Abstract
Due in part to renewed interest in the ideas of Joseph Schumpeter, the field of economic geography has undergone substantial change during the past few decades. Among other matters, Schumpeter (1934) outlined how innovation, entrepreneurship, and credit interact so that new products and processes can be brought to the market. He clearly viewed money not only as a medium that facilitates the circulation of goods and services but also as a mechanism—working through institutional lending and borrowing—that allows the entrepreneur to “force the economic system into new channels” (p. 106). Edward Elgar has certainly been a leader in publishing edited handbooks establishing the role of geography for innovation and entrepreneurship, but this appears to be the first volume addressing the implications of space and place for the behavior of agents in the financial industries.
Following an especially detailed overview by the editors, Ron Martin and Jane Pollard, there are 25 chapters covering matters such as the nature of financial crises and bubbles, the regulation of financial industries, the organization of banks, the geography of assets and debts, and a variety of new and emerging topics. Overall, there are 39 different contributors to the volume—mostly drawn from the United Kingdom (20) or elsewhere in Europe (13)—who claim that spatial concepts, including location and scale, are underappreciated in our current understanding of “the constitution, operation and organization of money and financial systems, institutions, agents and markets” (p. 1). Instead of summarizing the full contents of such a lengthy and diverse volume, this review focuses on three of the more interesting chapters and then briefly outlines the remaining material in the book.
Chapter 2, by Gary Dymski and Mimoza Shabani, takes up the issue of asset bubbles and claims that the three prevailing approaches to the phenomenon—valuation above fundamentals, time-series deviation, and outright speculation—all look for commonalities across financial crises, while not recognizing that these crises unfold in different places and are often triggered by different events. A short but interesting discussion ensues about the key differences between Charles Kindleberger and Hyman Minsky on the subject, where the authors favor the more heterodox Minsky in part for claiming that asset bubbles always create a tension between investing and financing. In fact, Minsky distinguished among three broad types of financing: hedge, where cash flow covers borrowing; speculative, where cash flow covers interest; and outright Ponzi. The last is the most dangerous because here borrowers are betting that asset prices will continue to appreciate enough to cover all liabilities, so when cash inflow no longer matches those liabilities the boom period abruptly ends and the speculative bubble bursts. Next, the authors briefly outline a framework for dealing with space or place in such asset speculation. Here they consider a small open region tied to the rest of the world where significant investment flows in from outside, thereby separating financiers in one place (outside) from their investments in another place (inside). In this sense, all investment becomes speculative, in both time and space, because financiers can only enjoy limited knowledge about the future and limited knowledge of other places. Unfortunately, though, the authors provide only some detail about how the varying attributes of place (e.g., banking regulations, concentration of wealth, etc.) actually affect the creation and destruction of an asset bubble. Nevertheless, they are persuasive that this topic needs more research to enhance our understanding of how investment-driven economic processes unfold across space.
Later, in chapter 8, Luca Papi, Emma Sarno, and Alberto Zazzaro examine the changing network of banking organizations across Italy. They begin by noting that lending (especially to firms) often makes use of both hard and soft information, where hard information involves matters like credit scores and repayment histories, and soft information involves matters like reputations and financial strategies that are not so easily codified. In general, large banks, which are hierarchically organized and geographically dispersed, enjoy an advantage in using access to hard information, whereas small banks, dealing mainly with local customers, enjoy an advantage in collecting and assessing soft information. In an empirical study of banking change over two decades, the authors examine three types of distance measures: operational (from borrower to branch), functional (from branch to headquarters), and interbank (between rival branches). The results indicate that (1) borrowers (mostly firms) often choose their main bank depending on the physical proximity of the various branches; (2) home bias exists in granting credit where small borrowers often have difficulty securing loans from banks having distant headquarters; and (3) areas with high densities of rivals often show a lot of institutional switching, thereby eroding away any persistent bank-to-customer lending relationships. The chapter concludes with a network analysis of Italian banking where it is very evident that banks headquartered in the nation’s core (peripheral) provinces have had much more (less) recent success penetrating the peripheral (core) provinces with their branches. But surprisingly little is said about the geographic impact of rising electronic transactions (including ATMs) or any dramatic post-2007 downsizing, the latter being a process that—at least in the United States—has clearly shifted the relative incidence of bank branches in small versus large places and poor versus rich regions (Ensign & Jones, 2017).
Regional scientists should particularly enjoy chapter 16, where David Bieri argues that financial regulation is very important to the evolution of the space economy. His main emphasis is on the spatial flows of funds that occur across both sectors (industries and households) and regions where financial instabilities arise when the balance sheets of those various regional cash inflows and cash outflows no longer match. Although he does not mention central place theory, Bieri envisages a hierarchical system of lenders being tightly bound to a surrounding field (or functional region) of borrowers. Over time, a dialectical relationship creates a sort of path dependency in banking behavior, and this invariably leads to the rise of some lending centers at the expense of others. But, while he posits the existence of a hierarchy of money, he does not fully use this concept—as David Harvey (1982) might—to shed light on the recent changes seen across many economic landscapes like the United States. Here large banking centers, with many depository institutions (and more political influence), were able to weather the dramatic events of 2007-2008 reasonably well, but small banking centers were more vulnerable to those events because financial losses in those places comprised a much higher ratio of local gross domestic product. Moreover, broad regional differences arose in these stories of financial success and failure because of the regulatory fragmentation inherent to the U.S. banking industry, where one agency was dominant in only a few large cities along the coasts but another had oversight responsibilities spread across the entire nation.
Perhaps though, Bieri and others should have used their knowledge of social accounts to clarify how these geographic shifts in banking had differential impacts on local economies. Charles Tiebout (1962), for one, was mainly interested in the constituents of the economic base multiplier, but his work also sheds light on the different temporal attributes of monetary capital. He distinguished between short- and long-term time horizons where the former only included consumption activities (firm and household demand) but the latter included both consumption and investment activities. For typical small- and intermediate-sized places, Tiebout’s model indicates that innovations like online shopping reduce the size of the short-run multiplier but changes in banking organization further reduce the size of the long-run multiplier. So, as banking becomes more centralized, the economic bases of most smaller places are eroded away because investment returns, once captured by local banks, now typically flow out to larger banks located in distant metropolitan areas.
The five chapters in part 1 take issue with the standard approach that money is neutral and financial regulation is apolitical. In doing so, the authors call for a more realistic treatment of financial systems in all their variation and complexity. In fact, several, including Michael Pryke, claim that the shifting topology of global finance—exemplified in the rise of a few world financial centers—has changed both the spatial and temporal attributes of international money flows in recent times. Also, as data become more available about alternative spatial investment possibilities, a broad and dangerous change occurs in societies where financiers become more valued than entrepreneurs. The nine chapters in part 2 explore how the operation of financial systems shapes, at various scales, the geography of economic development. Here attention focuses on matters such as stock markets, sovereign wealth funds, mortgages, and pension funds, where the role of finance is often underappreciated in creating uneven development. Over the past few decades, traditional capital circuits have not only changed because of banking reorganization but entirely new capital circuits have arisen through venture-type activities and other schemes. Concerns are expressed that the continued adoption of neoliberal policies will jeopardize the funding of much-needed infrastructure projects (Peter O’Brien and Andy Pike) and will exacerbate already notable levels of socioeconomic inequality (Gordon Clark). The five chapters in part 3 take up the issue of financial regulation and, echoing people like Thomas Piketty, clarify why national policies remain ineffective when dealing with global flows of mobile capital. Here, special attention is given to the issue of offshore accounts (Thomas Wainwright), which allow personal or corporate taxes to be reduced or completely evaded, and to the increasing complexities that must be recognized when generating accurate credit ratings (Ginevra Marandola and Timothy Sinclair). The six chapters in part 4 will likely be of greatest interest to younger readers, as they address new or emerging issues like crowdfunding and cryptocurrencies. An especially thoughtful chapter is provided by Janelle Knox-Hayes, who links financial instability to the ongoing environmental crisis. She sees evidence that externality taxes can help ameliorate environmental impacts of production (and consumption), but fears that financial representations of the environment can be mismanaged or manipulated to induce even further financial instability.
This is an interesting and well-referenced book that contains a lot of useful knowledge about the world’s financial and monetary systems. Although some of the chapters have used excessive Marxian terminology, often invoking Harvey’s three types of spaces, the various claims are never really all that opaque. However, if these authors want to move from the conceptual to the operational, many will have to adopt the tools of econometrics to strengthen their claims or generalize their results. Imagination and skill will be needed to tease out the local or regional effects from complicated path-dependent national and global processes, whether these effects mainly reflect the varying institutional architecture of financial systems or the capital flows that accompany ongoing asset pricing across different locations.