Yves here. In a bit of synchronicity, I saw this Richard Murphy post almost at the same time as Colonel Smithers recommended it via e-mail. Keep in mind that orthodox economists, as Steve Keen in particular has lamented long-form, basically ignore banking and finance, That means they can also turn a blind eye to the damage it does and rely instead on ideology, like financial deepening (as in more finance activities relative to the size of the economy) being better. As we pointed out, none other than the IMF concluded the reverse in 2015:
But the recent IMF paper, Rethinking Financial Deepening: Stability and Growth in Emerging Markets, is particularly deadly. Even though it focused on the impact of financial development on growth in emerging markets, its authors clearly viewed the findings as germane to advanced economies. Their conclusion was that the growth benefits of financial deepening were positive only up to a certain point, and after that point, increased depth became a drag. But what is most surprising about the IMF paper is that the growth benefit of more complex and extensive banking systems topped out at a comparatively low level of size and sophistication.
The paper concluded that Poland (recall as of the early 2010s) was at the optimal level. More finance (unless perhaps well regulated, a condition not observed in the wild) reduces growth.
Even though Murphy’s case study is the UK, the harms he lists apply fully to the US.
By Richard Murphy, Emeritus Professor of Accounting Practice at Sheffield University Management School and a director of Tax Research LLP. Originally published at Funding the Future
Why does Britain feel poorer, more unequal and less productive than it should be?
In this Funding the Future podcast, I speak with John Christensen, co-founder of the Tax Justice Network, about the finance curse, which occurs when banking and financial services grow beyond any socially useful scale.
Drawing on John’s work in Jersey and decades of UK experience, we explain how finance crowds out real economic activity, drives up housing costs, drains talent, captures politics and ultimately undermines democracy. We also discuss new research showing the staggering cost of this failure to every household in Britain, and what can be done to reverse it.
This is the audio version:
There is no transcript of this as it would be far too long, but this is a summary instead:
The Finance Curse: How Britain Was Hollowed Out
I recently recorded another Funding the Future podcast with my long-standing friend and collaborator John Christensen, with whom I co-founded the Tax Justice Network almost a quarter of a century ago. This conversation followed on from an earlier discussion about what has become known as the finance curse. This is an idea John has spent much of his working life developing, and one which I believe is central to understanding why the UK economy is in such deep difficulty today.
The finance curse describes what happens when a financial services sector grows beyond any socially useful scale and begins actively to damage the economy and the political system that hosts it. John’s insights into this emerged originally from his work as economic adviser to the government of Jersey, where he was formally tasked with maintaining a balanced and diversified economy, and where he instead watched, in real time, as finance crowded out almost everything else.
From the “Jersey disease” to the Finance Curse
John explained how the idea first emerged from observing Jersey’s transformation in the 1980s and 1990s. What had once been an economy based on agriculture, horticulture, tourism and small-scale enterprise was rapidly overwhelmed by banks, law firms and accounting firms serving offshore finance. This process was so destructive that John and an academic colleague initially labelled it the “Jersey disease”.
Over time, however, it became clear that what was happening in Jersey closely mirrored the better-known resource curse, where countries rich in oil or minerals experience economic distortion, political corruption and weakened democracy. In the financial case, it is not oil or gas but banking and financial services that behave like a cuckoo in the nest, by squeezing out other sectors and capturing political power.
John stressed that the harms of the finance curse are not static. They evolve over time, affecting currency values, labour markets, democracy, inequality and investment. Crucially, they impose real and measurable costs on households — costs which we now know amount to tens of thousands of pounds per person in the UK.
>Seeing the Damage With Our Own Eyes
I reflected on how stark this transformation has been in physical as well as economic terms. The Channel Islands I visited as a child, places shaped by farming, fishing and tourism, are unrecognisable today. The harbour areas and town centres now resemble anonymous financial districts that could be anywhere in the world.
The same is true of London. The City I entered in 1979, when manufacturing and productive enterprise still dominated the corporate landscape, has been replaced by an economy centred on finance, rent extraction and speculation. This matters because the UK, unlike larger economies such as the US, has allowed finance to become overwhelmingly dominant, hollowing out its industrial base in the process.
Six Ways Finance Destroys Economies
John then set out six core mechanisms through which the finance curse operates. These mechanisms not only apply to Jersey, but to the UK as a whole.
First, there is a form of Dutch disease. Finance drives up asset prices, wages and land values, making other sectors uncompetitive. In Jersey, this was visible in house prices rising at twice the UK rate for a decade, making it impossible for workers outside finance to live there. In Britain, the same process has priced entire generations out of housing, particularly in London and the South East.
Second, the labour market is distorted. Highly educated and talented people are drawn into finance by inflated pay, draining skills from engineering, manufacturing and research. This brain drain undermines innovation and long-term productivity, leaving the real economy weaker as finance grows stronger.
Third, financialisation accelerates wealth extraction. Private equity and hedge funds acquire viable businesses, load them with debt, strip assets, suppress wages and extract rents. John and I both noted how this process destroys productive capacity while generating paper profits often routed offshore.
Fourth, finance concentrates geographically. Wealth, talent and political attention are sucked into financial hubs, and above all, London, while the rest of the country is starved of investment. This deepens regional inequality and fuels misleading narratives that places like Scotland and Wales do not create value, when in reality their value is extracted and booked elsewhere.
Fifth, everyday life becomes more expensive. Rents rise, small businesses are priced out, high streets hollow out and social mobility collapses. The free-for-all in mortgage lending since the 1970s has left millions burdened with unsustainable debt, reversing decades of post-war progress.
Sixth, and most dangerously, finance captures politics. Because financial capital is highly mobile, it can threaten to relocate unless it gets tax cuts, deregulation and political deference. This gives banks and financial institutions enormous leverage over governments, political parties and the media — undermining democracy itself.
The Staggering Cost of the Finance Curse
We then turned to the evidence on cost. Research commissioned by the Tax Justice Network, from the University of Sheffield and the University of Massachusetts, estimated that between 1995 and 2015, the finance curse cost each person in the UK around £67,500, or more than £3,000 per year. In total, the losses amount to around £4.5 trillion.
These costs arise from:
- misallocated investment,
- excessive mergers and acquisitions,
- underinvestment in innovation,
- labour misallocation,
- bank bailouts and
- vast bonus payments.
The idea that private banks allocate capital efficiently, John argued, is simply false. The evidence shows the opposite.
What Can Be Done?
The obvious conclusion is that the City of London is not the “jewel in the crown” it is so often claimed to be. It has been a drag on the UK economy for decades. Reining it in will require stronger regulation, public control over capital allocation, regional and national investment banks, and serious competition policy.
John also argued for confronting the ideological roots of the problem, which he explores in his forthcoming film The Finance Curse. These include the shareholder revolution, the dismantling of antitrust law, and the race-to-the-bottom ideology of national “competitiveness” promoted by global elites.
The task ahead is not simple, but continuing to allow finance to dominate unchecked would lead to economic stagnation, social division, and democratic decay. If we want an economy that works for people rather than against them, confronting the finance curse is unavoidable.
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Thank you, Yves, including for the shout out.
May I add that most of Labour’s engagement before the election and since has been and is with Big Finance, as much Wall Street as the City, if not more so.
My former trade body colleagues talk about “how much of their shopping list was adopted” by Labour in government and “how pleasantly surprised that the unprecedented level of engagement in opposition continues in government”.
Labour can’t, or more accurately is paid not to, understand that Big Finance is not the same as industry and Wall Street is not Main Street.
Who can be surprised that Britain remains mired in seemingly unstoppable decline and Labour is at a loss to work out why?
With regard to the landscape that Richard refers to, it’s the same in Buckinghamshire. My parents and I often talk about the factories that dotted the area until a generation ago.
For older readers, that included the firms that printed airline tickets, Aeroprint, and Readers’ Digest.
Thank you too!
I have a question for anyone here (not necessarily you CS) which i myself try to answer though I would appreciate a discussion on mechanisms by which excess “financialisation” results in extreme rent extraction. I beg your pardon in advance for my financial naivety.
OK, when excess financing drives asset prices (housing for instance) up, then larger mortgages for those willing and able to buy, does this automatically translate in higher rents for those who rent? Are housing rents determined as a fraction of income of potential renters, or rather, it depends mostly or exclusively on the price of houses and amortization of the investment? I tend to believe the acting force is the second and that is why we end with outrageously expensive rents.
How should be this problem dealt if anyone had a sensible idea?– I think PK suggested something not long ago but I cannot recall what exactly.
I can add a little colour to Richard Murphy’s excellent summary of the finance curse because in the 1960’s one branch of my family married into Jersey and my grandmother’s best friend moved to Guernsey and I have spent a lot of time on the islands both inside and outside the finance class (the cousins on Jersey set up and ran a professional offshore trustee services company).
The islands were idyllic in the 1960’s, a series of extended English country villages and narrow granite walled lanes with sub-tropical weather and Norman French flourishes. Nobody locked their doors, everybody knew each other (for better or worse), cars were limited in number and people walked or cycled or took diminutive little buses. Lifestyles were very rural, people grew their own vegetables, cooked on ranges and relied on open fires for heat.
Incomes were low compared to the mainland. Many people worked in agriculture (growing tomatoes and cut flowers in glasshouses on Guernsey, growing Jersey Royal potatoes and other early crops on Jersey and Guernsey) or in hospitality (both islands catered to a large domestic package holiday trade, by coach and ferry or by air, serviced by inexpensive hotels or boarding houses; a lot of English and Scottish working class people took a week on the Channel Islands because it was warm and foreign but the currency was sterling, the language was English and the food the same as at home but better).
Finance took off in the 1970’s. Prior to this, Jersey and Guernsey had begun carving out a niche as tax havens for individuals in the 1960’s. Under the Death Duty regime, living UK residents could move to Jersey and side step the tax. Similarly, high earners could avoid high income tax etc if they were resident in the islands – but they could be in London within an hour’s flight and days travelling did not count towards UK residency at the time. The replacement of Death Duties with Capital Transfer Taxes by the 1970’s Labour government stopped up the escape route for the great landed estates but the other Labour taxes, e.g. supertax, just incentivised further flight by high earners and “entrepreneurs”. The Mayfair set of corporate raiders (Goldsmith etc) could structure their affairs to blossom outside the UK. By the end of the 70’s, the islands were servicing wealthy individuals and entrepreneurs but also providing a low tax jurisdiction for corporates and banks looking to move money in and out of Europe (no stamp duties in Jersey on shares or property). Anti-avoidance measures were crude and profits could be siphoned off to Jersey. With Thatcher and the ending of capital controls, the role of Jersey as a conduit for international institutional financed boomed.
The effect on the ” Square Yard” (Jersey being the smaller cousin of the Square Mile, the City of London’s nickname from its Roman-walled dimensions) was dramatic. Every major law firm and accountant and bank and trust company opened an office. Mass tourism died on its feet. Agriculture abandoned the glasshouses (energy crisis plus ruthlessly efficient Dutch at scale plus air freight mange-tout from Kenya). Car ownership exploded. The local population were sucked into support services for international finance: administration, asset management, company secretarial work etc. On one level, Jersey never had it so good. But on the other hand every other indigenous industry failed – the famous channel island knitwear businesses, local pottery, fresh flower delivery to the UK. All killed by high cost labour.
Forty years of this mean that very little remains of the charm of the islands I summered in as a boy. I don’t think the tomato-house theme park still runs! And who knows whether the quality of life could be better if the economy was more balanced.
However, the islanders were canny and did a couple of things the UK itself should have considered.
First, they controlled the housing market and land development very tightly. Jersey’s approach is to ruthless restrict residential qualifications. You cannot own your own front door, as they put it, unless you have descent or you have an occupational visa (preference for island labour) or you bring £50m odd in liquid assets. In this sense, they have kept the worst of the finance curse at bay and socialised (some of) the gains through wages. Guernsey’s approach is more elegant, there is a dual market: if you sell a local market house, you can buy a local market house. Otherwise, you have to buy on the open market at a multiple of the price. Anybody can move to Guernsey if they pay the price!
Second, they make their money out of servicing wealth, not from acting as principal. Very little of the profit routed through Jersey lands in Jersey, just the fees and the wages of the trustees, administrators and so on. It’s less glamorous but more reliable. So the resource curse has affected Jersey through the employment channel and in opportunity costs and some extent in housing costs. But it has not distorted the pattern of investment in a primary way. Whereas the UK has switched to investing as principal in speculative tech stocks, property development and financial trading and away from the traditional long only investment of the City and the impact is not just comparative disadvantage in its traditional industries but active deindustrialisation and looting of capital-intensive industry.
These caveats should not distract from the headline points of Richard Murphy’s Jeremiad, all if which are true in general terms (if not specifically of offshore tax havens and their weird parasitic island communitarianism!).
Thank you.
That sounds like the transformation that Mauritius is going through.
I hope you’re in good form.
Bearing up, thank you, mon Colonel. I wish it would stop raining. It has rained every day since Christmas!
We decided not to sell the farm by the way, but try to make it work with a low impact system of rearing suckler calves for beef (and as an FU to Rachel From Accounts – we decide to stick with farming before she increased the IHT allowance…).
We will out-winter the animals on grass using tall grass grazing techniques (see Allan Savory). It’s low capital intensity, no shed or slurry pit or tractor for spreading required. We just cut the grass and bale it as hay for winter in the same field and then unroll a bale for the ladies in a fresh paddock each day. Fingers crossed the beef farming should be profitable and we can put the farm into higher tier stewardship for the subsidies for rare grassland habitat.
Right now though I am spending a fortune on fencing and water pipes and the place looks like the Somme. :-( Wish me luck!
Has your move to Mauritius progressed?
Oh, and I am mulling whether to fill in a form as a Reform candidate for the election that is brewing. Be the change you want to see vs a retirement home for Tory rejects. Reflation in one country versus US vassalage. It’s a tough call….
I concur with the general curse of finance. When brexit happened I was living in & out of London, so saw both sides. The countryside was hurting. The superficial gripe was the bloody foreigners, as always… but the real problem was that the country had not recovered since 2008. People were poor. Everyone knew several people long term unemployed.
Meanwhile the City had recovered nicely, and London was in boom time. The political classes were favouring London, and ignoring the country. So when the Brexit vote came up, the people punished London. The City really didn’t see it coming, but all you had to do was talk to the working classes out in the country to see the rebellion.
Another factor is that the UK favours bureaucracy and rules and FATF. So a large proportion of British working people are actually financially excluded. Estimates range from 1 million to 6 million. These are people who live with others, have no proof of address, have poor credit, are otherwise undesirables. Banks have taken on the FATF mission with zest and killed many unprofitable accounts. Europe for example has the right to a “basic payment instrument” but Britain never seemingly got around to implementing this requirement. Hence, Britain pushes the lower classes out of the economy and into poverty. See also the term “kill line”.
Sadly, I know too well of what I speak bc I was one of them. At some stage I got jack of having a fat City contract, but not having a bank account with which to enjoy the spoils, and jumped on the rubber boat and reverse refugeed. Still took an entire year for my European destination country to open bank accounts, but that’s another story.
That’s another crazy thing about the FATF kill-the-poor policy – if these people haven’t got a bank account, they can’t earn, and they can’t pay taxes! Heaven knows what passes for brains in the Inland Revenue, but mad cows have more logic than the UK government. Anyways, end-of-rant!
Isn’t this what Hudson bangs on about constantly?
What is FATF?
The financialisation of the British economy has indeed wrought the disaster which surrounds us here in the UK.
Brexit was essentially the project of a particular section of the financial sector that Nigel Farage is particularly connected to, and that project is well described in this book:
https://www.plutobooks.com/product/alt-finance/
The hedge funds and suchlike who set out to benefit from Brexit tend to hang out on the other side of town from the City, in Mayfair and Pall Mall, but wherever they set up for business, it tends to be a bad day for the rest of us.