How the city shapes society

Michael Schluter, March 2007

The City, defined here as a group of London-based interlocking financial and trading institutions, including both UK-based and international companies, is essentially a wholesale market for capital rather than a retail market.

It includes investment banks, pension funds and fund managers, international banks, insurance and reinsurance brokers and syndicates, hedge funds, commodity brokers and those making markets in equities, bonds and foreign exchange. In addition there are support services such as law firms, accounting firms, recruitment consultants and, of course, the authorities such as the Financial Services Authority and the Bank of England.

Employing over 300,000 people, the City is a major factor in helping Britain balance its payments, earning a huge financial surplus and attracting capital into the UK from all over the world.

Efficiency and Individualism

How then does the City shape society? There are important benefits: efficient global commodity markets ensure that maximum prices are paid to producers and the prices paid by consumers are no higher than necessary. The role of options, futures and other financial derivatives is to reduce or spread risks and ensure liquidity in the market so that producers can always sell their product and consumers can always get what they need.

The influence on society of trading capital efficiently is more controversial. It can be argued that the City lowers the cost of capital, making it easier for businesses to start up or grow because they can raise capital more cheaply. However, trading capital through markets reduces the opportunity for relationships which should result from money changing hands. It seems that the biblical ban on interest was intended to encourage providers of capital to engage closely with those who wish to use it, sharing the risks, the gains and the losses and thus forging deeper relationships in the process. Putting banks, pension funds or other intermediaries between capital provider and user makes it more difficult for those relationships to develop and contributes to making our society more deeply individualistic.

Capital Chasing Profits

Arguably, the City’s ethos is amoral. Generally speaking, those working in the financial markets do not stop to consider the moral worth of a particular transaction. The criterion is simply whether it makes money. So, if the City can make money out of Islamic banking, Russian oligarchs, or investing in alcohol or tobacco, carbon emissions trading or ethical investment funds, some company will pursue the opportunity.

The City thus shapes society by prioritising where and how capital is used, and the ethical issues involved, for those who consider them, can be complex. For example, City financial institutions prioritise particular kinds of products, particular regions within the UK, or particular countries. A consequence is that savings in a depressed region may well be diverted to a growth region where the return is marginally higher. The downside of this capital flow is that jobs are harder to find in the depressed region and the outflow of younger people breaks up families and communities.

There is much debate at present about companies being taken off the stockmarket by ‘private equity’. When private investors establish a fund to buy up major corporates such as Sainsbury’s, there is a positive side in that they can pursue greater efficiency, often breaking up powerful vested interests. However, such pursuit of profit may be at the expense of the interests of employees, local communities and other stakeholder interests, with devastating effects on the family life of employees and on small companies that have been traditional suppliers.

Wider Cultural Influence

There is one more way in which the City shapes wider society: through its own work culture. Long working hours of around 12 hours a day are common. Relatively few women take jobs in high-risk trading positions, which gives the City a reputation for treating women badly. The high and conspicuous rewards, bonuses in particular, create jealousies in wider society, although they reflect in part worldwide demand for specialised knowledge of financial markets.

Conclusion

Those who work in the City are involved in a complex economic system which has, I believe, put at the centre the efficient use of capital rather than the well-being of families and communities, or relational well-being (RWB). The advantages of this ‘capitalist’ system are clear in terms of technological progress, global communication and the lifestyles of a large Western middle class.

However, a broader assessment of the way the City has shaped society requires us to weigh up the costs in terms of family breakdown as well as, for example, the well-being of children, the marginalised and many low-income groups. Such costs cannot be ignored.

I would suggest that reform of this system should begin, first, with promoting forms of financial relationship which bring together the providers and users of capital in a closer relationship, not involving a bank or other financial institution. As the size of this sub-sector of the economy grows, so will a society’s relationships start to prosper and social deprivation decrease. Secondly, making equity more attractive than debt from a tax perspective, rather than the opposite as at present, would prevent excessive growth of companies and hedge funds, and help to restore stability and equity in global financial affairs

The author is grateful to Paul Mills for comments on an earlier draft.

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Category: News and Reviews

March, 2007

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