Knowledge that Transforms

All economic activity can usefully be classified under three heads, namely: (i) Direct exploitation of natural resources (agriculture, pasture, forestry, fishing, hunting and trapping, mining and quarrying, hydroelectric power). (ii) Manufacture, which may be precisely defined as the organised labour of a number of workers using mechanical power for the purpose of continuously producing transportable goods. (This definition thus excludes, for instance, the workshop employing only one or two workers, the dressmaker who does not use mechanical power, the builder whose product is not transportable.) (iii) All other activities, which may be described for convenience as the Service Industries. The principal service industries are building and construction, commerce, transport, education, public administration, and the like. This classification must form the starting point for any scientific theory of the location of economic activities and of the functions of cities. For the first group of industries must, by their nature, be carried on where the natural resources are located. The manufacturing industries, on the other hand, producing, by definition, goods that are transportable, and using as materials either natural products or partially manufactured goods that are also transportable, can generally be carried on, if desired, at a point distant both from their consumers and from their suppliers of materials. (If either the product or the materials are particularly bulky, perishable, or otherwise difficult to transport, this freedom is of course diminished, but does not disappear.) The service industries, however, diverse though they may be in other respects, all share the fundamental characteristic that they can on the whole only be carried out in the city where the consuming population lives, or at least at some centre that the consuming population can reach without undue difficulty. A community at any given level of average income expects to consume services up to a certain standard

It has commonly been argued that public spending, to be a remedy against unemployment, must be deficit spending and not spending balanced by an equal amount of taxes, since, in the latter case, the government would only be taking back with one hand what it gives with the other. One necessary qualification of this statement is, of course, well known, namely, that taxes corresponding to an equal amount of public spending may lead to a redistribution of incomes which, in turn, may lead to a higher level of national consumption at a given level of private investment. The effect of such redistribution, however, depends essentially on whether or not there is any substantial difference in the marginal propensities to consume, as between the various income groups. If, for example, the propensity-to-consume function of the individual is a linear function of personal income the marginal propensity to consume will be constant for all levels of income, and there could be no redistribution effect (unless the redistribution had an effect on private investment). In this latter case it might then be thought that public spending balanced by an equal amount of taxes would have no effect upon total income and employment in the society (apart from a possible effect, indirectly, on the propensity to invest). This commonly made conjecture is, however, false, as has already been pointed out by several writers on the subject.' In a situation with unemployment and idle resources there is a definite employment-creating effect of public outlays even when they are fully covered by tax revenues. And this is true quite

1. IT WAS a great achievement of Gibrat2 to show that the distribution of the logarithms of some economic variates (for instance, the distribution of factories according to the number of workers) is approximately normal. The explanation of this phenomenon by Gibrat may be presented in a rigorous form as follows: Let us denote the variate X (for instance the number of workers in a factory) at a certain date by XO. Let us further assume that subsequently it undergoes a series of random independent proportionate changes mi, M2, *, mn, (Gibrat's loi de l'effet proportionnel).3 Thus at the end of the period in which these changes have taken place the value of the variate will have become XO(1+ml)(1M+m2) * (1 ++m,) and its natural logarithm=log Xo+log (1+ml)+log (1+m2)+ + +log (1 +mn). If we denote the deviation from the mean of log XO by Yo and the deviation from the mean of log (l+mk) by yk, the deviation from the mean of this expression becomes YO+yl+Y2+ +Yn. The absolute value of mk may be assumed small as compared with 1. It follows that the absolute value of log (1 +mk) and consequently that of yk is also small as compared with 1. As the second moment of yl+y2+ * +y. is equal to the sum of the second moments of Y1, Y2, * .., yn, it may be assumed that if n is sufficiently large the standard deviation of Yl+y2+ * +yn is equal to or greater than 1 (provided the standard deviation of yn does not fall below a certain level as n increases.) Thus yk is small as compared with the standard deviation of Yl+Y2+ +Yn. With this condition fulfilled the distribution of Yl+Y2+ +y,, is approximately normal (according to the Laplace-Liapounoff theorem4). Further if n is so large that the standard deviation of yl+y2+ + yn is large as compared with the standard deviation of Yo also, the distribution of Yo+yl+y2+ * * * +yn will not differ much from normality. Whatever the distribution of Y at the initial date, with the lapse of time it approaches normality more and more. 2. This argument is formally correct but it may be shown that its