Applications of Evolutionary Economic Geography

1. Introduction

Economic geography is the field of study that deals with the uneven distribution of economic
activities in space. Two conflicting theories are currently influential in the field: institutional
economic geography and the ‘new’ economic geography. Institutional economic geography is
dominated by scholars with a geography background and is akin to institutional economics
(Hodgson, 1998). At the risk of oversimplification, institutional economic geography argues that
the uneven distribution of wealth across territories is primarily related to differences in
institutions (Whitley, 1992; Gertler, 1995; Martin, 2000). The new economic geography has been
developed by neoclassical economists (Krugman, 1991; Fujita et al., 1999; Brakman et al., 2001),
who view uneven distributions of economic activity as the outcome of universal processes of
agglomeration driven by mobile production factors. Recent debates between geographers and
economists have been fierce and with little progress (e.g., Martin, 1999; Amin and Thrift, 2000;
Overman, 2004). The lack of cross-fertilisation between the two disciplines can be understood
from two incommensurabilities between institutional and neoclassical economics (Boschma and
Frenken, 2006).

First, institutional economic geography and new economic geography differ in methodology.
Institutional economic geographers tend to dismiss a priori the use of formal modelling. Instead,
they apply inductive, often, case-study research, emphasising the local specificity of ‘real places’.
By contrast, the New Economic Geography approaches the matter deductively using formal
models based on ‘neutral space’, representative agents and equilibrium analysis. Proponents of
the latter approach do not value, or even reject altogether, case-study research. Second, the two
theories differ in core assumptions regarding economic behaviour. The new economic geography
aims to explain geographical patterns in economic activity from utility-maximising actions of
individual agents. By contrast, institutional scholars start from the premise that economic
behaviour is best understood as being rule-guided. Agents are bounded rational and rely heavily
on the institutional framework, which guides their decisions and actions. Institutions are
embedded in geographically localised practices, which implies that localities (‘real places’) are
the relevant unit of analysis. Institutions play no role in neoclassical models, or only in a loose
and implicit sense. They are not regarded as essential to economic explanations, and their study
should therefore be ‘best left to the sociologists’, as Krugman once put it (Martin, 1999: 75).

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