High technology fails to weaken the lure of London's Square Mile
Explanations for London's appeal seem weak. There is a pool of skilled labour, English language, the time zone - but this is just as true of Luton
Thursday 05 December 1996
For Big Bang in London and similar changes in other financial centres were defined as much by the huge investment in information technology and telecommunications as by regulatory change.
This investment, the need to stay on the technological wild west, remains the hallmark of the financial markets - the first and biggest cyber-industry. William Mitchell of the Media Lab at the Massachusetts Institute of Technology calls derivatives "pure creations of cyberspace".*
The economic engine of the financial services industry is the production, transformation, distribution and consumption of digital information. It is in the front line of the shift towards what I call the weightless world.
This name reflects the fact that the economy physically weighs about the same now as it did a century ago, partly because most goods are smaller and lighter, partly because the things that increasingly have the greatest economic value are software and services.
This shift raises some interesting questions. Digital industry can take place anywhere, so why do financial services continue to be focused on the City? And would a UK decision not to join the European single currency threaten the City?
It is a paradox that, as its activity has dematerialised, the City as a place has become ever more important. Obviously, some things that were done in London have moved, thanks to high technology.
This includes back offices, registrars - any functions where the information can be put on a production line. But the high value added functions remain and are becoming increasingly concentrated in the Square Mile as more foreign banks move in.
There are certainly cost pressures to move out, or Canary Wharf would not exist and thrive. Rents and taxes are high in the City, the burden of commuting is heavy, deliveries and logistics are difficult, and there is even the threat of terrorism.
With the cost of telecoms falling and quality rising steadily, acting as a powerful decentralising force, there must be some pretty strong glue.
So what explains the paradox? A lot of the standard explanations for London's appeal seem pretty weak. There is a pool of skilled labour, the English language, the time zone - but this is just as true of Luton as of London. And a lot of City workers probably live closer to Luton than to London.
Another standard explanation is that processing and exchange of information is essentially social. That you're not in the know if you're not in the bar. That rumours, gossip, sensitive conversations and spin doctoring don't work on the phone.
There may be something in this. But frankly, anyone who says you can't gossip down the line hasn't listened to a teenager recently.
It is the weightless economics that explain London's magic. One key is the existing infrastructure, representing enormous fixed investment - in expensive equipment, in the initial concentration of information, as well as the ease of connecting with other people. History matters in economics, like path-dependence in science - just think of the enormous cost of laying cable and installing screens in other locations.
A related element is the "oasis" effect of access to high bandwidth cable connections, the fibres whose capacity to transmit digital bits is effectively infinite. The cost of using these channels increases enough with distance that users cluster together.
But just as important is the fact that telecoms allow concentration as well as decentralisation, to exploit economies of scale. It means that trading operations for international banks are increasingly centred on London. Deutsche Bank's decision to base its trading in the City is emblematic.
In economic geography, the key to the location of economic activity is concentration. The obvious manifestation of this is that most people live in urban areas.
US economist Robert Hall puts this in extreme form when he says a city and a boom are essentially the same thing, one in space and one in time. In addition, most urban areas are very specialised because of the economies of scale. Hollywood does movies, Seattle does aircraft, Paris does couture.
London does financial services. It embodies the circularity of economic geography that companies want to be where the market is biggest and the market is biggest where the companies are.
This happens when there are big enough economies of scale and low enough transport costs. The economies of scale are clear in something like trading in the financial markets although they probably do not exist to as great a degree in sales. Falling transport costs, which comprise telecoms costs as far as the City is concerned, have therefore probably helped reinforce the concentration of some types of financial services in London.
Last but not least among the economic explanations is the fact that the financial services industry is growing rapidly, and a lot of the growth is going to take place where it is already located.
The advantage of infrastructure and economies of scale and growth will not be overturned until there is technical obsolescence on at least the scale of Big Bang, 10 years ago, and perhaps not even then. It is similarly implausible to suggest that UK membership or non-membership of the single European currency would make all that much difference.
Could these economic buttresses of the City's pre-eminence ever crumble? New technologies will almost certainly change the economic calculations significantly.
Techno-authors such as Nicholas Negroponte describe the possibilities eloquently, from clothes that form part of your computer such as batteries in the belt buckle and antennae in the frames of your glasses, to holograms of software agents sitting in front of your computer screen, waiting for verbal instructions.
This still seems the stuff of science fiction but one thing that is already clear is that modern technology and communications mean the link binding work to workplace is crumbling.
Not too long ago a fine building in the Square Mile would correspond one-to-one with a fine old institution. It rendered the institution visible and concrete. This is no longer true. It is people, not places, who define the institution these days, and a shifting group of people at that. It is at least as true of financial services as of advertising that it is a people business.
Equally, work is making greater claims over people. Work follows most of us everywhere, thanks to the phone, fax, pager, mobile and laptop. We could be seeing the start of a reversal of the trend towards the divorce of home and workplace identified by the historian Lewis Mumford in his 1934 classic, Technics and Civilisation. In financial services, as in many other professional or white-collar jobs, work attaches itself to the person, not the place.
These shifts will continue to work against London's primacy as a place, a three- dimensional city in geographical space. But if it can survive the plague and the Great Fire, industrialisation and the automobile, it can probably also beat off the challenge of cyberspace.
* "City of Bits", William Mitchell, MIT Press 1996.
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