The City and Political Economy: "Deconcentrating Capital"

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.

Tensions between democracy and financial interests go back at least as far. The financial-maritime interest was an important part of the formation of the English and then the British polity, expressed in the primary role of the navy and the Treasury. But it was constrained by Parliament and royal prerogative as well as by common law and customary practice. It was urged to keep its attention overseas and not interfere too much in the domestic economy or its politics.....

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