An older piece from American Affairs Journal:
On a great many metrics, a strong and innovative financial services
sector contributes significantly to growth, jobs, and productivity in
the wider economy. For example, it is well established that measures of
financial depth—such as the size of the banking sector, the market
capitalization of stock markets, and the scale of corporate debt
markets—have an empirically strong relationship with per capita GDP and
its growth rate. This is because large and effective financial
intermediation facilitates investment by mobilizing savings and matching
capital to effective projects.
And yet, beyond a certain point, financial sector expansion can have
negative effects on economic growth, as demonstrated by a large body of
research.1
More than a decade after the financial crisis, questions surrounding
the appropriate size and scope of finance remain the subject of intense
debate, especially in countries such as the UK and the United States,
where the financial industry accounts for an unusually large percentage
of GDP.
Historically, the relationship between finance and the rest of the
economy was not simply an economic issue but a political one as well.
Finance in many ways constitutes a separate ecosystem in tension with
the real economy, and channeling it effectively requires conscious
policy action. This essay proposes one such program for the United
Kingdom, though significant portions of it might also apply to the
United States.
On most measures of financial depth, the UK scores highly. Its
banking sector assets in relation to GDP, at almost 400 percent, are
higher than any country other than small offshore financial islands,
which are often linked to the City of London. Its stock market
capitalization, at around 120 percent of GDP, is among the highest in
the G7, behind only the United States; and the stock of corporate bonds
outstanding has grown rapidly in recent years.2
The size of the UK financial services sector is, at least in part,
the result of comparative advantage and of a long-term historical
pathway. The UK runs a large trade surplus with the rest of the world in
financial services, amounting to 3 percent of GDP—without which the UK
current account deficit would be closer to 10 percent than 5 percent.
The financial services sector employs almost 1.1 million people. Its
share of employment is a relatively modest 3.2 percent, but its share of
UK value added is much higher at 7.2 percent, underscoring the UK’s
comparative advantage in financial services. On all these metrics, the
UK financial services sector is a considerable source of strength to the
UK economy.
If we look beneath the surface of these numbers, however, a somewhat
different picture of the sector emerges. This derives from the fact that
the UK financial services sector, in practice, comprises not one but
two distinct ecosystems: a global ecosystem, centered around the City of
London which provides global financial services; and a local ecosystem,
providing services to domestic companies and consumers.
This is not surprising. The City of London, founded by the Romans,
was part of their extended maritime trade system incorporating Ostia,
Piraeus, and Marseilles. The City was open to the sea, but the Romans
built the largest city wall in Europe to protect it from domestic
pressures. Boudicca has not yet been claimed as an early Brexiteer, but
it is only a matter of time. From Roman times there were two distinct
economic systems, the territorial and the maritime. The domestic economy
was strictly regulated; maritime trade adventurously mercantile.
The distinction between the formal and the substantive economy or the
maritime and territorial economy was a central tenet of classical
statecraft. Ports were placed at a distance from cities, for the sea was
not only a place of threats and piracy but also of tremendous wealth
and speculation. The returns from the domestic territorial economy were
always lower than those built around long distance voyages and
insurance. The basis of the British Empire was the City of London as the
hub of a maritime economy that circled the globe every bit as much as
Rome was built around the port of Ostia and the control of the
Mediterranean.
Maritime trade was based on commodification, in which everything from
people to precious stones had a price. In the domestic economy, by
contrast, neither human beings nor nature were commodities and the rates
of return on investment were thus constrained.3
The necessities of life were secured without an exclusive reliance on
the price system through a range of local and national measures.4
Politics was the means through which the substance of society was
preserved in defiance of commodification. This was done through
legislation. Democracy has been the route, since classical times,
through which poor people could maintain a non-commodity status and
exert some constraint on the power of money. It is significant that the
City of London Corporation remains the oldest continuous civic democracy
in the world. As a City from “time immemorial,” it is not subordinate
to Parliament and has never been required to disclose its assets....
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