Anyone familiar with portfolio theory will know there is one very simple rule: run with your winners and cut your losers. It might seem obvious, but most investors do precisely the reverse. They sell their winners, thinking they need to take profits while they still can, and hang onto their losers, hoping they might finally come good one day. As a result, they end up with a portfolio stuffed with rubbish companies because they sell the successful ones and keep the ones that are failing. Instead, they should hang onto winners and sell their losers, so that they end up with a portfolio full of success stories, all making money.
Something similar is happening with Britain itself. We have a clear winner in London and some other parts of the southeast of England. Yet, just like a naïve investor, we punish that and focus on helping our losers – regions such as Wales, the northeast or Northern Ireland. The result is that we will end up poorer than we should be.
Every week brings more evidence of just how successful London’s economy has become. Last week, the Investec Top 100 list of Britain’s fastest-growing companies found that 30% were based in London and half in the southeast. Five of the top ten were based in the capital. Some were in the city’s traditional areas of strength, such as finance, media and business services, but others were in industries not especially associated with London – such as solar-panel distributor Alternergy, or sushi chain Wasabi. London is not just a city of bankers, lobbyists and global multinationals – it is increasingly a city of thriving entrepreneurs as well.
London’s share of Britain’s total economic output is now 21.9%, according to the Office for National Statistics. This is the highest proportion on record: the last time it was close to these levels was in 1911, reports economic historian Nicholas Crafts. Yet it manages that share of output with only 8.1 million people, or 13% of Britain’s total population of 62 million. And London only seems likely to get more and more dominant.
The number of active businesses in the city has risen by 11.5% since 2007, against just 1% for the rest of Britain. An extra 267,000 jobs have been created in London since the financial crash, against a drop of 284,000 in the rest of Britain. The number of active businesses is growing at an annual rate of 7.2% in London, compared with only 0.7% for the rest of the country. Locals might complain about how outrageously expensive London property has become, but no one is forcing anyone to buy or rent at inflated prices. People are doing so because London is creating lots of well-paid jobs. London increasingly has Chinese-style growth.
If you were a competent portfolio manager, you’d compare the performance of London and the southeast with the rest of Britain. You’d top up your holdings of London, and start selling off the Merseysides to anyone who was willing to pay you a half-decent price to take them off your hands. The trouble is, that is not what Britain has been doing. Instead, the discussion is all about ‘rebalancing’ the economy, as if the success of London and the southeast was a problem that needed to be fixed – and as if the other regions would somehow do better if the capital was not hogging so much of Britain’s resources.
But that is nonsense. London is not competing with Newcastle, Belfast or Cardiff. It competes with New York and Hong Kong. There are almost no companies in London that might decide to base themselves in Glasgow instead. If they were not in the capital, they would move to another country. And yet the government concentrates on the rest of Britain instead of London.
Public spending is far higher per head outside the southeast. Where subsidies and grants are available, they are directed at other parts of Britain. Very little money is spent on the capital’s infrastructure. The Crossrail line is finally being built, but the only other major infrastructure project – the high-speed rail link – is designed to help Birmingham and Manchester. There is no sign of the new airport that London needs – Heathrow is a tired, cramped hub for what is now the Hong Kong of Europe.
Macro-economic policy is little better. The Bank of England keeps devaluing sterling to try and revitalise manufacturing, although so far with little sign of success. But London does not need a cheaper currency to prosper. It is doing just fine as it is. A lower pound just makes everything it imports even more expensive. It would be far better off with a stronger pound than a weaker one. If London is this successful with so little care and attention, imagine what it could do if the government was prepared to help it out.
True, there might be social or political reasons for redistributing wealth from London. The southeast of Britain is already relatively overcrowded, and there may be limits to how many more people and companies it can cope with. The regions might go into freefall if they had less support than they did now – and that might create costly social unrest. But the current policy is equivalent to selling your winners and holding onto your losers. Just as in portfolio theory, Britain would quickly find it was more prosperous overall if it concentrated more on London – and let the regions decline if necessary.