Response to critics

The Finance Curse, in its UK edition, amounts to a comprehensive attack on the City of London financial sector in its present form. The book’s argument is that the City, around a useful wealth-creating core, has accumulated a host of wealth-extracting activities that are making other parts of Britain poorer, and that the net result for Britain as a whole is negative. The clear implication is that policy makers should seek to shrink the City back to its useful wealth-creating core.

Predictably, people in the City of London and large parts of the British establishment don’t like it.  This page advances the debate by describing the criticisms and responding to them. We haven’t yet found a comment that makes a serious dent in the main arguments.

Let’s start with a Schumpeter column in The Economist, which I can only assume was written by someone who had not read the Finance Curse book, since it tilts at straw men and misunderstands and overlooks its main arguments and evidence. Schumpeter’s core argument was that while indeed parts of the City are “socially useless” there is no need to be “sizeist”, and that the proper way to deal with all the sins of the City is not to shrink it but to subject it to a dose of better bank regulation and antitrust enforcement. Here is a response I sent to The Economist, which they have not (so far) printed.

Response to The Economist

Schumpeter’s commentary on my book the Finance Curse oddly did not engage with its core argument and evidence: that the City of London, outside a useful wealth-creating core, extracts wealth in myriad ways from other parts of the British economy and population.  To call such activities merely “socially useless” is to misunderstand them. The Brexit vote reminds us that the people and businesses being extracted from won’t keep accepting this bitter medicine.

Schumpeter also shied away from mentioning the broad and growing strand of research from the IMF and many others, now known as “Too Much Finance,” which shows that once a country’s financial development exceeds some optimal size, further expansion curbs that country’s growth and inflicts other damage. In opposing “sizeism”, is Schumpeter asserting that all this research is wrong? If so, how? If not, how big is big enough? How would our democracy fare then?  It’s no use lauding the City’s jobs and tax contributions: those are gross benefits. We want to know the net benefits, which the finance curse analysis shows to be deeply negative.

The roughly quarter century after the Second World War, when finance was savagely suppressed, saw the fastest and most broad-based economic growth, before or since. This had more than one cause, but it did show that reining in oversized finance can be compatible with a strong economy. After the London-based Eurodollar markets helped the City break down these controls, especially from the 1970s, growth slowed, economic crises became more frequent, and inequality rose. And the City grew fast, in large part because Britain had such lax regulations. This made it easier for financial players to rig all sorts of markets in their favour.

Schumpeter argues for stronger regulation and antitrust laws, to counter this. Me too, and I’d add a proper crackdown on tax havens, at the very least. Yet generations of politicians have shied away from such reforms precisely because they will “damage the City.”  If done properly, however, such measures would tackle the City’s harmful, lucrative wealth-extraction schemes – and shrink the City back back towards its smaller, more useful core.

So Schumpeter agrees with me after all – but for some reason seems unable to say it.

The only way I can imagine that Schumpeter could square that circle would be if they are advocating non-serious regulation and antitrust enforcement: essentially the status quo, with a few rough edges sanded off. Which is what the entire article is advocating, in fact.

Financial Times.

I had a comment article in the Financial Times, entitled Brexit offers London’s rivals a poisoned chalice. There are, as it happens, a number of comments beneath it, some of which are worth responding to.

Argument: “Optimal size” is only a factor if the financial sector “steals” or “starves” other sectors.”

Response: This is wrong, on two main levels. First, the “Too Much Finance” literature is by now very robust and widely accepted, which shows just this. Second, everybody knows that the financial sector steals or starves other sectors, not least from the carnage caused by the activities that fed the boom ahead of the financial crisis. And the Finance Curse book explains, with great detail and evidence, a wide range of mechanisms for stealing and starving. (For a taster, read this.) Or look at the graphs here.


Argument: it’s not just finance. There are problems in other sectors too.

Response: Of course. It’s just that there’s something special — in a bad way — about oversized finance, and finance that’s doing the wrong thing.


Argument: Any country with a concentrated economic sector – Germany with its cars, for instance – will suffer risks.

Response: There is something in this. But finance is especially dangerous. Also, car crashes, while nasty, are rather less systemically dangerous than financial crashes.


Argument: Singapore, Luxembourg, Ireland and other finance-heavy places do really well, we should emulate them.

Response: This is dealt with in extensive detail at various parts of the book. For a taster, see this.


Argument: The “Dutch Disease” problem where large City-related net financial inflows push up the real exchange rate, harming other tradable sectors, doesn’t really hold (Schumpeter also dismissed this with a glib (“dynamic industries squeeze out sluggish ones everywhere: try being a steel-processor in the Bay Area.”)

Response: This is actually a complex and thorny area, which there’s no space for here. There has been a fair bit of – but not nearly enough – discussion elsewhere, however. See Izabella Kaminska here, for instance, or this, from Roger Bootle and John Mills.


Argument:  This is from a commenter called Ijack, which begins “I read the research on which Nicholas Shaxon’s work is based- the research is fundamentally flawed as it is mathematical function for econometric investigation.” And it goes on at some length.

Response: This comment looks superficially competent but it isn’t. Just for example, it argues that “The “too much finance” thesis that finance starts to retard an economy and its performance, once it goes beyond a certain size, usually a turning point of around 90% of GDP. The size of the finance industry in the UK has not been beyond 9.0% of GDP since 1990 – 2017 (Source: Parliamentary research briefing 25 April 2018.)

This is nonsensical: the “too much finance” metric is credit to GDP, while the 9.0 percent stat is a measure of finance’s value added in GDP. Completely different things. The nonsense continues through this comment.

Argument: Countering my argument that oversized finance contributed, and surely swung, the Brexit vote. “Unlike Brexit Britain with its finance curse, France doesn’t have any rightwing populists at all. Oh, wait.”

Response: Pithily put, but here’s a pithy response. Unlike Britain, France didn’t suffer from the Global Financial Crisis. Oh, wait. And there’s also a whole chapter in the Finance Curse book, revealing how the City of London played a far more central role in the global mayhem than almost anyone realises.

Other comments.

Argument: “Financial Services have a preference for high density geographical concentration- they don’t physically crowd out more productive activities e.g. manufacturing or mining or agriculture.” (from a comment under here.)

Response: This comment suffers from confusion over, among other things, the geography of the finance curse. Highly-paid financial services tend to attract young, dynamic talent from across the regions and poorer parts of London, damaging regional businesses, local government and more. (See here, for instance.) What goes for regional businesses also goes for poorer parts of London.

What is more, the private equity chapter in the Finance Curse book provides an example of a different kind of crowding-out. Private equity firms buy up healthy businesses, and financially re-engineer them to increase their use of tax havens, raise their debt loads and much more. The players involved, who would have in another world been fixing up companies and making them hum, are instead turned away from such wealth creation and towards wealth extraction. It may look like they are still in the same sector (and thus not crowded-out), but in reality this is a different game.


Argument: “Finance prefers countries with good Law and Order and a fiscally responsible Govt. If we are likely to elect a Chavez like nut-job determined to squeeze Finance, nothing will be there for him to squeeze.”

Response: One of the lines from the Finance Curse book, (which the Sunday Times described as “one of the best sentences ever written about the City”) laid out the particular way the corruption works with respect to a(n offshore) financial sector like the UK’s. “Britain owes its pre-eminence as a financial centre to the combination of a strong legal system, which stops people stealing your money, with a weak regulatory one, which allows you to steal other people’s.”

The City has literally built itself up since the emergence of the Eurodollar markets in the 1950s on this kind of carefully cultivated corruption – the kind that attracts then profitably shelters criminal money, or activities that help the participants get rich by taking huge risks at the expense of taxpayers, as the financial crisis revealed. This is not about bribery and chaotic Chavez-styled corruption, the kind that gets talked about by the likes of Transparency International. It’s more subtle than that, though no less potent for that. (A far more sophisticated analysis of corruption is provided here.)


Argument: “It is not a function of how “big” London, New York, or Singapore’s financial center is. It is a function of regulatory capture.”

Response:  This is a version of Schumpeter’s “sizeism” argument. The glib response is “. . . and regulatory capture is a function of the size of the financial sector, relative to the size of the local economy and democracy.”

Argument: “The author [is] weakest when it comes to cure.

Response: a couple of reviewers have said this: for example in the Sunday Times, or the Financial Times. I can live with this criticism: the concluding chapter of a book, where “solutions” are aired, cannot possibly do justice to the “solutions” to something that has is at the heart of the global economy. My three main solutions are: 1) Wake up to the national security implications of this; 2) Wake up on the issue of monopoly, where nearly everyone is asleep, and 3) “Smart capital controls.” This is not about controlling capital flows at the border, but about discouraging inflows through all sorts of measures such as land value taxes, or radical transparency measures. The earlier sections dismissing the all-too-common concerns about “competitiveness” open the door for “smart capital controls”.

* This page is a work in progress *