Skip to content

Deconcentrating Capital

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.

Two Economies

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.

The balance could not hold, however, and there was an explosion in the 1830s when a combination of enclosures, the abolition of apprenticeship laws, and the Poor Law Reforms meant that the rules of the maritime economy were for the first time enforced on dry land with a free market in people, land, and food. Once again, democratic politics was the means through which this was constrained and re­fashioned through new labor market and welfare legislation as well as the enforced preservation of common lands through parks and com­mons. What has become known as municipal socialism was an extraordinary burst of creative energy, preserving and creating civic institutions that defended the non-commodity status of people and land.

The central point, then as well as now, is that rates of return have always been higher in the financial rather than the productive sector, in the maritime rather than the territorial, in the global rather than the national economy, and that the pressures of globalization are not new. A land-based, settled economy is always more sluggish than the mercantile-maritime one. Even today, recent research by both the Center for Research and Sociological Change and the Bank of Eng­land indicate that a “foundational economy,” which includes up to 85 percent of economic activity, plods along, more or less impervious to the global demands of relentless innovation and ever higher rates of return.5 This economy is constituted by health, social care, relational support, and local services as well as building and maintenance.

Diminishing Returns

Nothing much has changed in two thousand years. The global entrepôt of the City of London is world-leading and thriving, while the domestic and regional financial sector has been starved of sunlight for several decades and does a relatively poor job of supporting domestic households and firms. It is not an exaggeration to say that the British economy looks like Singapore around London and like Portugal everywhere else. These realities show up in alternative metrics of UK financial sector health.

There appear to be distinct limits to the benefits of greater financial depth. For example, work by the IMF and the Bank for International Settlements has shown that there is an inverted U-shaped relationship between banking sector assets relative to GDP and growth, with oversized banking systems appearing to be damag­ing to growth.6 The peak of this inverted U is found to be around 100 percent of GDP, putting the UK well into the downslope.

Furthermore, although the UK has a relatively high market capitalization, a chunk of this reflects foreign-listed companies. More fundamentally, the UK stock market is no longer a primary source of market financing for UK companies: more is extracted in stock buybacks than is being raised in IPOs. The number of IPOs on the UK Stock Exchange is half the number of a couple of decades ago, as is the number of listed companies. The City of London functions as a global and not a national source of investment.

In fact, despite the rapid growth and large scale of banks’ balance sheets, there has been no discernible improvement in the availability of financing to small- and medium-sized UK companies than there was a generation ago. This partly explains the extraordinary concentration of capital, the oligopoly of the world’s largest banks, and their lack of resilience, as was revealed in the crash of 2008.

This financing problem for SMEs was exposed during the financial crisis, but the problem itself is a long-standing one. The Macmillan Report of 1931 drew attention to the same issue and it requires a structural response.7 Latterly, that problem appears to have been particularly acute among innovative companies and among companies at the scale-up, rather than start-up, stage of the innovation life cycle. It is also the case that productive manufacture is far more complex and demanding than financial services. It involves the material move­ment of things, complex supply chains, highly skilled labor, and is far more prone to disruption. The rates of return are lower in production than in global investment.

Thus perhaps it is also unsurprising that the fraction of UK banks’ balance sheets devoted to financing companies has been falling for many decades. It currently stands at around 7 percent, having been as high as 20 percent as recently as 1990. Furthermore, in postwar Brit­ain, capital has centralized with the same intensity as the state, and this has left regions without finance or financial institutions. The story of North­ern Rock is instructive in this regard.

The Northern Counties Permanent Building Society was established in 1850 in Newcastle. It was modest in its spending and deeply embedded in the life of the region. During the 1984–85 miners’ strike, for example, it suspended mortgage payments so that workers could keep their homes. It was part of the local economy and society—that most precious civic inheritance, a trusted financial institution. In 1965 it merged with another local institution, the Rock Building Society, to become Northern Rock Building Society.

It demutualized in 1997 and became Northern Rock, which spon­sored Newcastle United and became the fifth biggest lender in the UK market. But this mutually owned institution—which had part­nered with its region in good times and bad for 147 years, and which had weathered four serious depressions and emerged stronger from each—could not last through New Labour’s period in government. It was nationalized in 2008, and Newcastle United came to be sponsored by Wonga, a payday lending company that began lending at 4,000 percent interest at a time when the banks were borrowing at less than 3 percent. The team is now sponsored by a Chinese betting com­pany and owned by poverty-wage-paying billionaire Mike Ashley. It is understood locally as dispossession and disinheritance—in Eng­land, the severance of a city from its football club is no small matter.

Meanwhile, in the household sector, although the growth of credit has been rapid, largely in order to finance personal consumption, it is nevertheless questionable how well the banking industry serves households. Banks and other financial services tend to score extremely poorly in surveys of trust and satisfaction among consumers, trends exacerbated by the financial crisis.

As with business lending, however, these trust and dissatisfaction problems predate the crisis. Some of this may reflect the centralization of financial decision-making among most banks and, in many cases, their physical disappearance from the high street. Between 1989 and 2016, 53 percent of UK bank branches closed. At the start of the twentieth century, there were more than seven thousand UK bank branches, with the local bank manager a figure of prestige and standing in the local community. Whereas once there were small platoons of local lending officers, with institutional autonomy, local relationships, and power in their locality, today decision-making is often automated and usually centralized. Barclays is a case study in this.8

Remarkably, for a country with one of the world’s leading global financial centers, there are still around 1.7 million adults in the UK without a bank account. According to the Citizens Advice Bureau, the same number of people are reliant on high-cost, nonbank sources of credit to make ends meet, paying extractive rates of interest.9 A recent House of Lords report highlighted the extent of this financial exclusion among large cohorts and regions of the UK: 51 percent of 18–24-year-olds regularly worry about money; credit ratings have caused financial problems for one in five young people; and one-third of people over the age of eighty have never used a cash machine or prefer to avoid them.10

What Is to Be Done?

The Brexit vote may be considered wrong and ill-informed from any number of rational and policy-based perspectives. It is, however, continuous with a long-standing tradition of using democratic politics as a means of asserting some form of political control over the commodification of people and land. London’s international financial services are a key component of our economy, but their continued profitability does not entail the continued neglect of the domestic economy.

Perhaps the most pressing issue for a renewed political economy is how best to reconstitute the locally focused, regionally oriented aspects of the UK’s financial services ecosystem in order to support investment, productivity, and growth. This has received too little public and policy attention, in part because of the very success of the global financial ecosystem which it is largely detached from. Supporting the local and regional financial infrastructure, however, need not detract from the successful global operations. To the contrary, it would help build and maintain support for the global components, which is currently lacking.

The “Macmillan Gap” referred to earlier describes a situation in which viable regional businesses cannot secure capital because the rates of return offered by global finance were higher and commercial imperatives required the maximum return on investment. The gap in the early 1930s applied mainly to loans between £5,000 and £200,000; the gap now is in the range between £250,000 and £1 million.11

To address this problem, the Bank of England established the Bankers Industrial Development Company in 1930 to serve large industry, predominantly coal, iron, and steel. In 1945, the Industrial and Commercial Finance Corporation was established with a distinct mission to lend to small and medium businesses. It “provided a national service at no cost to the taxpayer and a substantial return to its shareholders.”12 As a self-governing corporation, with a specific purpose and accountable to the Bank of England, it was remarkably successful. During the thirty years after the war it established strong long-term regional and sectoral relationships. But it could not over­come the ideological insistence that, as neither a state-directed nor a private company, it should not have been successful at all. It was rebranded and then privatized in 1987 as 3i, a private limited company focusing on buyouts rather than loans.

In addition to the depletion of an institutional ecosystem for industrial investment for SMEs, there has also been a decimation of the institutions required for household and personal loans. This was exacerbated in the credit crunch. None of the building societies that were demutualized in the 1980s and ’90s are autonomous institutions today. Northern Rock is perhaps the worst example of regional institutional malnutrition, but it is part of a general trend.

What is required today is the endowment of two autonomous corporations, regulated by and accountable to the Bank of England, established in each city and county of the UK. These new institutions—“banks of England,” as they might be called—would function as follows:

(1) An Industrial and Commercial Finance Corporation would invest in regional SMEs through targeted regional sub-funds with weights inversely related to regional GDP. These investments would be embedded in the foundational economy. Such an institution could also establish city and county stock exchanges as a means of strengthening local access to capital and regional markets. It could also champion environmental technology as an alternative to a centralized green new deal. (2) The other would function as a building society or local bank with the mandate of reconstituting relational and low-cost personal loans as an alternative to payday lenders.

There are various alternatives which could be considered when it comes to the endowment and financing of these new civic financial corporations. They could be discrete or complementary. It could be a very British form of a sovereign wealth fund—a shared asset that underpins the financial stability of the nation. Concerning the size of initial funding, 10 percent of the total cost of the financial crisis bailout would provide a substantial endowment, paid for by the banks and redistributed in the form of a shared asset to the cities and counties of the country. The National Audit Office claims that the cost of the bailout paid by the state was £1.162 trillion; £100 billion would be an adequate endowment and match the scale of the lack of capital and investment in the towns and counties. This could also be partially financed by pooling local authority pension funds and supplemented with an endowment from pension funds and insur­ance companies. Finally, it could be supplemented with an incentive for individuals to invest in the fund through a tax-free individual savings or retirement account, perhaps with a regional component.

The corporate governance of the institution would include the Bank of England as well as core anchor institutions from the applicable city or county such as churches, mosques, universities, and hospitals, as well as the workforce, to provide a balance of interests and a responsiveness to local needs.

These institutional reforms might also be supplemented by gov­ernance rules that recognize wider public and stakeholder inter­ests, as well as by improving access to basic bank accounts, perhaps pioneered by these “banks of England.”

The establishment of a new civic ecology, which is dominated by neither the demands of capital nor the state, and is built around an embedded self-governing corporation with a specific purpose to fill the gaps highlighted by the 2008 crash, would be consistent with the practices and principles of restoring an economics of the common good. These principles include the rediscovery of place, institutions, and tradition in a renewed political economy that encourages markets in real commodities but not in the commodity fictions of labor, land, and money.

This article originally appeared in American Affairs Volume IV, Number 1 (Spring 2020): 33–42.


1 See, for example: Stephen G. Ceccehetti and Enisse Kharroubi, “Why Does Financial Sector Growth Crowd Out Real Economic Growth?,” BIS Working Papers 490, February 12, 2015; Thomas Philippon, “Finance vs. Wal-Mart: Why Are Financial Services So Expensive,” Rethinking the Financial Crisis, ed. Alan Blinder, Andrew Lo, and Robert Solow (Russell Sage Foundation, 2012); Lawrence H. Summers and Victoria P. Summers, “When Financial Markets Work Too Well: A Cautious Case for a Securities Transactions Tax,” Journal of Financial Services Research 3 (1989): 261–86.

2 We would like to thank Shiv Chowla for providing the statistics for this paper.

3 For a far more detailed analysis of the dual economies of Athens and Rome see Maurice Glasman, Landed and Maritime Markets in Ancient Rome: The Polanyi Paradigm Reconsidered (unpublished manuscript).

4 An excellent analysis of the different types of economy that makes this distinction between formal and substantive through the idea of a foundational economy of material and providential goods is made in Luca Calafati, Julie Froud, Sukhdev Johal, and Karel Williams, “Building Foundational Britain: From Paradigm Shift to New Political Practice,” Renewal 27, no. 2 (Summer 2019): 13–23.

5 See Andrew Bowman et al., The End of the Experiment?: From Competition to the Foundational Economy (Manchester: Manchester University Press, 2014). See also, “Productivity Puzzles,” lecture given by Andrew G. Haldane (chief economist, Bank of England), London School of Economics, March 20, 2017.

6 For the U-shaped concept see, Jean-Louis Arcand, Enrico Berkes, and Ugo Panizza, “Too Much Finance?,” Journal of Economic Growth 20, no. 2 (2015): 105–48.

7 The Report of the Committee of Finance and Industry, June 1931. It is worth noting that while Harold Macmillan was chair, Keynes and Ernest Bevin were active members of the committee. For a long-term perspective on this see, Raymond Frost, “The Macmillan Gap 1931–53,” Oxford Economic Papers 6, no. 2 (June 1954): 181–201. The Macmillan Gap refers to the lack of investment in small and medium sized business. In Germany this is known as the Mittelstand, and their sectoral and local banking arrangements are of great interest.

8 See Margaret Ackrill and Leslie Hannah, Barclays: The Business of Banking (Cambridge: Cambridge University Press, 2001), 320–60.

9 Citizens Advice Bureau, Payday Loans: An Improved Market?: Overview of the Trends in the Payday Loans Market, March 2016.

10 See “Tackling Financial Exclusion: A Country That Works for Everyone,” Select Committee on Financial Exclusion, UK Parliament, March 25, 2017.

11 David Merlin-Jones, “The Industrial and Commercial Finance Corporation: Lessons from the Past for the Future,” Civitas, 2010, 3.

12 R. Coopey and Donald Clarke, 3i: Fifty Years Investing in Industry (Oxford: Oxford University Press, 1995), 376.

Sorry, PDF downloads are available
to subscribers only.


Already subscribed?
Sign In With Your AAJ Account | Sign In with Blink