GORDON BROWN'S establishment of a panel of the world's biggest business cheeses to advise on globalisation and competitiveness, and another to 'promote London as the world's leading international centre for financial and business services', prompts a question that will almost certainly never be raised in either forum: are these objectives compatible? Or will the City's continued rise make it harder rather than easier 'to achieve what we have not achieved since the first days of the Industrial Revolution - to become the best location for scientific R&D and world leaders in the new enterprises of the future', as the Chancellor earnestly put it last month?
Questioning the country's most vibrant success story might seem perverse. As charted in a Treasury budget paper, the City of London is the leading international financial centre in the world: global No 1 in foreign equity and foreign exchange trading, cross-border bank lending, derivatives and as a secondary market for international bonds. It is the fastest-growing hedge-fund market. Whereas rival financial centres in New York and Tokyo largely serve domestic economies, London's growth is global. This is reflected in the pounds 19bn trade surplus chalked up by financial services in 2004, up 9 per cent over 2003.
The City of London increasingly dominates the UK economy. Financial and business services account for 45 per cent of the UK corporate tax take. The financial district's high earners (on pounds 100,000-plus) pay 25 per cent of all income tax. Forty per cent of the capital's employment is provided by the financial sector.
Given that all advanced economies are increasingly service-based, what does the emergence of what might be called the derivative economy mean for non-City businesses? Well, recall that banks and financial services grew up to serve industry and commerce, and it is from industry's revenues (as well as from individuals) that their own still have to come.
Recall, too, that despite Brown's assiduous attentions (hence the new panel) UK productivity and investment, including financial services, remains low compared with rivals. Is there a connection to be made here? Plenty of people would argue yes.
At least three recent reports have catalogued how corporate directors increasingly feel obliged to dance to a speeded-up, short-termist City tune. One suggests that the UK investment climate is the least favourable in the world for building high-tech and knowledge-based companies.
This should be a reality check, at the very least, on the Chancellor's ambitions for the UK as a technology hub. A minion might also alert him to the absence of UK firms from today's tech-based sectors. That ought to tell him something about the relationship of productivity to the City - as should the fact that, apart from GlaxoSmithKline, the sole large native high-tech firm available to represent the UK on his advisory panel on globalisation and competitiveness is Rolls-Royce.
He would have been better off with two items of readily available reading matter. As a helpful reader suggests, one would be anything written by the late WE Deming, who was practising joined-up management 50 years before New Labour thought it invented it.
The second is Warren Buffett's 2005 letter to Berkshire Hathaway shareholders. Buffett is the world's most successful and least active investor. Berkshire Hathaway doesn't have an 'exit policy' for its investments because it never intends to sell them. Berkshire eschews debt and invests in simple companies ('if there's lots of technology we won't understand it') with good management: insurance, utilities, Coca-Cola, AmEx and a variety of manufacturing and service sectors. Berkshire has conjured growth in book value of 305,134 per cent since 1965, an average annual gain of 21.5 per cent.
Buffett understands all about productivity. In his letter, he notes that, despite record losses from Hurricane Katrina, Berkshire's insurance companies still made a profit, largely because of productivity gains that mean they can offer customers outstandingly good value at low prices. Rocket science or what? He also understands what undoes productivity. In an aside on 'how to minimise investment returns', he notes that the 'frictional costs' to investors of employing brokers, managers and other professional help (some of it bearing 'sexy names like hedge fund or private equity ') may now be eating up 20 per cent of the earnings of US business.
Buffett also describes Berkshire's great difficulties (and losses) unwinding derivative contracts entered into in the 1990s by its reinsurance business. He believes they should be a warning to all managers and regulators - the more so since the victim was a minor player with a conservative owner.
Since then, the number and complexity of global derivative contracts has mushroomed beyond calculation, with unknowable consequences in the case of a financial Katrina. When Berkshire exits derivatives, Buffett sums up, his feelings 'will be akin to those expressed in a country song, "My wife ran away with my best friend, and I sure miss him a lot".'
So let's keep the City in perspective.
The Observer, 2 April 2006