1.

3 The economy and economic geography

1.3.1 The capitalist economy

‘The economy’ refers to the interrelated processes of production, circulation, exchange and
consumption through which wealth is generated (Hudson, 2005, p.1). It is through such
processes that people strive to meet their material needs, earning a living in the form of
wages, profits or rent. Production involves combining land (including resources), capital, labour
and knowledge – commonly known as the factors of production – to make or provide
particular commodities. It relies on a supply of resources from nature, meaning that economic
activities have a direct impact on the environment. The commodities produced are then either
directly consumed by the producers or, much more commonly, sold to individual consumers
and households through the market.

Human societies have tended to organize and structure their economic activities through
overarching modes of production. These can be defined as economic and social systems that
determine how resources are deployed, how work is organized and how wealth is distributed.
Economic historians have identified a number of modes of production, principally subsistence,
slavery, feudalism, capitalism and socialism. Each of these creates distinctive relationships
between the main factors of production. Capitalism is clearly the dominant mode of
production in the world today, operating at an increasingly global scale. It is defined by
individual ownership of the means of production – factories, equipment and money capital –
and the associated need for most people to sell their labour power to employers or capitalists
in order to earn a wage. This allows them to purchase commodities produced by other firms,
creating the market demand that underpins the capitalist system. Compared to earlier modes
of production, production and consumption are often geographically separate under
capitalism, creating a need for extensive transport and distribution networks.

A key underlying point here concerns the fact that the principal features of the modern
capitalist economy – such as the role of the market, profits and competition – are not natural
and eternal forces that determine human behaviour, as mainstream economists and business
commentators tend to assume. Instead, capitalism is a historically specific mode of production
that has emerged from its roots in early modern Europe in the sixteenth and seventeenth
centuries to encompass virtually the entire globe today. It has been superimposed on a
complex mosaic of pre-capitalist societies and cultures, resulting in great regional variation as
pre-existing local characteristics interact with broader global processes (Johnston, 1984).
While capitalism is clearly the dominant mode of production in the world today, it does not
follow that all economic activity is capitalist in nature. In reality, the formal, capitalist economy
based on striving to maximize profits or earnings coexists with a range of other economic
activities and motivations such as domestic work, volunteering, the exchange of gifts and
cooperatives. Gibson-Graham (2006) represents this in terms of an ‘iceberg’ model with the
capitalist economy masking a wide range of other forms of economic activity (Figure 1.9). The
two categories are not separate in practice, however, with non-capitalist activities interacting
with capitalism in a variety of ways. Think of the relationship between domestic work and paid
employment, for example, or the role of gift-buying within capitalism. Gibson-Graham (1996)
emphasizes the existence of diverse economies, criticizing the preoccupation with the formal,
capitalist economy among economists and economic geographers. This critique has informed a
number of studies of ‘diverse’ or ‘alternative’ economies such as informal work, local
currencies and cooperatives (Leyshon et al., 2003).

1.3.2 An economic geography perspective

Economic geography is concerned with concrete questions about the location and distribution
of economic activity, the role of uneven geographical development and processes of local and
regional economic development. It asks the key questions of ‘what?’ (the type of economic
activity), ‘where?’ (location), ‘why?’ (requiring explanation) and ‘so what?’ (referring to the
implications and consequences of particular arrangements and processes). According to one
recent definition:

Economic geography is concerned with the economics of geography and the geography of
economics. What is the spatial distribution of economic activity? How is it explained? Is it
efficient and/or equitable? How has it evolved, and how can it be expected to evolve in the
future? And what is the appropriate role of government in influencing this evolution? (Arnott
and Wrigley, 2001, p.1).

Three key themes emerge from this: a) The geographical distribution and location of economic
phenomena. Figure 1.10 provides an example of such a distribution, showing variations in
employment in financial and business services – a key growth sector in developed countries
over the past 25 years – across the UK. Describing and mapping distributions of economic
activity in this way can perhaps be seen as the first task of economic geography, addressing the
basic questions of ‘what’ and ‘where’.

b) The next stage is to explain and understand these spatial distributions and patterns of
economic activity. This is a more demanding task, which brings in theory and requires us to
have some appreciation of history. It involves addressing the more advanced questions of
‘why’ and ‘how’. In trying to explain why financial and business services employment is
clustered in south-east England and one or two other areas, then, we would need to draw on
theories of the spatial concentration of economic activity and to have some understanding of
the basic economic history of the UK since the industrial revolution.

c) A third issue is that of engagement with policymakers in government and the private sector,
making recommendations and offering advice about particular geographical issues and
problems. As well as describing and explaining the distribution of certain economic
phenomena, geographers have also sought to outline how the economic geography of
particular countries and regions should be organized. This role has sparked periodic debates
about the social ‘relevance’ of the subject (Peck, 1999).

1.4 A political economy approach

In this section, we build on the above definition of economic geography by introducing our
favoured approach to the subject: political economy. Political economy analyses the economy
within its social and political context, rather then seeing it as a separate entity driven by its
own set of rules based on individual self-interest. It is concerned not only with the exchange of
commodities through the market, but also with production and the distribution of wealth
between the various sections of the population (Barnes, 2000b). This focus on questions of
production and distribution distinguishes political economy from modern economics. While
the classical political economy of the nineteenth century was not concerned with geography,
economic geographers have sought to apply a political economy framework to geographical
questions such as regional development and urban growth (Harvey, 1982; Massey, 1984).

1.4.1 Social relations

Social relations provide the general link between the economy and society. In contrast to
mainstream economics, which is underpinned by the assumption of individual rationality,
political economists believe that economic activity is grounded in social relations. These simply
refer to the relationships between different groups of people involved in the economy such as
employers, workers, consumers, government regulators, etc. A key defining social relationship
is that between employers and workers, structuring activity within the workplace. The two
groups are commonly regarded as different classes within society, a position set out with
particular force by Marx, although for some commentators the growth of a large middle class
of ‘white collar’ workers has blurred the distinction considerably. Other important social
relations are those between producers and consumers, different firms (e.g. manufacturers and
suppliers), different groups of workers (e.g. supervisors and ordinary employees) and
government agencies and firms. As our case study of the banana indicated (Box 1.1), the
production of a simple commodity creates complex social relations between people based in
different places. Even if some of the parties – for example, consumers at large supermarkets in
the UK or US – are not aware of such relationships, they still exist.

Once we have accepted that the economy is structured by social relations, it is important to
recognize that these relations will change over time as society evolves. We have already
pointed to a transformation occurring in Western societies from around the fifteenth century
onwards where a system of market capitalism gradually replaced feudalism as the underying
mode of production. In other words, feudal ties and values of the peasantry and the nobility
have given way to market competition, the pursuit of profit and the wage relationship
between capital (employers) and labour (workers) as the key social relationship shaping
economic and indeed human development. Increasingly intensive competition between firms
is also a critical relationship, driven by the relentless pursuit of profit and the subsequent drive
to eliminate rivals to gain a greater share of the market.

1.4.2 Power

Having accepted that the economy is structured by social relationships, it is also important to
recognize the role of power in underpinning these relationships. Ultimately all human social
relations are underpinned by power, in the sense of the ability or capacity to take decisions
that involve or affect other people (see Allen, 2003). Economic relations in this sense are no
different. Power percolates through economic relationships at all geographic levels: from that
of the household in terms of who makes decisions regarding the domestic budget, and who
‘goes out to work’ and who ‘stays at home’; at the level of the firm in terms of the share of the
wealth generated in production that accrues to employers rather than employees; in the
relationships between firms within particular industries with large retailers and manufacturers
often able to dictate prices and terms to their suppliers (e.g. the cost-cutting strategies of the
large supermarket chains such as Tesco in the UK have reduced prices for farmers); and at the
international level, in the way that some institutions and governments – the World Trade
Organization (WTO) or the US – have greater power to set the rules of trade than others.

The ‘secret life of a banana’ (Box 1.2) indicates how the social relationships between different
groups of people located in different places are structured by power. At a very basic level, it is
clear that some actors in the chain, particularly the supermarkets and the multinational firms
that coordinate the production and distribution processes, are in a more powerful position
that the small Caribbean farmers or the labourers in the large Central American plantations.
Unequal power relations in this sense are central in understanding the concept of uneven
development.

1.4.3 Institutions and the construction of markets

Another crucial element in our political economy perspective is a view of markets as socially
constructed entities that require social and political regulation rather than representing
naturally occurring phenomena capable of self-regulation. Unlike mainstream economics,
which holds that markets, if left to their own devices, will return to an equilibrium position
where supply equals demand and waste is eliminated, we believe that unregulated (‘free’)
markets are destabilizing and socially destructive. While the notion of the free market retains
its ideological and political power, in reality virtually all economies are mixed, containing
substantial public sectors. Following Karl Polanyi (Box 1.3), we emphasize the institutional
foundations of markets, recognizing that the economy is shaped by a wide range of
institutional forms and practices. These include cultural rules, habits and norms that structure
the social relations between individuals, helping to generate the trust that underpins legal and
contractual relationships, and the direct. intervention of the state in managing the economy
and in running systems of social welfare. Key forms of institution at the national level include
firms, markets, the monetary system, business organizations, the state and a wide range of
state agencies and trade unions. These are not merely organizational structures; they also tend
to incorporate and embody specific practices, strategies and values that evolve over time.
Economic geographers are particularly interested in how local and regional economies are
shaped by distinctive institutional arrangements (Martin, 2000). Important forms of
institutions in this respect include local authorities and development agencies, employers’
organizations, business associations and chambers of commerce, local political groupings,
trade union branches and voluntary agencies. According to Amin and Thrift (1994) institutional
‘thickness’ or density is an important factor shaping local economic success, referring to the
capacity of different organizations and interests to work together in the pursuit of a common
agenda. While far from typical of the structure of contemporary local economies, the industrial
districts of central and north-eastern Italy offer a striking illustration of the role of institutions
in shaping local economic development (Box 1.4).