. The economies of rural places tend to resemble the economies that we can deduce for remote places on the Thunen plain. They are: a) specialized, b) either low-density in population or relatively poor, and c) conservative (i.e., relatively slow to adjust to changing market signals). Only if the place is so remote as to be beyond the zones of commercial production for the single city market are we likely to find any exceptions to these characteristics, and that only in the case of less specialization in order to meet the needs of a subsistence existence. Generally, allowances made for differences in resource endowments and a multi-centered system of urban places, these are, indeed, the familiar characteristics of economies in real world rural places. Hence, the Thunen model becomes even more promising as a potential paradigm for rural development analysis.
The chief problem with using the Thunen model in rural development scholarship is hinted at in the discussion above: The real world is a much more complicated place than that postulated by Thunen. Moreover, Schumpeterian innovations mean that the real world is always in a state of flux in which Thunen's neat concentric circles are continuously being disturbed, erased, and redrawn. Rural development is about a process of change in time and the Thunen model, taken by itself, offers only limited insight into the dynamics of change in remote economies.
That does not mean, however, that we are lacking in the theoretical mechanisms to set up a dynamic process for the Thunen plain. One obvious source for such a dynamic is in Schumpeter's theory of economic development. The need is to synthesize Schumpeter theory and the Thunen model and elaborate upon it. What follows, in broadstroke form, is one possible way such an elaboration might be constructed.
Consider a system of central places, as theorized by Christaller and Losch, upon a Thunen plain each urban place with its own hinterland of remote sites, but most places within the hinterland of a large urban center. Consider that the system is in some steady-state equilibrium, and real per capita income across zones on the plain have converged. Then postulate the introduction of a major Schumpeterian innovation that undermines the old equilibrium and begins the well-know process of creative destruction.
The precise nature and ramifications of the innovations will not be immediately known. But the underlying structure of either supply or demand (or both) will have been changed and the search for the new equilibrium will occur within the constraints of Simon's bounded rationality [Simon, 1957]. There will be over-reaction in markets and there will be resistances to change. By a process of trail and error such as that postulated by Mises and his Austrian colleagues, information will be generated and a new rationalization of economic geography will eventually emerge.
But the process may take a while, and if our hypothesis about remoteness and asset fixity, discussed above, is correct, it will take longer in the more remote --- i.e., more rural --- parts of the Thunen plain than in the less remote places. In this time of chaos, enterprise and input mixes in the remote places disadvantaged by asset fixity will depart from optimal by more than in the less remote places, hence per capita incomes in those places are likely to fall relatively to the less disadvantage urban places, and a divergence in interregional real per capita incomes could be expected.
There has been a small cottage industry recently examining convergence and divergence in interregional per capita incomes, both in the United States and elsewhere [Amos, 1989; Coughlin and Mandelbaum, 1989; Garnick, 1990; Barro and Sala-i-Martin, 1991; Maxwell and Hite, 1992]. The long and the short of these studies is that while convergence is the empirical norm, as can be predicted from neoclassical theory, there have been significant periods of divergence, most recently in the late 1970s and 1980s, a time of major innovation in economic activities. Moreover, there is at least superficial evidence that the divergence is associated with lagging incomes in remote places [Rowley, Redman, and Angle, 1992, Maxwell and Hite, 1992].
The evidence is superficial because the exact meaning of remoteness in the real world is not clear. Thunen's model is too reductionist to be of much help in clarifying its meaning. On-going work by Webb, Warner, Hite and Ward [1994] suggests that in so far as asset fixity is concerned remotness refers to distance from the geography center of production of a particular kind (or industry). Yet remoteness must surely also have something to do with economic distance from the geographic centers of consumption. It may well be that some formulation of potential models [see Carrothers, 1956] might be suitable to estimate remoteness. Even so, the theoretical explanation for why this would be so is not readily apparent from Thunen, and only hinted, in the very broadest terms, by Christaller and Losch.
Thus we come to the chief limitation of the Thunen model as a paradigm for rural development. Short of an operational theory of remoteness, the Thunen model leaves rural development scholarship in a lurch. Using the Thunen model, rural development scholars can explain why rural economies, generally considered, are as they are, and they can predict that significant Schumpeterian innovations will disrupt rural economies relatively more and relatively longer than those of urban places. But they will be unable to speak in anything other than generic terms and therefore are forced to remain silent regarding the specific geographic places that are likely to prosper or decline through time.
That is a rather serious limitation if one objective of rural development scholarship is to instruct actual behavior of economic agents in particular rural or remote places. It is also a serious problem if the objective is to advise policymakers on the (perhaps unintended) consequences for rural places of various public policy options.
Yet having such a limitation is less of a problem than not have any paradigm at all. One can at least conceive of theoretical advances that eliminate the limitation once the deficiency is recognized as critically important. For instance, remoteness might be defined as the summation of the economic penalties on both the product and input sides that a place suffers because of its location when that place produces according to its greatest comparative advantage or least comparative disadvantage. If that were the case, remoteness would increase with increases in the ratio of the local prices of capital to labor, and hence, be inversely correlated with site rents. With a little ingenuity in searching for data and in econometric analysis, it ought to be possible to model remoteness over both time and space.
Conclusions
The central question in rural development policy goes something like this: what would the economies of rural places look like in the absence of any subsidies to rural areas from urban centers? In the present political context when governments are looking toward reductions in subsidies of all kinds, the question becomes what would happen if existing subsidies to rural economies were withdrawn?Rural development scholars have lacked any theoretical construct for finding answers to such questions. If rural development scholarship is to escape for the limits of a case-study methodology, it must find a theoretical paradigm. The Thunen model is an obvious place to start searching for such a paradigm, and as I have tried to show in this paper, a very promising place.That is a conclusion that others may take issue with, and one cannot rule out the possibility that some other body of theory might provide more fruitful paradigm.
It is certainly true that the Thunen model is highly reductionism, and thus artificial in many respects. Yet it is hardly more deficiency in this respect (if it is a deficiency) than the fundamental paradigms of neoclassical theory. And if the simplicity of the Thunen model is a problem, it is also a great advantage in helping to isolate essential relationships and generalize about the fundamental nature of rural economies.
Indeed, most of the observed characteristics of rural economies are deducible from the Thunen model once rurality is understood to be synonymous with remoteness on the Thunen plain. The chief analytical limitations of the Thunen model have to do with lack of any dynamic element and the complications that arise in defining remoteness in a geography of many urban places of different sizes and functions. However, synthesis of the Thunen model and the theories of Christaller, Losch, and Schumpeter can take us a long way toward overcoming these limitations.
We would be ill advised, in my judgement, to expect that we will ever have a rural development paradigm that fosters detailed predictions about economic change at specific rural locations. Even economic theory that abstracts from space cannot deliver such predictions. We are dealing with historical processes that are evolutionary and hardly deterministic.But the Thunen model can give rural development analysts an overall framework that it now sorely lacks.
In rural development scholarship, we need to crawl before we can expect to walk. The Thunen model gives a paradigm for crawling that we might usefully adopt because the richness of Thunen's theory also offers a prospect for a paradigm for walking, too, after we prefect the crawling.
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