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Åke E. Andersson and David Emanuel Andersson

Real estate capital is interesting not because it is a combination of land and physical capital (the usual interpretation), but because it represents a bundle of physical and social capital attributes. In places with high land values despite an elastic supply of land, it is social capital—that is, superior access to other people and adequate institutional support for economic interactions—that explains almost the entire capital value of local real estate. The capital value of real estate is around 50 percent of household wealth in Europe and the United States. In the Eurozone, the value of households’ direct real estate ownership amounted to more than €15 trillion in 2015. The price and thus capital value of a house varies between different locations because of actual and expected differences in accessibility, amenities and local services. An apartment on Fifth Avenue near Central Park may be therefore 50 times more valuable than a seemingly similar apartment in downtown Poughkeepsie, New York. Because of the extreme durability and fixity of real estate, there are substantial entrepreneurial opportunities in real estate markets. New uses, improved technical solutions and changes to the interior and exterior architecture of buildings are thus typical of the most dynamic cities. Some of the greatest increases in the cost of real estate are however not caused by an expansive regional economy, but instead by land use regulations that render the supply of developable land inelastic. North American examples of dramatic planning-induced increases in real estate values include Honolulu, San Francisco and Vancouver. Similar planning initiatives have made some of the world’s financial cities even less affordable than they would have been with less restrictive land use regulations, with Hong Kong and London being two notable examples of the combined land price effects of agglomeration economies and urban growth boundaries.

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Åke E. Andersson and David Emanuel Andersson

In the late Middle Ages, there was an unprecedented growth in the number of towns in Europe. Economic historians have focused on the critical role of the improved transport and trading network that preceded the growth of trade and the increased division of labor between the new towns as well as between each town and its rural hinterland. Much of Europe had been made up of autarchic fiefdoms until the eleventh century. There had been exceptions such as Venice, which acted as a node for what little trade there was between the eastern and western parts of the Mediterranean. The Crusades opened up new transport and trading opportunities and indirectly paved the way for the establishment of important trading houses in northern Italian cities, which pioneered various profitable banking practices. Examples include the Gran Tavola (the largest bank in Siena) and the extensive commercial and banking network of the Medici family in Florence. Henri Pirenne and later Fernand Braudel showed that the most important factor behind the increase in trading volumes, accumulated wealth and urban manufacturing was the slow but steady expansion of the European transport system, which eventually comprised a network that integrated all parts of Western Europe from the Mediterranean to the Baltic Sea.

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Åke E. Andersson and David Emanuel Andersson

Trade across space is central to economic theory. Trade presumes the existence of a transport system. Already in the eighteenth and nineteenth centuries, economists such as Adam Smith and David Ricardo elaborated upon the gains from trade between two nations. It was the Law of Comparative Advantage in production that explained the gains from trade, according to Ricardo. Eli Heckscher and Bertil Ohlin reformulated Ricardian trade theory by treating spatially trapped resources in different locations as the root cause of the existence of comparative advantages. Their treatment of space-bridging frictions remained implicit, however. Stella Dafermos and Anna Nagurney addressed this neglect by transforming older theories of international trade into a very general class of network-based interregional models of trade and transportation. These were the so-called “variational inequality models.” The German economist Johann Heinrich von Thünen developed an early spatial alternative to mainstream trade theory. In 1826, he formulated a complete general equilibrium theory of transport, location, land use and trade in a continuous one-dimensional model. In the second half of the twentieth century, Martin Beckmann and Tönu Puu showed that von Thünen’s model is applicable to two-dimensional continuous space. Spatial economic theory, which in principle includes all theories of international and interregional trade, has evolved over time. Early implicit models evolved into models with discrete systems of regions and then into models with continuous one- or two-dimensional space. However, all of these theories and models assume the prior existence of a transport system. In this chapter we show that economic actors create networks of nodes (towns) and links (trading routes) because they expect various advantages to arise due to new opportunities for trade. Such network creation is a type of entrepreneurship that exhibits consequences that are unusually collective. Hence agglomerations of people and productive activities reflect accessibility differences and these differences are associated with unequal internal and external scale economies. We also show that there is a self-organizing process of network creation that makes cities more efficient over time.

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Åke E. Andersson and David Emanuel Andersson

Classical economists such as Adam Smith, David Ricardo, John Stuart Mill and Karl Marx introduced the concepts of time and capital to economics. They developed the labor theory of value, thereby assuming that the historical process of accumulated labor would determine the value of capital goods. By the end of the nineteenth century, a number of economists had started to question this approach to capital theory. Carl Menger proposed a completely different theory, focusing instead on the role of expectations. He used this new theory as an argument against the labor theory of value; the subjective preferences of consumers rather than labor inputs were for Menger the ultimate source of economic value, including the value of capital. According to Menger, historical circumstances have made goods available in the present, and these circumstances mostly reflect producers’ expectations of future profits. Subsequently, Eugen von Böhm-Bawerk and Knut Wicksell formulated dynamic models that showed that the expected future flow of returns would determine the value of capital. They linked this to an optimality condition that required the expected growth rate of the capital value to equal the interest rate on loanable funds. In this chapter, we show that markets for works of art offer an especially lucid illustration of the importance of expectations and the irrelevance of labor inputs. Frank Knight was the first economist to analyze the structural uncertainty of long-term expectations, while Irving Fisher showed that the credit market is essential for investors in real capital. Fisher suggested the possibility of using a two-stage decision process. In the first stage, the investor would aim to maximize the expected value of a project. The second stage would make the investor aim at an optimal solution by becoming a borrower in the credit market. Wicksell and later John Maynard Keynes modeled the dual problem of an equilibrium interest rate and another interest rate that arises within the banking system as a cause of inflation or unemployment. Only much later was this to become the main concern of central banks.

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Åke E. Andersson and David Emanuel Andersson

The games of markets including entrepreneur-driven economic development have always taken place on an arena of the combined material and non-material infrastructure. The infrastructure thus constitutes the arena; it is public capital that facilitates and constrains the rapid “games” of buying and selling that economic agents play. Agents perceive the arena as stable because its evolution is so much slower than that of markets for goods and services. Synergetic theory is well equipped to handle such multiple timescales. Its application to economic phenomena enables us to show that competitive equilibrium theory requires prior specification of the infrastructural arena, which consists of public knowledge, space-bridging networks and institutions. Synergetic theory can also help us avoid the pitfalls of conventional macroeconomic theory. In this chapter, we demonstrate how macroeconomic equilibrium depends on the infrastructure. We claim that all goods are durable and are thus instances of capital. This means that historical trajectories, current outcomes, uncertain expectations and changes in spatial accessibility all influence the growth and fluctuations in the value of capital goods. Dynamic non-linear interactions between scientists, inventors and entrepreneurs affect investments. New technological or design ideas spread most easily among spatially proximate firms within communication and transport networks. Such network effects shape processes of spatial clustering, agglomeration and urbanization. Based on causal and various econometric considerations, it has been common for economists to resort to difference equation in their modeling strategies. But if we include dynamic interactions within a system of difference equations—so as to accommodate realistic causal assumptions—it will often result in complex models with chaotic outcomes. However, there are ways out of chaos in economic modeling. The first is to focus on continuous dynamic synergetic models, which implies a careful separation of variables and dynamic processes according to their relevant timescales as well as the collectiveness of their impacts.

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Åke E. Andersson and David Emanuel Andersson

The duration of human life has been increasing steadily in most parts of the world for at least the past 50 years, and in many cases over a much longer time period. The well-known Preston Curve shows that the material standard of living as reflected in per capita real income is associated with the mean life expectancy, but with a weaker association at high levels of income. In this chapter we discuss the impact of a consumer’s choice on his or her life expectancy. In affluent societies, lifestyle choices have much greater effects on individuals’ lifespans: people have more discretionary income and infectious diseases are less prevalent. Affluent people therefore have far greater control over their own personal life expectancies than people in less fortunate circumstances. Although most people know that the composition of their diet and their drinking, smoking and exercise habits influence their life expectancies, genetic factors and interdependencies among health-affecting choices make such effects highly uncertain. Empirical studies nonetheless show that high education elasticities are associated with choices that increase the expected duration of life, perhaps because old age is less unattractive to people who derive utility from cerebral activities. Oeppen and Vaupel have shown that the Preston Curve underestimates long-term increases in life expectancy. We believe that the Preston Curve is shifting upward over time as a consequence of slow but persistent infrastructural improvements to public knowledge, communications and institutions. Our trend analysis of time use implies a long-run reduction of remunerative working time toward levels as low as 1,300 hours per year. This implies that we expect that the time allocated to work will drop to 7 or 8 percent of the 900,000 hours (102.7 years) of life that we expect in the most post-industrial regions in the very long run.

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Time, Space and Capital

New Horizons in Institutional and Evolutionary Economics

Åke E. Andersson and David Emanuel Andersson

In this challenging book, the authors demonstrate that economists tend to misunderstand capital. Frank Knight was an exception, as he argued that because all resources are more or less durable and have uncertain future uses they can consequently be classed as capital. Thus, capital rather than labor is the real source of creativity, innovation, and accumulation. But capital is also a phenomenon in time and in space. Offering a new and path-breaking theory, they show how durable capital with large spatial domains — infrastructural capital such as institutions, public knowledge, and networks — can help explain the long-term development of cities and nations.
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Edited by Thijs ten Raa

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Harvey Goldstein, Verena Peer and Sabine Sedlacek

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José M. Rueda-Cantuche

It is not easy to transform the input and output tables "produced" by statistical offices into matrices of input-output coefficients. There are commodity-by-commodity and industry-by-industry input-output matrices and each of them can be constructed using different models. This chapter provides a unifying framework for all these alternatives and discusses the theoretical and practical pros and cons of the alternatives in a way that consolidates the vast literature. The chapter is authored by an expert who combines statistical office experience and academic contributions to the interface of input-output statistics and economic-environmental modeling.