Cities in Contemporary Capitalism

ARTICLES

Cities in Contemporary Capitalism

STEFAN KRÄTKE

AbstractThis article outlines essential concepts of the political economy approach of urbanresearch and offers critical modifications and clarifications to some of its contentionsconcerning the functioning of cities as ‘strategic places’ of capital accumulation. Theinterrelations between contemporary capitalism and urban economic development arediscussed at the scale of a transnationally extended urban system. Based on the generalcontext of the global economic downturn, I focus on the role of cities in distinct circuitsof capital, the switching of capital flows within the urban system and the differentfunctional roles of cities within the world city network that interconnects cities both inthe global North and South. I call into question the established focus of urban economicresearch on the role of cities as financial and service centres, arguing that cities mightredirect their economic development trajectories towards ‘real economy’ activities,in contrast to relying on the disastrous development model of finance-dominatedcapitalism.

IntroductionContemporary capitalism is shaped by a finance-dominated regime of accumulation,wherein trade in financial assets and derivatives as well as the urban real estate businesshave become leading sectors of economic development. This particular regime ofaccumulation has a profound impact on the development of cities and urban regions. Inthe context of a worldwide economic crisis affecting territories and places all across theworld, it is worth revisiting essential concepts of the urban political economy approachconcerning the functioning of cities as ‘strategic places’ of contemporary capitalism. Theretreat of political economy perspectives in contemporary urban studies might have beenfuelled by the widespread view that the work of David Harvey in particular offers an‘exhaustive’ account of the role of cities in capitalism that leaves no scope for furtherdevelopment. By offering some critical modifications and clarifications to certaincontentions within the urban political economy tradition, this article presents the keyarguments of radical urban political economy with regard to contemporary patterns ofurban restructuring, and includes some new and specific claims on how to interpretfinancialization, the theory of capital switching and the need to combine the urbanpolitical economy approach with a global urban network approach that highlights thedifferent yet interconnected functional roles of cities in the global North and South. Incontrast to a ‘northern view of global capitalism’, I argue that despite the regional andlocal variations in urban economic and socio-spatial structures, cities in both the globalNorth and South are shaped in essence by the economic forces of today’s globalcapitalism, including the uneven distribution of key functions in a global spatial divisionof labour.

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Volume 38.5 September 2014 1660–77 International Journal of Urban and Regional ResearchDOI:10.1111/1468-2427.12165

© 2014 Urban Research Publications Limited. Published by John Wiley & Sons Ltd. 9600 Garsington Road, Oxford OX42DQ, UK and 350 Main St, Malden, MA 02148, USA

In general, cities and urban regions play a central role in the spatial organization ofcapital accumulation — they represent the geographic nodes of capital accumulation inthe real economy sector as well as in the financial sphere, and they seem to be the mostimportant places of capital valuation in the real estate sector, which today forms anintegral part of the capitalist economy’s financial sector. At the same time, cities offer theenterprise related infrastructures that support capital accumulation, and they representspatial centres of social consumption, which comprise the spheres of collectiveconsumption (Castells, 1978; Theret, 1982) of health, education and transport servicesand so forth on the one hand, and the spaces of private consumption, including urbanresidential areas with different qualities and locational features on the other. The socialdivisions of a capitalist society articulate themselves in the city by more or lesspronounced socio-spatial hierarchies and divides. Nonetheless, there are importantdifferences between cities — not only in terms of size, but particularly with respect to thefunctional specialization of urban economies and the dynamics of economic, social andspatial restructuring processes. From a comparative perspective, individual cities formpart of an urban system that increasingly exceeds the boundaries of national stateterritories. The urban system comprises cities of different sizes, economic andsocio-spatial structures that are interconnected by economic exchange and controlrelations, information and capital flows, as well as migration flows. At the urban systemscale, the problem of uneven spatial development in capitalism is articulated by thedifferent pathways of prospering or ‘up-and-coming’ cities and ‘declining’ cities.

The role of cities in contemporary capitalism might be analysed from the perspectiveof a particular city. Yet from a broader perspective, the role of cities can be reviewed atthe scale of urban systems. At this scale level, we are in a good position to take functionalspecialization, spatial division of labour and competition between cities into account.Today, the economic development and internal structure of cities is increasingly affectedby global influences, particularly cities’ external relations. Hence it is increasinglydifficult to analyse the ‘functioning’ of a city endogenously, based on what is happeninginside its conventionally defined administrative boundaries. A city’s economic andsocio-spatial restructuring, particularly the extent or ‘spatial reach’ of residentialgentrification processes and the construction of new business centres, is increasinglyshaped by the city’s positioning within a transnationally extended system of competingurban regions. This systemic perspective on urban development is not confined to thetraditional conceptualization of ‘national urban systems’. At present, the scale level of aglobal urban system is of much more relevance.

This article presents an account of the major economic forces that shape unevendevelopment within the capitalist urban world. The second section of this article startsfrom the general context of the current global economic crisis, referring to the role ofcities in distinct circuits of capital and to the switching of capital flows within the urbansystem. These basic themes are closely related to the notion of uneven development andof the different functional roles of cities within the urban system. Therefore we need todeal with the spatial division of labour and the different economic profiles of cities in thecapitalist urban world. This theme is at the heart of the third section, which is based onthe claim that we need to relate the key concepts of the urban political economy approachto the study of global urban networks in order to grasp the different yet interconnectedfunctional roles of cities both in the global North and South.

The current world economic crisisIn contrast to preceding historical formations of capitalist society, contemporarycapitalism is characterized by a finance-dominated model of development (Huffschmidt,2002; Chesnais, 2004; Sablowski, 2011; Zeller, 2011) and a mode of regulation that restson the neoliberal conception of unchaining market forces in all spheres of economic and

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International Journal of Urban and Regional Research 38.5© 2014 Urban Research Publications Limited

social development (Brenner and Theodore, 2002). The financial sector no longer has amere supporting function within the economy, but has become the dominant and drivingforce in a ‘post-Fordist’ model of capitalist development. The deregulation of financialmarkets exerted a decisive influence over its proliferation. Interestingly, the current crisisemanated from a ‘financial innovation’ called ‘securitization’ of subprime credits in thereal estate sector, that is, it was triggered by financial operations related to urban settings(Aalbers, 2012). However, it may be exaggerated to argue that the crisis is ‘rooted’ in thedevelopment of urban areas. Rather, securitization primarily relates to the inclusion ofurban real estate valuation in the circuits of financial capital, whose unchained race forprofits based on investment banking and newly constructed derivative financial productsis at the heart of the current crisis (Blackburn, 2008). Meanwhile, the crisis scenario hasexpanded and involves the damaging of entire national economies (as in the case ofIreland and Greece) by financial-market imperatives that combine with neoliberalausterity policy. The neoliberal model of deregulated ‘casino capitalism’ has proven to beextremely harmful to economic development all over the world. Furthermore, the crisisis causing millions of people, particularly in developing countries, to fall below thepoverty line. Advocates of neoliberal capitalism have organized government bail-outs ofthe financial sector to a previously unknown extent. David Harvey’s warning (1989: 277)concerning the destructive powers of financialization turns out to be quite relevant to thecurrent situation: ‘There are abundant cracks in the shaky edifice of modern capitalism. . . The world’s financial system — the central power in the present regime ofaccumulation — . . . puts such huge claims on future labor that it is hard to see any wayto work out of it’. Indeed, current policy for handling the crisis has abolished the marketeconomy in the ‘systemically relevant’ financial sector by extensively bailing out failedbanks. This will force continued tributes from the ordinary population, and, owing to theradical austerity policies involved, is turning out to become the greatest assault on thewelfare state ever experienced, in decades.

Contemporary capitalism is characterized by tremendous amounts of capitalcirculating in the financial sphere, the total sum of which corresponds to a multiple of theworld’s GDP. An empirical measurement of the ‘financialization’ of capital is impededby the lack of statistics on international financial transactions. A large share of thesecapital flows entails the activity of ‘shadow banks’ and ‘over-the-counter’ transactions(OTC) occurring outside the official stock markets. If we take world GDP as a roughmeasure of worldwide ‘real sector’ economic activity, the relation between the worldGDP and the volume of international financial transactions (including speculativeactivity such as the trade in derivative financial ‘products’ and currencies) is estimated toamount to 1:65 in 2007 (UNIA, 2009). Since 1970, the relation has strongly shifted infavour of the financial sphere, since the volume of financial transactions grew muchfaster than real sector production activity (Huffschmidt, 2007; UNIA, 2009). Inparticular, the financial derivatives business grew from US $123 billion in 1990 to avolume of US $1,408 billion in 2005 (Huffschmidt, 2007). Over the past few decades,the sum of capital circulating in the financial sphere has been additionally fuelled by anincreasingly polarized income distribution in the heartlands of neoliberal capitalism.Owing to capital owners’ sharply rising claims of profitability, the sphere of investmentbanking and financial speculation has been extended ever further at the expense ofinvestment in the real economy sector (Huffschmidt, 2002). Thus capitalism today hasbecome for the most part a parasitic endeavour that rests on picking others’ pocketsinstead of manufacturing goods, constructing infrastructures or offering ‘real’ consumerand producer services.

The economic geographies of financialization are multifaceted (Pike and Pollard,2010; Hall, 2012), yet the actors, processes and impacts of financialization seem to bestrongly (though not exclusively) concentrated on urban areas. How does the crisis offinancialized capitalism relate to cities? In the most simple way, we might say that theworld’s most prominent financial centres — in particular the city of London, New York’sWall Street, and Tokyo (besides the well-known ‘offshore financial centres’ of the world)

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represent distinct places from which the current destabilization of the world economy isset in motion. Yet on the ‘receiving side’, the economy and population of cities all overthe world is — to a more or less dramatic extent — confronted with the outcomes of thecrisis, which manifest themselves in the downturn of ‘real sector’ production activity,rising unemployment, cutbacks in social expenditure and public services and the spreadof abandoned urban housing estates as a result of foreclosures. A more differentiatedaccount, however, needs to remind us of some basic insights of the political economytradition of urban research.

The role of cities in distinct circuits of capitalThe political economy tradition of urban research emphasizes the essential role ofcapitalist economic relations in the development of cities, particularly the impact ofcapitalist imperatives on the restructuring of urban economies, the cities’ builtenvironment and socio-spatial fabric. In his account of the urban process undercapitalism, David Harvey (1982; 1989) — drawing on Lefebvre (1976: 169) —emphasized the interplay of different circuits of capital as a macro-economic backgroundthat has a profound impact on urban development. A ‘primary circuit of capital’ is relatedto the capitalist production process, in which the creation of surplus value can be focusedon diverse forms of ‘absolutely’ extended exploitation (representing ‘absolute surplusvalue’ in terms of Marx’s analysis of capital — cf. Marx, 1981) or on productivity gainsderived from innovation of the productive forces through the application of advancedtechnology and the reorganization of work processes (‘relative surplus value’). At thelevel of the capitalist firm, innovation activity is driven by the search for surplus profitsarising from the command of superior technology and organizational forms (includingthe firm’s spatial organization). Whereas the ‘primary circuit of capital’ is related to thesphere of surplus generation in manufacturing industries, the conceptualization of a‘secondary circuit of capital’ refers to the combined outcome of individual capitalaccumulation processes in the primary circuit, which are leading at the aggregate level toa tendency for periodic ‘overaccumulation’. Today, this tendency manifests itself in anincreasing amount of disposable financial capital seeking profitable investmentopportunities outside the established industrial base. This capital can be switched into a‘secondary circuit of capital’ that, according to Harvey, denotes capital flows into thebuilt environment. Hence this circuit is closely related to the real estate sector and urbandevelopment. A closer look at the main features of contemporary urban real estatebusiness might be useful for clarifying that ‘rent seeking’ as a (capitalist) way of shapingand exploiting urban spaces forms an integral part of financialization and the secondarycircuit of capital: according to Scott (1980), the urban real estate market and theappropriation of urban land rents are of particular importance in determining the spatialstructure of cities in capitalism and actively forcing a continued restructuring of thesecities’ built environment.

Marxist contributions to the theory of land rent often proceeded from the assumptionthat land rent represents an appropriation of revenues stemming from the surplus valuecreated in the real economy sector, that is, in the primary circuit of capital. As a deductionfrom surplus value, land-rent appropriation would have a restrictive effect on theaccumulation process. Hence the economic utilization of private landed property appearsto be ‘parasitic’ and dysfunctional to modern capitalism. Yet scholars such as, forexample, Harvey (1985) and Ball et al. (1985) emphasized that the valuation of urbanreal estate will be included in the prevailing dynamics of capital accumulation, so that thetraditional Marxist thesis of landed property acting as a barrier to the accumulationprocess has to be corrected. In the course of historically changing ‘regimes ofaccumulation’ and their respective institutional settings, the emergence of new forms ofurban real estate valuation have to be taken into account. The most important institutional



change is the ‘fusion’ of landed property and capital (Massey and Catalano, 1978) interms of the dissolution of the traditional ‘class’ of landowners. Today, the appropriationof land rents and valuation of real estate takes place within the capitalist economy and ispassed on to the entire flow of capital investments, contributing to an expandedaccumulation of capital. With the integration of landed property into the entire process ofcapital accumulation, urban real estate has become an ‘ordinary’ sphere of capitalinvestment that supports and accelerates accumulation. Today, a stage has been reachedwhere the acquisition and valuation of urban real estate largely means the choice of adistinct financial asset (Harvey, 1985; Haila, 1988) that forms part of an entire portfolioof stocks, bonds and so on, and thus becomes a component of the entrepreneurialmanagement of portfolio investments. A second decisive development is theinternationalization of real estate capital: banks and large corporations, includingcapitalist firms specializing in the real estate business, acquire transnationally scatteredurban property as a financial asset. In the course of this development, particularlylarge-scale office complexes, new ‘consumption palaces’, exclusive residentialproperties as well as large-scale complexes of upgraded ‘ordinary’ housing estates in themetropolitan centres of the urban system have become important forms of capitalinvestment and profit generation. Correspondingly, the sector’s contemporaryinstitutional structure includes the internationalization of commercial capital, focusingon the trade and financing of urban real estate (cf. Thrift, 1987). The capitalistexploitation of urban real estate as a financial asset functions as a driving force behindstrategies aimed at maximizing urban land rents. These strategies have a profound impacton the built environment and the socio-spatial structure of cities.

In particular, the real estate business has become a driving force behind today’sgentrification processes, in which strategies for proactively constructing ‘privilegedsites’ enable the acquisition of monopoly rents in line with the real estate sector’sinclusion in the circuits of financial capital (Krätke, 1992). While the classic notion ofdifferential rents refers to enhanced economic returns stemming from particularlocational advantages (Marx, 1981), monopoly rents have become the predominant formof land-rent appropriation in urban settings (cf. Harvey, 1985; Krätke, 1992). One type ofmonopoly rent is based on the fact that urban spaces offer manifold opportunities tocreate ‘local islands’ with unique locational qualities. The construction of prestigiousbuildings (such as new, attractive office complexes and shopping centres) in the inner cityand social-status differentiation of residential areas enable the appropriation ofsite-specific monopoly rents. A second type of monopoly rent is based on the collectivepower of real estate owners to command economic returns on urban land use that exceedthe level of economically calculable locational advantages and are for the most partdetermined by the customer’s ability and willingness to pay. This applies to officecomplexes as well as to residential areas, where competition among different classes andsocial groups for attractive residential locations enables monopolistic pricedifferentiation on top of the ordinary returns demanded for a residential building (or theconstruction related investment). The switching of capital flows to large-scalegentrification projects and, according to Neil Smith (2002), the proliferation ofgentrification as a global urban development strategy can be regarded as a specificmanifestation of capital circuits that directly affect the urban spatial fabric. Inconclusion, investment in urban real estate can play a crucial role in the absorption ofcapital surpluses (in terms of the ‘overaccumulation’ problem). This point has beenparticularly emphasized by David Harvey. At the same time, real estate deals and urbanland-rent appropriation contribute to the ‘unbounding’ of financial sector accumulationprocesses. In this sense, the contemporary real estate business also represents a ‘barrier’or impediment to the development of ‘productive’ real sector investment activity.

However, there are further possible ways of dealing with the overaccumulationproblem: according to Rosa Luxemburg (1951), the geographic expansion of capitalinvestments in order to include new spaces in the process of capital accumulationrepresents a particularly relevant approach, as well as the switching of capital flows into

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sectors that had not previously been incorporated into the domain of private capitalaccumulation. The latter is articulated by the continued struggle for privatization of evermore sectors and resources. What is most important to the dynamics of a ‘secondarycircuit’ of capital, however, is the financial sector as a whole. In contemporarycapitalism, the sphere of financial investments and the creation of ‘fictitious capital’ hasexpanded to the extreme. This development can partly be attributed to the incorporationof the real estate sector into the sphere of financial investment. Harvey’s initial conceptof capital circuits particularly emphasized the switching of capital flows into the builtenvironment and thus underestimated the continued ‘unbounding’ of the financial sectorin modern capitalism, a process extending far beyond the sphere of real estatedevelopment.Yet in his more recent works, Harvey emphasizes the financial sector’s rolein the proliferation of strategies of ‘accumulation by dispossession’ or ‘primitiveaccumulation’ (Harvey, 2003; 2006). This term denotes accumulation practices thatMarx had treated as ‘original accumulation’ during the rise of capitalism (Marx, 1981).Today, such practices include the privatization of hitherto public assets, the neocolonialappropriation of natural resources, the ‘white slave’ trade, and the economically mostdevastating forms of all, the worldwide proliferation of speculative financial ‘products’that serve as a means of primitive accumulation. ‘Securitization’, for example, can becharacterized as a form of profit making that is consciously based on fraud (see alsoBlackburn, 2008). As far as the determinants of the current world economic crisis go, adetailed analysis of the proliferation of ‘systemic’ fraud and thievery in the contemporaryfinancial business has been presented by Leo Müller, lecturer of ‘economic crimeinvestigation’ (Müller, 2010; see also Anderson, 2008). In contrast to ‘ordinary’ capitalaccumulation, which rests on the production of surplus value and its appropriation bycapital owners owing to a ‘rational’ exchange relation between capital and wage labour(cf. Marx, 1981), primitive accumulation rests on the appropriation of value throughpractices of fraud and robbery. Contemporary practices of primitive accumulation,however, should be distinguished from ‘original’ accumulation as described by Marxwith regard to the historical preconditions of the rise of industrial capitalism.

Today, an increasing amount of surplus capital desperately seeking profitableinvestment opportunities circulates within the secondary capital circuit of speculativefinancial investments, which include, as mentioned above, the acquisition anddevelopment of urban real estate, and particularly extends to derivative financial‘products’ and the attendant business of dealing with financial assets. According toempirical estimates cited in the first section, we might say that the worldwide volume ofthe secondary circuits of capital today is 65 times larger than the volume of the primarycircuits of capital as measured by the world GDP (a rough measure of ‘real sector’economic activity). In the past few decades, the secondary circuits of capital grew muchfaster than real sector investment and production activity (Huffschmidt, 2007; UNIA,2009). This means that in a finance-dominated regime of accumulation, investment inreal sector manufacturing activity, particularly in innovation and technological change,no longer functions as the major pathway to increased capital accumulation, sincefinancial sector deals and speculative financial investment activities seem to be anequally relevant or even superior strategy. At the level of the urban system, somemetropolitan centres are specializing in a sectoral mix of secondary circuits of capital —namely financial centres with a particularly strong share in the FIRE sector (finance,insurance and real estate) — and on the command and control of geographicallyextended value chains of the primary circuit, which allows gains from manufacturingactivities at distant locations to be channelled into the respective command and controlcentres. The diagram in Figure 1 presents a rough picture of the positioning of cities inmajor circuits of capital, distinguishing between cities that specialize in a sectoral mix ofsecondary circuits of capital and the command and control of geographically extendedvalue chains of the primary circuits of capital, and cities whose economic base primarilyrests on ‘real economy sector’ activities (particularly the manufacturing industries)within the primary circuits of capital (see Figure 1). These two types of cities might



represent a classical form of the spatial division of labour between cities in the globalNorth (which contain financial, command and control centres, technologically advancedmanufacturing and innovation) and the global South (where many cities function as apreferred location for standardized manufacturing in a transnational value chaingoverned by corporations of the global North). Yet the two types of cities also existwithin the urban systems of both the global North and South. In the framework of aglobalizing capitalist order, the urban system of countries such as China, India or Brazilhas also been subject to a functional spatial division of labour between prominentfinance, service and command centres on the one hand and ‘manufacturing towns’ on theother. The simplified representation does not deal with the national and local state’sfunctions concerning circuits of capital.

This graphic representation highlights the leading role of secondary circuits of capitalin contemporary capitalism and the inclusion of urban real estate business into thefinancial sector. The tremendous growth of capital flows within the financial sector givesa sustained boost to urban real estate business, not only in cities that are functioning as

= Primary Circuit of Capital (Real Economy Sector)

= Secondary Circuit of Capital (Financial Sector)

Strength of Flows variable over Time

Investment Banking,Derivatives and Speculative Financial Deals

OffshoreFinancial Centres

Financial Centre andHeadquarter City

Real Sector Firms’Capital Flows to theFinancial Sector

Financial Sector

Urban Real Estate Sector

Urban Real Estate Sector

Real Economy Sector

Real Economy Sector

Industrial City: Urban Economyprimarily based on Manufacturing

Externally controlledSubsidiary/Branch Plant

Real Economy SectorCorporate Headquarters

Branches within theSecondary Circuit

Internal Circuitof the urban real economy

Internal Circuitof the urban real economy

OutgoingCapital Flow:SurplusAppropriation

IncomingCapital Flow,in Case ofReal SectorInvestmentActivity

ExternalReal EstateBusiness

Figure 1 Cities in major circuits of capital (source: author)

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financial centres, but also to the ‘external’ real estate valuation in cities outside the groupof metropolitan finance and service centres. It is important to note that the ‘strength’ ofdifferent capital flows and their branches varies over time. Present conditions under thefinancial crisis might lead us to expect a growing share of financial flows to be directedtowards speculative investment in the real estate sector, which may trigger an increase ininner-city redevelopment projects and gentrification processes in major cities of theurban system. Figure 1 also emphasizes that, in line with a finance-dominated regime ofaccumulation, real sector firms increasingly direct shares of the surplus appropriated inthe primary circuit to the financial sector and thus ‘feed’ the growth of the secondarycircuit of capital. Furthermore, the representation points to the issue of inter-urbanconnectivity of capital flows: industrial cities whose real economy sector encompassesbranch plants controlled by external firms might draw on incoming capital flows for realsector investment activity, yet in the long run they will be subject to outgoing capitalflows in terms of surplus appropriation by the respective ‘headquarter city’ (seeFigure 1). The situation of ‘declining cities’ with a shrinking industrial base andweakened real economy activity, which also includes a decoupling from inter-urbancapital flows, is not explicitly dealt with in Figure 1. While the rough schematicpresentation emphasizes the role of the secondary circuit of capital, we have to be awarethat the primary circuit of capital anchored in real economy sector activities is still ofgreat importance to urban economies — manufacturing and ‘real’ producer andconsumer services (those services that are not grouped under financial servicesand related consultancy services) form an integral part even of the headquarter cities’ andfinancial centres’ urban economy, and they represent the major economic base of most‘ordinary’ cities, aside from those cities that specialize in manufacturing functions orclusters of particular manufacturing industries. The functioning of urban economiesevidently also encompasses the internal circuits of the cities’ real economy sector.

It is important to note that the dynamic of capital circuits entails the sectoral andgeographical switching of capital flows, which imply the unfolding of various crises(Harvey, 1989): we can distinguish between switching crises and global crises that affectall sectors and regions of the capitalist world. The current crisis, which was triggeredwithin the secondary circuit and subsequently spread out to the real economy sector, isa striking example. The particular form of ‘switching crises’, by contrast, stems from themassive relocation of capital from one sector or geographical location to another.Frequently, the relocation of capital into emerging new industries (such as informationtechnology, biotechnology, and so on) involves restructuring the economy’s sectoral mix,which can lead to the downgrading and decline of traditional industrial sectors.Moreover, the rise of new industries can trigger geographical switching crises. Inaddition to strategies of accumulation that focus on the spatial extension of productionnetworks and offshoring of jobs (Gereffi, 2006), the rise of new industries implies theshifting of capital flows towards the emerging centres of these new industries, thuscontributing to the decline of the regional centres of traditional industries. This dynamiccan be regarded as a specific articulation of capital’s sustained search for ‘the commandover and the creation of favourable locations’ (Harvey, 1989: 29). The active creation ofnew favourable locations that are essentially based on collective economies of scalethrough the clustering of distinct industrial activities in specific urban regions is a majorsubject of Storper and Walker’s (1989) ‘theory of geographical industrialization’. Theswitching of capital flows within the ‘real economy’ sector manifests itself in thedifferent development paths of ‘declining industrial cities’ that are losing theirmanufacturing base, on the one hand, and ‘up-and-coming industrial cities’ that are basedon the expansion of new industries, superior innovation systems, or on the inclusion intoglobally extended value chains of manufacturing, on the other. Hence the global crisis’urban impacts should be distinguished from the economic ‘downgrading’ of selectedcities triggered by a real sector related switching crisis.

Today, a global economic downturn unfolds side by side with the sectoral and relatedgeographic relocation of capital to distinct industrial clusters and geographic activity



centres. This switching of capital flows is currently leading to the metropolization ofeconomic development potentials and innovation capacities within the urban system(Krätke, 2007). ‘Metropolization’ is a paraphrase for the increasing concentration oftechnology- and research-intensive industries and knowledge-intensive services inmetropolitan regions and large cities, which are functioning as the ‘motors’ of economicdevelopment. In addition to the local concentration of service industries in these urbanregions, these regions are the prime locational centres of innovative production clustersin fields such as information and communication technology, the pharmaceuticalindustry, medical engineering and biotechnology (Scott, 1988; Porter, 2001; Cooke,2002). In many cases, traditional technology-centred branches of manufacturingindustries such as the automotive industry and mechanical engineering represent anequally important component of the economy of metropolitan regions and large cities.The formation of local clusters of ‘real sector’ industrial activity entails the developmentof dense inter-firm transaction and communication networks within the urban economy,supplemented by strong linkages to the respective sector’s leading clusters located inother cities at the national or global scale. In the course of structural changes of industrialorganization linked to cluster formation, the economic geography of capitalistproduction is shaped by an increasing efficacy of agglomeration effects (in terms of thesocial production of localization and urbanization economies). Yet the increasingconcentration of economic potentials on metropolitan regions and large cities is also anessential driving force of increasing disparities in the urban and regional system.Not only underdeveloped rural regions, but also less dynamic urban regions areunder threat of being left behind in the process of metropolization if they are noteconomically connected to the leading metropolitan regions and large cities (forexample, by performing functions in the supply chain of firms residing in themetropolitan centres).

As competitive economic units within the geographical division of labour, cities relyon ‘systemic competitiveness’, based on the sectoral mix and the socially producedcollective assets that enhance their economic performance. At the urban-system scale,the continued search for surplus profits under conditions of intensified competitionbetween firms and urban regions triggers shifts in fortune of individual cities in terms ofthe rise or decline of particular urban economies. It is important to note that, within theurban system, the pathways of accumulation differ from one city to another. Besidesproviding an innovation-oriented path that focuses on the development of innovativecapabilities in diverse subsectors of an urban economy, the space economy of capitalismoffers, at least for a number of major urban regions, the option to rely on economiccommand and control relations for attaining a superior position in the inter-urbancompetition. This pathway is based on the local concentration of capital and headquartersof large firms that are able to exploit spatially dispersed external production sites andattract inward flows of surplus value created in other urban regions (Krätke, 2011).Command and control functions are regularly supplemented by local concentrations ofenterprise related business services. Particularly in established global cities, metropolitancomplexes of these ‘strategic business functions’ have developed (Sassen, 2000) thatdraw on gains from dealing with financial assets and managing transnational productionnetworks. The aggregate ‘wealth’ of urban regions thus may stem from quite differentsources, including different functional structures as well as different development paths.Hence the political economy approach assigns particular importance to the city’seconomic base and trajectory of economic change as well as to the strategic governanceof an urban region’s economic development. This point might clarify the meaning ofDavid Harvey’s notion of the different forms of ‘structured coherence’ that urbaneconomies can achieve (Harvey, 1989). Regrettably, the economic-geography dimensionof urban change, which has been at the heart of research presented by, among others,David Harvey, Allan Scott, Michael Storper and Richard Walker, tends to be mostlyneglected in recent contributions to critical urban theory, which predominantly focus onthe socio-spatial dimension of urban development and related social conflicts.

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A strategic option for urban economic development that is particularly widespreadamong the established metropolitan centres of the urban system is competition forcommand and control functions, which is increasingly supplemented by efforts toenhance the respective cities’ position within the ‘spatial division of consumption’ by anextension of high-ranking cultural amenities and the fostering of gentrification projectsthat include many different forms of ‘upgrading’ the urban built environment accordingto the preferences of affluent citizens and the functional elites of a capitalist society.Secondly, competition between urban regions with regard to the spatial division of labourcan focus on ‘upgrading’ the urban economy’s sectoral mix and on strengtheninginnovative capacities within established industrial sectors. Cities that develop strongtechnological innovation capacities might attain a comparatively privileged positionwithin the spatial division of labour (Krätke, 2011) — in contrast to cities thatpredominantly perform ‘executive’ manufacturing functions, or declining cities withabandoned industrial activity. Thirdly, the notion of competition between urban regionswith regard to the spatial division of consumption refers to the diverse local amenities acity offers the more affluent strata of its population and the functional elites of capitalistsociety. The competitive strategy in this realm is based on expanding attractive shoppingmalls, cultural facilities and entertainment quarters, and on upgrading its builtenvironments, particularly in inner-city areas, as a supply-side component ofgentrification projects (Smith, 1996; Lees et al., 2008). Furthermore, the positioningof a city as a centre of cultural creativity functions as a relevant ingredient ofcompetitiveness. The close interrelation between the potential contribution of the culturaleconomy to urban economic development and its specific role in strengthening a city’s‘consumerist attractivity’ is at the heart of the contemporary rise of urban growthstrategies that focus on what is known as the ‘creative industries’ (Krätke, 2011). In sum,interurban competition in its diverse forms is fundamental to uneven development in theurban system of capitalism.

The differing functional roles of cities withinglobal networks of the capitalist economyIn an urban political economy approach, the dynamic of distinct capital circuits and theswitching of capital flows within the urban system offer a basic concept forunderstanding how capitalist economic relations shape the development of urban areasand lead to uneven development within the urban system. Thus the political economyapproach must take into consideration the spatial division of labour, the differenteconomic profiles and the functional roles of cities in the capitalist urban world. Yetunder conditions of intensified globalization we need to relate the key concepts of urbanpolitical economy to an extended world city network approach in order to grasp thecapitalist economy’s global networks that interlink cities in both the global North andSouth. These global networks can be interpreted as representing a system of channelsthat direct capital flows between cities that function as prime nodes of activity andbranching points of capital flows. The relationship between different circuits of capitaland the formation of networks or nodes manifests itself in a distinct variation of thecities’ functional roles. The secondary circuit of capital requires the management offinancial operations on a global scale, which leads to the formation of a global networkof financial centres (equipped with related specialized business services). To a certainextent, urban economies specializing in secondary circuits of capital are also managingthe financialized real estate business that affects spatial development in many other largecities. The primary circuits of capital as the domain of ‘real sector’ production activity,by contrast, are increasingly shaped by the setting up of global value chains andproduction networks, which involve the formation of a global network of cities linkedthrough the transnational organization of the activities of manufacturing industries.



Critical urban theory has for a long time regarded the concept of the global city as anaccount of the rise of a distinct group of urban regions that serve as command and controlcentres through entrepreneurial control relations extending worldwide (cf. Sassen, 1991).By contrast, an extended approach, based on the idea that the globalization of capitalisteconomic relations involves a majority of ‘globalizing cities’ beyond the limited group of‘leading’ global cities such as New York, London and Tokyo, addresses the formation ofa global network of interconnected cities. This kind of global urban network analysisoffers scope to extend the urban political economy approach in order to grasp thedifferent functional roles of cities within global networks of the capitalist economy.

Today, the role of cities as strategic places of capital accumulation needs to beconceptualized at a global scale, since the different functions of cities within a globallyextended spatial division of labour have become a decisive factor of uneven developmentin the urban system. As John Friedmann (1986, cited in Brenner and Keil, 2006: 68) hasemphasized, ‘the form and extent of a city’s integration with the world economy and thefunctions assigned to the city in the global spatial division of labour will be decisive forits development level and internal structural changes’. Globalization does not simplylead to the formation of a small group of outstanding ‘global cities’ such as London, NewYork and Tokyo. Rather, we are facing the continued extension of transnational economicnetworks to include more and more cities both in the global North and South into thecomplex fabric of a world city network. In view of the shortcomings of previousglobal-city research, this section presents new perspectives on the functional divisionswithin the urban system of globalized capitalism and some findings of recent research on‘multiple globalizations’ in the world city network.

While Saskia Sassen’s approach to the global city (Sassen, 1991) focused oncomparative case studies of selected cities and thus did not present a truly ‘global-scale’urban analysis, the Globalization and World Cities Study Group (GaWC) explicitlyconcentrates on the inter-urban linkages in a global urban system, which includes a largenumber of cities beyond the small group of ‘leading’ global cities (Taylor, 2004; Tayloret al., 2010). Yet we have to be aware that both approaches focus on the respective cities’function as finance and corporate-services centres. The analysis presented by the GaWCis based on the global networks and specific urban anchoring points of 75 leadingfinancial sector corporations and 100 global service firms (Taylor et al., 2010). Thus, upto now, global and world-city research is presenting accounts of the global urban systemthat focus one-sidedly on the finance and service-sector functions of cities. We should beaware that global cities such as London and New York represent the outstanding urbancentres of financial business within today’s finance-dominated regime of accumulation.However, the ‘dominating’ role of financial accumulation does not mean that the cities’real economy sector can be neglected: within the urban system of capitalism, most citiesare still functioning as a production space that encompasses new and traditionalmanufacturing activities. In contemporary capitalism, we are even facing a sustainedproliferation of ‘industrial urbanism’ on a global scale (Soja, 2000) involving more andmore urban regions particularly in the global South. If we take into account the structuraldiversity of cities in the worldwide urban system, we detect that many urban regions inthe global North and South are linked to transnationally extended production networks(Henderson et al., 2002). ‘Globalizing cities’ of this type are functioning as majorlocations in the global value chains of manufacturing industries. The urban regions ofMunich and Bangkok, for example, are interconnected as spatial anchoring points of carmanufacturer BMW’s transnational production network. In similar ways, the globalproduction network of car manufacturer VW includes the global city regions of SãoPaulo, Mexico City and Shanghai (cf. Krätke, 2013).

Economic globalization processes are essentially characterized by the formation oftransnational production networks (combined with foreign direct investment activity)that generate a geographically extended network of interacting organizational units ofglobal firms (cf. Henderson et al., 2002; Dicken, 2007), which at the same time areconnected to local suppliers and service providers residing in the specific urban locations

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of the particular globally integrated activity. Against this background, the traditionalstate-centred conception of economic space that considers national state territories as theprimary units of the world economy has been challenged by research on the multi-scalarnetwork structures of the actors and organizations governing the process of globallyinterconnected production activity (cf. Bartlett and Ghoshal, 2002; Alvstam and Schamp,2005; Dunning and Lundan, 2008). However, global-city research — even though itinvestigates cities as anchoring points of global economic networks — has tended toneglect the role of global value chains and of manufacturing industries’ globalproduction networks in the constitution of transnational urban spaces.

The concept of global value chains (Gereffi and Korzeniewicz, 1994; Gereffi, 2006)interprets globalized production as a series of cross-border transactions betweendifferent corporate establishments. A global value chain denotes a transnational(transcontinental) network of production and value creation that connects the differentproduction stages of commodities. The chain links are geographically distributed over aseries of locations, and international transactions or capital flows take place between therespective spatial nodes. Within global value chains, control over the diverse stages ofvalue creation is unequally distributed among the participating actors and locations,resulting, in turn, in the uneven distribution of economic gains created within the valuechain in favour of those actors and locational nodes that are able to ‘set the standards’ andcommand the most profitable functions in a value chain (such as design, marketing,branding and logistics).

Today, research on global value chains and global production networks is in need ofmore detailed detection of the territorial dimension of global value chains andproduction networks, that is, of the regional and urban nodes of transnational production.This calls for an integration or combination of global-value-chain analysis andglobal-city research (cf. Derudder and Witlox, 2010). The question is: In which ways aredistinct nodes of global value chains inserted into the world’s fabric of globalizing citiesand global city regions? Global-value-chain analysis has so far neglected investigatinglocal articulations of inherent transnational economic linkages. Although the literatureson global cities and global value chains and production networks share a similar generalconceptualization of economic space in terms of the discontinuous territoriality of globalnetwork relations, they have not yet been constructively integrated (first attempts at anintegration are offered by Brown et al., 2010; Derudder and Witlox, 2010; and Parnreiter,2010). Yet the concepts of global value chains and global production networks offer anapproach to meet the demand for a multi-sectoral perspective on ‘globalizing’ cities.

Based on these concepts, world city network research has recently beencomplemented by an analysis covering 120 top global manufacturing firms fromdifferent subsectors (Krätke, 2013). The analysis reveals the positioning of particularcities within the global production network of distinct manufacturing industries. Theseglobally extended production networks might be interpreted as an organized system ofchannels for capital flows. In conceptual terms, the formation of a world city network isthe articulation of a global spatial division of labour at the urban-system scale, in whichthe involved urban regions are functioning as anchoring points or branching points oftransnational capital flows. In contrast to the actual capital flows, the urban anchoringand branching points of the capitalist economy’s organizational networks can beempirically deciphered. Furthermore, global urban network analysis covers the originsand destinations of foreign direct investment (FDI) flows, since any network linkbetween a corporate headquarter located in city A and a corporate division, branch plantor branch office located in city B represents the outcome of a distinct FDI flow (and thecontinued maintenance of capital flows between cities A and B). The analysisdifferentiates in detail between ‘incoming links’, which demonstrate an urban region’srole as a destination of capital flows, and the urban region’s ‘outgoing links’, whichreveal an urban region’s role as the source and control centre of capital flows.Interestingly, at the scale of distinct urban regions the locations of the establishments ofglobal manufacturing firms are predominantly situated in the fringe areas of the



respective urban regions, that is, in the suburban areas, thereby contributing to thecontinued spatial expansion of major cities’ economic territories (Soja, 2000). Thiscontrasts with the local concentration of the establishments of finance and service firmsin the central inner-city business districts of large cities, and confirms that a number ofvery important urban development processes are specifically taking place in thesuburban areas of cities (Keil, 2012). At the scale of a worldwide urban system, the‘space of flows’ of particular manufacturing industries’ global networks might beconceived as a structured fabric of channels for information and capital flows thatcontains some particularly intensive links and a number of distinct urban regions asmajor branching points.

In order to demonstrate that the formation of a world city network represents theoutcome of ‘multiple globalizations’ in which global firms from a variety of economicsectors contribute to transnational inter-city connectivity, the analysis of the geographicalstructure of global manufacturing firms’ corporate networks encompasses a comparativeranking of the outstanding urban nodes of global services and global manufacturing (seeFigure 2). This comparison focuses on the difference between the cities’ ranking in termsof global connectivity in both functional sectors.

Three groups of cities can be distinguished within Figure 2: first, the comparisonidentifies cities that possess a ‘surplus rank’ in manufacturing in terms of a positive rankdifference. Cities such as Milwaukee, Nagoya, Torino, Hannover and Stuttgart arecharacterized by strong global connectivity in the manufacturing sector (represented hereby the automotive industry) that considerably exceeds their rank position in the sphere ofglobal services. A second group includes cities that have comparatively balanced globalconnectivity between their service and manufacturing sectors. This means that the rankdifference between sectors is rather small. Globalizing cities such as Toronto, Paris,Milan, Bangkok and São Paulo are functioning to nearly the same extent as globallyconnected nodes of manufacturing firms’ corporate networks and as global servicecentres. The third group consists of cities with a ‘surplus rank’ in the finance and servicessector. It includes leading global cities such as New York and London, as well as anumber of globalizing cities in Asia, such as Singapore, Kuala Lumpur, Hong Kong andBeijing. Cities whose names appear in this group are characterized by strong globalconnectivity in finance and service-sector activities that exceeds the degree of globalconnectivity they have achieved in the sphere of manufacturing.

In sum, the world city network includes cities that focus on business services and thefinancial sector in particular, as well as many cities with differing profiles of globallyconnected activities. Hence we should be aware that cities may follow different pathwaysor sectoral trajectories towards globalization.

ConclusionAgainst the background of the current global economic crisis, this article revisitsessential concepts of the urban political economy approach and offers somemodifications and clarifications — particularly concerning the work of David Harvey —on the functioning of cities as central places of capital accumulation. The politicaleconomy approach concentrates on the economic forces that shape uneven developmentwithin the capitalist urban world. Under capitalism, urban development and urbanfortunes are essentially shaped by the dynamic of capital flows. These take on differentforms: first, capital flows from the primary to the secondary circuit of capital, duringwhich capital flows to the urban real estate sector fuel urban spatial restructuringprocesses. Large-scale financial deals aimed at the acquisition of (already built)commercial and residential estates for the purpose of rent appropriation (as a form of‘secondary exploitation’) form part of these capital flows. Secondly, urban economicrestructuring processes are shaped by the sectoral and geographical switching of capital

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flows within the urban system — particularly in the real economy sector of cities. Wealso dealt with major forms of inter-urban competition, which are generally gearedtowards attracting capital flows to particular cities, thus fuelling uneven developmentwithin the urban system of capitalism.

The proliferation of a finance-dominated regime of accumulation, in which trade infinancial assets and derivatives as well as the urban real estate business have become leadsectors, has a profound impact on urban futures. In particular, the financialized urban realestate sector is at the heart of the proliferation of gentrification as a ‘global’ urbandevelopment strategy. However, at the scale of a transnationally extended urban system,cities are included in the circuits of capital in different ways and obtain differentfunctional roles owing to the varying specialization of urban economies. Capitalisteconomic relations lead to different functional roles of cities and to uneven development

Note: The graph in Figure 2 is based on an analysis of the world’s 120 largest globalmanufacturing firms, according to the Forbes 2000 listing. In order to discover the selectedfirms’ international organizational network and its linkages within the global urban system,the prominent firm database Corporate Affiliations (http://www.corporateaffiliations.com/)was utilized. The analysis included 4,512 firm units that constitute the organizationalnetwork of the 120 parent companies. The locations of the registered enterprise units aredistributed across the world over a total of 544 cities (urban regions) in 104 differentcountries (for details, see Krätke, 2013). The ranking of global finance and service centres isbased on data by the Globalization and World Cities Study Group (GaWC) (see Taylor et al.,2010)

Figure 2 Rank comparison of selected cities’ global connectivity in the finance and servicessector and the manufacturing sector (represented here by the automotive industry), 2010(source: based on author’s calculations)



within the urban system. Thus the political economy approach must be extended toinclude the spatial division of labour and the different economic profiles of cities in thecapitalist urban world.

The secondary circuits of capital that obtain a leading role in contemporary capitalismhave a major impact on urban development by giving a sustained boost to the real estatesector on the one hand, and by ‘squeezing out’ investment and innovation relatedactivities in the real economy sector on the other. The urban system of capitalism entailsmetropolitan centres specializing in a particular sectoral mix in the secondary circuits ofcapital and in the command and control of geographically extended value chains ofprimary circuits of capital. Yet, for the majority of cities, primary circuits of capital thatrest on real economy sector activities remain relevant to shaping the city’s economic baseand labour market prospects.

Furthermore, the different functions of cities within a globally extended spatialdivision of labour have become a decisive factor of uneven development in the urbansystem. Thus we should link the key concepts of the urban political economy to a globalurban network approach in order to grasp the different yet interconnected functionalroles of cities both in the global North and South. In order to clarify the link between theglobal division of labour, the functional role of cities and their positioning in economicnetworks, we have to recall the distinction between different circuits of capital: in thecontext of economic globalization, the secondary circuits of capital require themanagement of financial operations on a global scale, which leads to the formation of aglobal network of finance and business-service centres. The primary circuits of capital,being the domain of ‘real sector’ production activity, by contrast, are increasingly shapedby the setting up of global value chains and production networks, which involve theformation of a global network of cities linked through the transnational organization ofactivity in the manufacturing industries. Within both types of capital circuits, globalcorporate networks function as a system of channels that direct capital flows betweencities that are acting as prime nodes of activity and branching points of capital flows.Through the switching of capital flows between economic sectors and cities located indifferent world regions, cities are included in the circuits of capital in different ways,obtaining different functional roles, depending on the extent to which their economy isinvolved in the primary or secondary circuits of capital, and on the extent to which a cityfunctions as a destination of related capital flows or as an origin, that is, as a source andcontrol centre of capital flows. Thus the world city network is the articulation of‘multiple globalizations’ in terms of different economic networks linking cities in aglobal spatial division of labour. This spatial division of labour is far more complex thanthe traditional view of a global urban system consisting of corporate finance and controlcentres in the global North and ‘dependent’ manufacturing towns located in the globalSouth suggests. Extended global urban network analysis confirms that both in the globalNorth and South the urban system includes cities focusing on business services and thefinancial sector in particular, and cities whose economic profile and functional role isshaped by their insertion into the global production networks of the manufacturingsector. In addition, we find cities functioning to nearly the same extent as nodes ofmanufacturing firms’ global networks and as global service centres. Hence the structuraldiversity of cities and their different functional roles in global networks need to beemphasized. This diversity means that the economic development strategy of globalizingcities need not be restricted to the pathway of developing global finance and servicecapacities. Global urban network analysis confirms that cities follow different pathwaysor sectoral trajectories towards globalization. Today, established metropolitan financeand service centres in particular represent the major geographic hubs of the disastrousdevelopment model of finance-dominated capitalism. Cities that are searching for asustainable development path might be better off extending and upgrading their ‘realeconomy’ activities, combined with efforts to link local manufacturing capacities toglobal production networks. This does not negate the need to improve industrialorganization, innovative capabilities, labour relations and employment standards in the

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‘real economy’ sector, which is still subject to capitalist imperatives fostering the‘precarization’ of labour and extended forms of exploitation. Yet we should be aware thatthe currently dominant development path of financialization involves a continueddevaluation of productive work and thus undermines the chances of enhancing thesituation of the working population of urban regions.

The different forms of integration of cities into global economic networks and theunequal extent to which this happens raise questions concerning the governance ofurban development. We might ask, for example, in which ways a city’s inclusion inglobal production networks of the manufacturing sector might be taken as a resourcefor upgrading its employment standards and industrial structure — for instance, bytaking over more advanced functions within the value chain or by developing localsuppliers’ capabilities — in order to spread the gains of ‘globalized’ economicactivities in favour of the city’s working population. Secondly, we might ask in whichways urban governance could deal with the threat of growing social and socio-spatialinequality in globalizing cities. Today, many cities are striving to take on global-cityfunctions in order to strengthen their reputation and position within worldwide inter-urban competition. Yet in most cases, urban governance in the globalization arena isgeared towards restructuring the city’s spatial fabric and built environment accordingto the presumed ‘needs’ of global finance and service functions, consequently fosteringsocio-spatial polarization. In this context, we are well advised to refer to Neil Smith’s(2002) emphasis on the proliferation of gentrification as a global urban developmentstrategy, which includes a broad range of ‘upgrading’ projects in the built environmentof cities beyond the well-known processes of residential gentrification, particularlylarge-scale conversion projects in inner-city areas. These extended forms ofcontemporary gentrification represent a major form of real estate based capitalaccumulation and function ‘as a vehicle for transforming whole areas into newlandscape complexes that pioneer a comprehensive class-inflected urban remake’(Smith, 2002: 96).

In recent times, urban restructuring in favour of the presumed ‘needs’ of capital andits functionaries has challenged critical urban scholars and activists to reclaim the ‘rightto the city’ (Brenner et al., 2011) for the urban regions’ ordinary population. In thisrespect, there is much scope for sustained efforts to advance strategies of urban economicand socio-spatial development that are socially inclusive and might benefit urbanresidents beyond the upper strata of business elites. The failure of neoliberalfinance-dominated capitalism demonstrates that there is an urgent need to cut back andre-regulate the ‘dealer economy’ of the financial sector and to redirect urban economicdevelopment trajectories towards ‘real economy’ activities and industrial upgrading, aswell as towards social innovation, particularly in terms of employment standards, publicservices, housing provision and urban residential spaces.

Stefan Krätke ([email protected]), Chair of Economic and Social Geography, EuropeanUniversity Viadrina, Große Scharrnstraße 59, 15230 Frankfurt (Oder), Germany.

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