We should challenge claims about the value of the financial sector to Britainby John Kay / September 17, 2015 / Leave a comment
Published in October 2015 issue of Prospect Magazine
There are good reasons to be sceptical about how much the financial sector contributes to Britain. It is an area in which Britain has competitive strengths, including language and time zone. Private profit without public benefit is a policy problem everywhere in finance, but a particularly acute British dilemma. About 1.1m people work in finance and insurance in Britain. This is 3.7 per cent of the labour force, less than in the United States (4.7 per cent) but more than in France (3.1 per cent) and Germany (2.8 per cent).
Most people in finance do clerical tasks in bank branches, call centres and insurance offices. Four hundred thousand people work in “the City,” the area round the Bank of England that is headquarters to most British financial institutions. Of these, 150,000 work for financial institutions.
Around 200,000 people work in London’s finance sector outside the City itself, many in Canary Wharf or the hedge fund centre in Mayfair, and another 250,000 are employed in the south-east region. Edinburgh is Britain’s second financial centre; 85,000 people in Scotland work in finance.
English law is widely used in financial contracts, even for transactions that have no connection with the UK—the result of the flexibility of its common-law basis, the English language and the perceived impartiality of English courts. And then there are the employees of sandwich bars and the London Transport staff who enable city folk to get to work. A reasonable guess might be that between 100,000 and 150,000 people in Britain are finance professionals who work in “the City,” and two to three times that number support them.
Around the time of the Second World War, a group of economists—notably Simon Kuznets, James Meade and Richard Stone—set out the principles for measuring the economic contribution of a commercial activity. We assess the car industry by its added value: the difference between the selling price of the car and the cost of the steel, rubber and other materials that went into it. That added value is the sum of the earnings of the people who build the car and the operating profit (before financing costs) of the business. We measure the value of a play by adding up what people pay for the tickets. These procedures may be crude, and mercenary, but they give a relatively objective answer.