Never have I written an optimistic piece about the UK economy, that is because I believe its immediate future prospects are not good, however there could be a better future. This I believe because there are startling similarities between contemporary Britain and that of the 18th century. It was the beginning of the industrial revolution when the British economy grew at a faster rate than at any other time. Society in the 18th century was dominated by a landed aristocracy who opposed any change that would threaten their interests. Their interests being the taking a disproportionate share of national wealth for themselves. This was possible because anybody not of their social class was excluded from parliament, senior offices in the judiciary and armed forces. Laws could be framed to protect this group’s interests and by controlling the law and judiciary they could enforce these self interested laws. Laws known such as the infamous ‘Black Acts’, whereby hundreds of offences against the propertied interest, became hanging offences. Breaking a landowner’s gate and fences, setting fire to hay ricks were for example offences punishable by hanging. Yet despite this monopoly of law making, British society was far too changeable and complex to be controlled by the law makers in Westminster and Whitehall. Not realising it these aristocrats were presiding over a century of rapid social change, which could not be stopped by laws from parliament. There was a social insurgency taking place that would revolutionise society. Wealth was increasingly being created not on the great landed estates, but in the new factories in the industrial town. This upsurge in wealth that was out of reach of the landed aristocracy undermine their political ascendancy.
In contemporary Britain there is a financial aristocracy that is as powerful as the landed aristocracy of the 18th century. Government has been subject to what is known as ‘institutional capture’, that is the financial sector that is has effectively captured the government and made it a creature of its own bidding. While there has been a shrinkage of the welfare state there has been a tremendous expansion of the welfare state for finance. When the financial crash came in 2008 the government was willing to cut national welfare to finance a bank bail out. Billions were poured into the banks coffers while billions were taken out of the welfare budget. Despite all the public debate about the need to reform the banks, the banks have been able to fight off any meaningful reforms. However it is their very attempts to create a social stasis that makes possible meaningful change. It is relatively easy to manipulate politicians to their will through political funding, but impossible to bend society to their will. Society is far too complex and changeable to be controlled by dictates from bank head offices in London. While it may appear to contemporary Britons that the financiers are in complete control there are changes taking place that will undermine their dominance. Financiers just as with their 18th century forebears cannot keep society confined within their financial straitjacket. They are vulnerable to an industrial insurgency that they cannot control.
The National Westminster Bank was once Britain’s largest bank. Unsound investments in the American market forced it into financial difficulties. It was taken over by a smaller but more soundly managed bank, ‘The Royal Bank of Scotland’. However that in its turn was appalling mismanaged and is only kept afloat by vast injections of state money. Eventually its assets will have to be written down to a level that reflects its true value. Then the much diminished bank can be sold off to a much sounder bank. This will mean a large loss for the state, but it is inevitable. When politicians say that the bank will never be sold off at a loss, they are denying reality. What I am trying to say is that in twenty more years time, Barclays, HSBC, Lloyd’s and RBS will be nothing more than medium sized businesses in the UK economy of the future. Their very conservatism will mean they cannot adapt to change and they will be left behind, with a consequent decline in their assets and size. They will be dwarfs not giants of finance and their veto on change will have long been rendered insignificant.
Despite their adoption of the new technologies, the financial services sector remains part of the old economy. They remain wedded to the old ways, income is to be made from speculative investments, not in funding breaking edge technologies. The purpose of the stock exchange should be to enable companies to raise capital through the sale of shares. This purpose has long been rendered redundant by the members focus on speculation in equities as the surest way of making money. All the new developments such as super fast trading are intended to make speculative activities more profitable by spending up speculative trades. Certainly in England when a company goes public it is the death knell for enterprise and innovation in that business. Financial considerations now dominate board room discussions. All such firms acquire a property portfolio as the surest way of making money, risky but potentially high return investments in new technology are discouraged. The conservatism of the finance industries becomes the dominant ethos. It is impossible to think of one company in the top Footsie 100 companies that has a reputation for enterprise and innovation. The story of graphene illustrates this all too clearly. This was a wonder material developed at Manchester University, yet there is literally no British money being invested in developing this material, instead most of the possible applications are being developed in Japan.
The new economy is represented by a company such as Apple, not just for because of its high tech products, but its financing. While the company has used the traditional means of finance, it has largely relied on the profits it has generated itself to invest in new technology. How many bank managers would have willing invested in such a high risk venture such as the IPhone? Probably none, it would have been regarded as too risky an investment. This is why Apple has a huge cash pile that it refuses to distribute to its shareholders. It needs this cash for investing in the development and production of new products. The old system of finance is broken and Apple understands this.
However companies retaining profits to fund new developments is nothing new. What is new is the sheer size of Apple’s cash holdings. There has to be a new source of funding for industrial innovation. Just as in the 19th the development of the joints stock enabled businesses to by pass the banks to raise funds by selling shares to the public, so new internet financing schemes such as ‘crowd sourcing’ will enable new businesses to avoid falling into the palsied hands of the banks, hedge funds, stock exchanges etc. There will be the development of internet exchanges to regularise this funding and these new exchanges will gradually replace the older investment banks which are rapidly approaching their sell by date.The great advantage of such internet finance is that it will be cheap and easy to access. The old investment banks will be unable to compete and will eventually be replaced by these newer rivals. Once they are established an industrial renaissance will be possible as cash will flow directly to new innovative enterprises. The insurgency in the finance sector whereby new revolutionary sources of finance replace the old conservative banks is the key factor.
Today viewing the huge monoliths that are today’s banks, it is hard imagine that they have achieved their apogee. However any industry that is dependent on huge state subsidies to survive (or the backing of implicit government guarantee, as are the banks) is not a well run industry, it is failing business waiting to be decimated by newer more efficient rivals. There is also the decimation of the industry that will occur when the next financial crash arrives, as it inevitably will. Governments and more importantly the electorate will not be willing to finance yet another massive bank bail out.
Once the old finance industry’s stranglehold has been removed from the money markets by new insurgent money exchanges there must be a new British industrial renaissance.
I apologise for writing yet again about banks, my next post will demonstrate a different reasoning for there being a better future.