Economic Geography

Principles and practice of finance
One of the most remarkable achievements of the academic discipline of finance
has been its development and codification of commonly accepted theoretical
principles. This is evident, for example, in the status accorded to the efficient
markets hypothesis, the capital asset pricing model, and the Black-Scholes
option-pricing theorem. These principles are the building blocks for introduc-
tory texts in finance, and serve as the reference points for new developments in
the field that may or may not match the expectations framed by these principles.
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The field is also highly quantitative drawing upon the most exotic mathematics
through to the most recent developments in dynamic stochastic time-series
modelling. In combination, papers published in journals such as The Journal of
Finance and the Journal of Financial Economics are a clearly recognized genre.
But there is a paradox at the heart of the theory of finance: for all its logic and
rigour the practice of finance is quite heterogeneous. This is all the more remark-
able considering there is a vibrant market for investment analysts and investment
managers that hold to theoretical principles, utilize the most advanced qualitative
methods, and proclaim their commitment to best-practice in financial engineering.
See, for example, the manifesto embodied in the Goldman Sachs approach to
investment management (Litterman et al. 2003). At one level, for all the formal
commitment to theoretical principles, it would appear that it is expected that the
practice of finance is responsive to unanticipated events outside of the parame-
ters set by those principles. At another level, however, it could be that theoreti-
cal principles are a charade in a world driven by successive waves of fashion 
and style amplified by the media wherein investment professionals legitimize 
their planned strategies if not their real actions by reference to these principles
(Clark et al. 2004). The recent technology, media and telecommunications (TMT)
boom and bust is an instance where observed behaviour went far beyond accepted
principles of finance, justified in many instances by claims that the ‘new’ economy
invalidated those principles (Shiller 2000, 2002).
Over the 1990s, the hegemony of the efficient markets hypothesis was such
that any talk of so-called ‘capital gaps’ in cities, in emerging markets, or in any
other market than traded securities markets was dismissed with a theoretical wave
of the hand. The TMT bubble and bust brought into the open an empirical
world not so easily rationalized against theoretical principles. It was recognized
that the actual practice of finance is far more diverse and systematically different
from first principles than theoreticians would have us believe possible. Since so
much of economic geography is based on fine-grained knowledge of markets and
institutions in particular times and places, the fact that the practice of finance is
similarly empirically-driven is reason enough for economic geographers to study
financial markets for their actual functions and performance. So, for example,
there is a pressing need to study in some depth the reasons why finance is absent
from some kinds of places at some times whereas finance may swamp other places
at other times with enormous volumes of resources to the point of overwhelm-
ing global financial markets (as was arguably the case during the TMT bubble).
Another important feature of the practice of finance is its dependence upon
hierarchies of tasks and functions as well as teams of individuals for the execution
of investment strategies and the trading of financial products. One of the lessons
learnt by large global financial houses during the 1990s was that individual
traders are as much a liability as they are valuable stars in marketing efforts for
new clients and new tranches of money to be managed. As we have shown (Clark
and Thrift 2004), risk-management within financial houses and across the 
world on a 24-hour basis requires heavy investment in the monitoring and
management of traders’ risk exposures. Cadres of people must be employed at
Setting the agenda
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the interstices between markets so as to oversee risk exposures set against param-
eters managed by senior executives of the corporation. Not only is there a geog-
raphy to risk-management, the hierarchy of tasks and functions within such
complex organizations have quite distinctive ethnic and gender-specific labour
markets: for example, compare the sources of clerical and semi-professional
employees against the sources of highly educated investment professionals in the
City of London or for that matter New York. In a nutshell, it is worth investi-
gating why traders are men and why those that market trading functions to
clients are women (see generally McDowell 1997).
In suggesting that there is a significant gap between the principles and prac-
tice of finance, and in suggesting that the practice of finance itself is subject to
recognized social processes of differentiation and distinction, I echo arguments
made by a number of social scientists (see, for example Knorr-Cetina and Preda
2004). At the same time, recognizing that at the core of finance there are well-
established and observed customs and norms of research, the world of finance is
open to the ideals and methodologies championed by economic geographers
over last couple of decades. 
Working from the bottom (the practice of finance) to the top (the theory of
finance) provides us an opportunity to interrogate accepted principles. This has
the virtue, of course, of building a conceptual understanding of the world of
finance by induction rather than deduction. It also has the virtue of joining an
increasing number of those in the finance industry who are seeking new ways of
conceptualizing how financial markets work. Most importantly, the tools of
economic geography can bring new insights about the structure and perform-
ance of financial markets given that the threads binding the field of finance
together (such as the efficient markets hypothesis) are unravelling. At the same
time, there remains scope for holistic models of the structure and performance
of global financial markets, especially those that take seriously the interaction
between markets and the geography of capital flows from the community
through to the system of global circulation (Clark 2005). These models may
require, however, the insights of close dialogue and the econometric techniques
of large-scale data analysis (Clark and Wójcik 2005a, 2005b).