Modern Day Relevance of von Thünen

Modern Day Relevance of von Thünen

By: Sulagna Chattopadhyay
Magazine Articles Policy

September 26, 2016

Who was he?
As the name suggests, Johann Heinrich von Thünen was a German, who acquired a large agricultural estate, Tellow, in 1810. If you try to locate this on the map you will find it close to the town of Rostok, in Macklenburg, on the Baltic coast of erstwhile East Germany. He successfully managed his estate for forty long years, till he passed away in 1850.

What did he do?
During the forty years of his lifetime, he consulted a mass of minutely documented data on input and output, to understand the economics involved in running his farm. A keen observer and an extremely intelligent man, he found a pattern in his observation. In fact, David Ricardo- a British political economist, and von Thünen, living miles apart, came to almost similar conclusions regarding economic rent, unknown to each other. Ricardo perceived the fertility of the land to be the key factor in determining rent, while von Thünen believed that distance from the market would determine rent. Thus his classical model of agricultural location drew largely from his experience of economic analysis of his farm accounts and even the constraints listed by him were based on these accounts.

How did he do it?
Any agricultural location model, as the name suggests, provides a framework for identifying important variables that determine the spatial pattern of agricultural production. Simply put, this normative model would tell you what would be an ideal location to plant specific crops in your ten acres of land. This ideal location for your wheat, cotton, sugarcane crops, etc. will give you the maximum economic benefit your farm is capable of, keeping in mind other farm and non-farm constraints.

von-1

Now you may have two questions: –

  • What is economic benefit, and
  • What are constraints?

Economic benefit means that if you put in INR 100 in your farm and get INR 200 when you sell the product, you have a 100 per cent profit. Thus, you are getting double of what you invested. However, while, on one hand you may get double or more, on the other hand, you may lose all that you invested if you are unable to reap returns from your produce. Thus evolves the concept of economic rent, which is the payment to a unit of any factor of production over and above the maximum amount necessary to bring that factor into production and to keep that factor in its present occupation. In other words, it is the surplus over and above opportunity cost. Now, assuming you are a rational person, in your ten acres of land you will produce only that combination of crops that will yield the maximum return.

Constraints may be farm and non-farm in the context of agriculture. External factors may also affect your calculations. Some of these may be positive constraints, such as the building of a canal, which would bring in larger areas into cultivation, or the building of a roadway which would reach the produce to the market very quickly, while some of this would be negative constraints such as market fluctuations, hike of transport costs, etc. The operation of these varying constraints make the entire process of agriculture extremely complex. With the object to simplify such a complex phenomena, von Thünen prepared a list of assumptions, which would hold the constraints in place and not allow it to affect the model of agricultural location.

  • Firstly, you have to imagine an isolated farmland; with no communication from outside. An ideal Hollywood site for a murder mystery. Thus, the market, other than the one within the unit, will not be able to affect it.
  • Secondly, the area is a featureless, fertile plain, some place where you could perhaps hold a Ben-Hur chariot race. No barrier to movement on any side or direction.
  • Moreover the physical resources are uniformly distributed. The soil fertility is uniform throughout the farmland and suitable for bringing under the plough. Thus the physical condition of relief, soil and climate being similar is called an isotropic surface.
  • Fourthly, the form of transport was envisaged to be horse drawn carts, which would be laden with the produce of the land and driven to the market located within this isolated farmland. The cost of transport was proportional to distance. Put simply, it would mean that the person who lived close to the market would have to pay less as compared to the farmer living on the outer edge of this isolated farmstead. Adding to the woes of the poor farmer farthest away, the cost of transport has to be borne by the farmer himself.
  • The cost of production of a single agricultural produce will be the same wherever you are located in the vast featureless plain.

There is now an imaginary estate with its horses and cart and produce, but, where are its people?
The population that would inhabit the land was postulated to come from a single race with similar settlement patterns. This would ensure that the level of technology and know how are the same, and the style of living and requirements would also be similar. Thus the produce that the dispersed population living in the fields produced would cater to the needs of the population living in the market. The villagers would exchange their goods for cash and provisions, provided by the town’s persons.

What was the logic of his theory?
Well, if I live close to the market I am lucky and can produce even perishable items, maybe delicious fresh jamuns, because I know that it will reach the market soon and I will bear no loss in transportation (Fig 1). But if my lands are far from the market, I can only produce such items that can be sustained over a long period of time. So, as defined before, economic rent will determine which produce will be profitable for me. Now, let us put what we have understood in a formulaic form, so that we may be able to calculate exact amounts.

Economic rent = per hectare yield X (unit price of your product – unit cost of production) – per hectare yield X transport rate X distance from the market

If the price of one unit of your product is INR 20, and it has taken INR 10 to produce it, then your profit per unit is INR 10. Supposing you have five hectares of land each yielding two units of produce. Your total number of units would be 5 X 2, which is 10. Profit per unit is also INR 10. Thus your total profit would be 10 X 10 = INR 100. But then you have some other costs that take away from your profits. These are the transport costs. Assuming that you are 10 miles away from the market and that the cost of sending one unit of produce per mile is 10 p. Then the cost of sending your total 10 units per mile is = 10p X 10 units, which is 100 p or INR 1. But we are 10 miles away from the market, how unfortunate!

von-thunen-graph-1

Now what? So, if cost of 10 units per mile is INR 1, what would be the cost of 10 units for 10 miles? You are probably feeling exasperated by now, because you have understood it all. Well the total transport cost is = 10 miles X INR 1 = INR 10. You are giving away INR 10 from your profit for transport. So your profit now is INR 90.

What would you do if your farm is not located 10 miles away but 50 miles away?
Common sense would tell you that you have to produce something that either has a low production cost or a high market value to counter the cost of transportation.

Thus von Thünen’s ‘bodenrente‘ (German: earth price) can be derived by using the expression,

Lij = Y (P – Ci) – YiTiDi.

i = per unit of land; j = the land is located at j; L = locational or economic rent; Y = yield per hectare; P = market price per unit; C = production cost per unit of commodity; T = transport rate per unit; D = distance from the market.

The logic of this entire scheme by now must have become clear to you. Represented diagrammatically, you will find that every product beyond a certain distance incurs losses. Another way of looking at it would be that since land near cities or markets have higher value, farmers near the market must farm the land intensively to break even, whereas farmers further away, where land values are lower, can use the land more extensively. Thus, near the market we have intensively produced perishable or bulky items, while away from the market you have extensively produced less perishable or bulky items.

What does the model look like?
If you take a profile of a number of products and project a graph for each, you will find that some crops can sustain transport cost while others incur enormous losses once away from the market. You will then find yourself placing the product which has the highest economic rent closest to the market and then placing other products in a hierarchical order, according to the one that brings maximum economic rent at that particular distance from the market.

Thus emerge zones which follow concentric rings (Fig 2).

von-thunen-graph-2

How did the modified models evolve?
As time flew by, von Thünen discovered that all was not perfect with his little Utopia. He tried to add certain external factors which he had assumed until now to be inert. This now distorted the concentric pattern (Fig 3).

  • He first introduced a transport medium such as a navigable river, which was quicker and cheaper, being only 10 per cent of the original cost of land transport.
  • Second came an alternative market, which was either smaller than the original or capable enough of competition.
  • Third came the alteration in productivity of land over space. You would probably find such examples anywhere, whether in the park behind your house or on a long rail journey. Some parts of a piece of land are either rocky or steep or just not fertile enough to produce what the adjoining area does. Something similar to the fact that not all the fingers of our hand are of the same size! With the introduction of this less fertile or infertile area, von Thünen’s zones acquired an irregular pattern similar to modern day land use patterns.

Is the model outdated?
A lot of writers believed that this model had no relevance in modern economic situations. Especially with the modifications in transport and new technological achievements, the needs of the 21st century seem obsolete.

Refrigeration can now preserve perishable products for a longer time and so these items can be transported over long distances. With the introduction of air freight, the world has now shrunk into one big farmstead. Thus no such concentric pattern is visible.

However all is not lost. It would be unscientific to criticize the model without its right historic perspective. Timber, located on the second ring in the concentric model, was a bulky material and an essential commodity for building houses as well as for fuel in bygone days. Thus it was located close to the market. Its relevance in those times was enormous, much in the same way as today’s world would view petroleum, much in demand and bringing exceedingly high returns.

This model has a unique applicability, as pointed out by a British geographer, M.Chisholm in 1908. He believes that the model is independent of scale and can apply to a small farmstead as well as an entire country, and even an entire continent with equal plan.

von-thunen-graph-3

Today perhaps the applicability is restricted to two extremes, one of individual small scale remote farmlands, and two, on a global scale. However when discussing any phenomena that can be interpreted on a world scale, it is important to keep in mind the demand which is usually determined by more affluent nations. Well, that is another debate altogether.

Recollect that von Thünen had stated that the market determines production or crop selection. As global organizations attempt to stimulate commercial agriculture in less developed societies, they attempt to locate a market niche, or the country’s comparative advantage in the global economy. For Nigeria this was the production of cocoa beans and palm oil, while for Ghana it was peanuts, and for Colombia it was coffee. The problem with commercialisation of subsistence agriculture is that countries with stronger market pull may determine crop selection at the expense of domestic food production in poor countries. For example, Colombia exports its high quality coffee to the US and other large markets to obtain high market value, after which the government releases cheaper varieties for consumption by their own inhabitants. The same may be noticed with the tea and rice production, (among others) of India. The best quality tea or basmati rice is exported to fetch a high market price. This is just one of the problems of globalisation.

Anyway, enough of deviation, the crux of the matter remains that on small farmsteads as well as on the world as a whole, the ring effect still reigns, validating the theory.

Our modern day production centres need additional labour to harvest the crop over and above the labour available within the farmstead. This labour also has to commute certain distances to reach the location of work. Thus, the travelling cost of labour added to the land and market values, especially in less developed countries produce a concentric pattern similar to the one postulated by von Thünen. E Ahmed (1952), in his work, Rural Settlement Types of Uttar Pradesh (United Provinces of Agra and Oudh), published in the Annals of Association of American Geographers, mentions in detail how the zoning is evident in these settlements. Quoting from his article, “The most fertile, heavily manured and irrigated arable fields surround the village. Beyond this lies another zone given over to the chief food crops, irrigated from wells or canals. An outermost zone, the poorest in fertility, is used for dry cultivation, usually millets and fodder crops.”

The theory also serves as a prime example of the ideal distribution of land based on property cost and production. William Alonso postulated the bid-rent theory in 1964 which bases itself on von Thunen’s postulations on land rent costs for agricultural functions. The bid rent theory is a geographical economic theory that talks about how the price and demand for real estate changes as the distance from the central business district (CBD) increases. It highlights that different land users would compete with each other to acquire land close to the city center.  The concentric land-use structure thus generated was proposed to be inspired by von Thünen’s model.

But just as every day is not a Sunday, our theory here also has some problems which cannot be ignored. von Thünen proposed costs proportional to linear movement. But, alas, the agricultural world is too complex. We have seasons in the sun, and seasons in the rain and cool blissful seasons, which all dictate exactly what crop to plant when. These crops may not conform to any concentric pattern as the farmer may plan his yearly income rather than seasonal income. If he has very high profits in one season, he may not be opposed to incurring losses the next, or even breaking even. Moreover real life situation is quite different from the model, as the same farmer can own land at differing distances from the market. He, the decision-maker, will calculate costs on overall terms and not rely on individual farm output and distance from the market. Furthermore, the model assumes each farmer to be rational and aware of all the information prevalent in the society. This, however may not be true, as not every human being is rational, and, not every person living in a society has equal access to information. Besides, markets and demands, can keep fluctuating quite disastrously, modulating what the farmer may produce. Also, economies of scale will operate if the commodity is of high value and amount of produce carried is large. This may not be applicable to smaller farmers who have to pay higher transport costs. Thus the logical minimisation of costs may not hold true in all cases. Such variations have unfortunately affected the arrangement of rings to shift dramatically from the idyllic picture visualised by von Thünen.

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