Revisiting the Urbanization of Capital

Abstract

In a recent interview, David Harvey referred to the initial stages of the ongoing global economic crisis as a “financial crisis of urbanization.” This article explores and substantiates Harvey's argument by returning to the thesis of capital switching that Harvey, following Henri Lefebvre, initially expounded in the 1970s and 1980s. The nub of this argument was that as capitalist production edges toward periodic crises of overaccumulation, capital “switches” from production per se into production of the urban built environment as a means to absorb surplus capital and hence avert—if only temporarily—crisis. Although Harvey's thesis has proven extremely influential among political economists, urban theorists, and geographers of various stripes, previous attempts to buttress it with empirical evidence have failed to unearth any demonstrable switching dynamic of the kind Harvey theorizes. This article analyzes data for the years leading up to 2007 and the unfolding of the current economic crisis. Focusing primarily on the United Kingdom, it presents two separate analyses that suggest a clear pattern of capital switching into the built environment since the turn of the millennium: first, a switching of overall private-sector expenditures and, second, a switching of pension fund investment. Together, the analyses place urbanization, following Harvey, at the heart of contemporary economic crisis.

En una entrevista reciente, David Harvey se refirió a las estapas iniciales de la actual crisis económica global como un “crisis financiera de la urbanización.” Este artículo explora y verifica el argumento de Harvey retornando a la tesis de la sustitución del capital que aquél, siguiendo a Henri Lefebvre, había expuesto inicialmente en las décadas de los 1970 y 1980. El meollo de ese argumento era que a medida que la producción capitalista se aproxima a sus crisis periódicas de sobreacumulación, el capital “salta” de la producción per se a la producción del entorno urbano construido como un mecanismo para absorber los excedentes de capital y así conjurar—aunque solo temporalmente—la crisis. Aunque la tesis de Harvey ha resultado extremadamente influyente entre economistas políticos, teóricos urbanos y geógrafos de varias líneas, los intentos previos al que acometemos para respaldarla con evidencia empírica han fallado en la búsqueda de alguna dinámica de sustitución demostrable del tipo que Harvey teoriza. Este artículo analiza datos de los años que que llevan al 2007 y al desenvolvimiento de la actual crisis económica. Enfocándose primariamente en el Reino Unido, el artículo presenta dos análisis separados que sugieren un claro patrón de sustitución capitalista por el entorno construido desde el giro del milenio: primero, una sustitución generalizada de los gastos del sector privado, y, segundo, una sustitución de las inversiones en el fondo pensional. En conjunto, los análisis colocan a la urbanización, siguiendo a Harvey, en el corazón de la crisis económica contemporánea.

Key Words:

• accumulation
• capital switching
• economic crisis
• urbanization

关键词:

• 积累
• 资本转化
• 经济危机
• 城市化

Palabras clave:

• acumulación
• sustitución del capital
• crisis económica
• urbanización

Acknowledgments

Many thanks to the anonymous referees for their helpful comments and suggestions, and to Audrey Kobayashi for her careful editing of the article. The usual disclaimers apply.

Notes

1. Following Lefebvre (1970), Harvey refers to these different realms as “circuits”: The “primary” circuit is the realm of production and of the creation of surplus value; the “secondary” circuit is the built environment; and the “tertiary” circuit, to which Harvey pays much less attention, includes “investment in science and technology” (the purpose of which is “to contribute to the processes that continuously revolutionize the productive forces in society”) and “social expenditures that relate primarily to the processes of reproduction of labor power” (1985b, 7–8). I have chosen not to use this terminology in this article. The reason is that Harvey elsewhere (and in this case following Marx) uses the idea of “circuits of capital” in an entirely different sense—where the overall circulation of capital is disaggregated into a circuit of money capital, a circuit of productive capital, and a circuit of commodity capital. Using the same phrasing for an unrelated application is liable, in my view, to complicate more than it clarifies, particularly for a readership that is not necessarily familiar with these literatures.

2. The rechanneling of investment into the built environment, of course, is not the only form of switching or crisis “fix” identified and discussed by Harvey. Most notably, The Limits to Capital (Harvey 1982), in which the “urbanization of capital” thesis is restated (235–38) and integrated within Harvey's “second cut” at crisis theory (324–29), added the famous “third cut,” essentially, geographical expansion into new markets.

3. Another former Harvey student, Neil Smith, offered a further operationalization of the switching idea in the shape of his well-known “rent gap” thesis, which argued (Smith 1982) that urban gentrification was but a “leading edge” of the wider process of switching of investment into the built environment in response to overaccumulation in the productive sphere.

4. The third factor of production identified by classical economists—land—presents something of a quandary. Arguably we should include payments to land (i.e., rent) alongside payments to labor and to fixed capital (ex-buildings) within our proxy measure for spending on production. The problem with such an approach, however, is that the rental economy is not only inextricably bound up with but is in some respects part of the economy of the built environment, which is precisely the economy whose investment trajectory we are attempting to compare with the investment trajectory of the productive economy. Ultimately, no easy answer exists as to whether to include rent or not; but on balance, my view is that it is better excluded. Fortunately, the macro picture we are examining is not greatly affected one way or another, because rental expenditures—at least in the cases studied in this article—are much smaller than spending on construction and labor.

5. Although it comes at the switching problematic from a very different theoretical and analytical standpoint, the work of Lizieri and Satchell (1997) merits recognition at this juncture, because it considers switching in the particular institutional context that I advocate here: the context of financial investment. However, rather than analyzing actual patterns of investment in the built environment versus investment in productive activities (a sine qua non, in my view, of a meaningful empirical substantiation of switching), they focused on relative returns from equity and real estate markets, generating “regression coefficients [that] lend some support for the capital-switching” (22) model.

6. Gotham (2006) provided an especially interesting—and explicitly geographical—perspective on the importance of structural (specifically, state-led) influences on patterns of financial investment in the built environment. See also Dymski and Veitch (1996) and Hoesli and Lekander (2008).

7. Perhaps the most important development in the underlying structural conditions for institutional investment in U.K. property in the past decade has been the introduction of real estate investment trusts (REITs). A REIT is a tax designation for corporations investing in real estate that reduces or eliminates corporate income taxes, requiring such REITs, in return, to distribute 90 percent of their income, which might be taxable, to investors. When the pertinent legislation came into effect, nine U.K. property companies more or less immediately converted to REIT status. But for the purposes of this article any impact of REIT legislation on investment patterns can be ignored, as the changes did not come into force until January 2007, and the beginning of 2007 serves as the endpoint of the article's analysis of trends in institutional investment asset allocation.

8. Financial journalist John Gapper (2007), among others, dismissed as “ridiculous” the notion that the United Kingdom was “minding its own business when it caught U.S. financial flu”—the latter thesis encapsulated in Chancellor Alistair Darling's comment in 2007 that “Perhaps if someone in America had looked more closely at who they were lending to, some of these problems would have been avoided.”

9. In strictly theoretical terms there is a possibility that material movements in this share of the type we are interested in here could reflect other expenditure dynamics, because we are not quite dealing with a closed system: The expenditures charted do not represent all private-sector net expenditures, but they do account for the vast bulk thereof—over 90 percent, by my estimates (based on the ratio of these combined expenditures to private-sector gross value added)—and thus in practical terms it would be unrealistic to treat any such material movements as anything other than switching.

10. I have used the Retail Prices Index (RPI) rather than the Consumer Price Index (CPI) to convert nominal U.K. growth rates to real U.K. growth rates, because it is the most long-standing general-purpose measure of U.K. inflation and, in particular, because it includes various housing-related costs that the CPI excludes.

11. For U.S. growth rates, the CPI is used as the deflator. Like the U.K. CPI, it also excludes certain housing-related costs; but the exclusions are less material (housing costs account for upward of 30 percent of the U.S. CPI, cf. approximately 10 percent of the U.K. CPI), and in any event there does not exist a recognizable alternative to the CPI in the United States akin to the U.K.'s RPI measure.

12. In the U.K. case that I am most concerned with here, the puncturing of the property bubble was particularly severe in respect to commercial property, where market prices are estimated to have fallen by 42 percent in two years from their high point in June 2007 (Hawkins 2009); residential property prices, by comparison, suffered a relatively modest fall—peaking, according to Land Registry data, as late as January 2008, before declining by 17 percent in the 15 months to April 2009.

13. Even this, though, does not represent the complete picture, for it excludes U.K. financial institutions outside of the formal institutional investor category, including, most notably, banks (aside from their own dedicated fund management arms). As events of the past three years have made clear, many such banks had built up, by 2007, enormous exposure to both domestic and international property assets through investment in mortgage-backed securities and other securitized real estate financing instruments. Indeed, one estimate by analysts put the United Kingdom's five leading high-street banks’ collective exposure solely to U.S. property-related debt assets at as much as £95 billion in late 2008 (Costello 2008). Assessing the degree to which such investment resulted from further switching behavior is extraordinarily difficult and beyond the scope of this article. Nevertheless, it does suggest that the quantification of investor switching offered here is most likely a conservative one.

14. As is Fainstein (1994) in her The City Builders. In seeking to account for the surge of investment money into real estate in the United States in the 1970s, Fainstein (221–22) acknowledged the possibility of capital switching due to overaccumulation but also gestured toward at least two other likely contributory factors: the fact that property was perceived as providing a hedge against inflation and the fact that it offered tax advantages that other investment opportunities did not.