In the course of time, stuff-directing profits became so significant that cadre of brains switched its focus from stuff-directing to profit-directing. Shall we call that 'money-directing'? Merchant banks that got going from lending money to merchants ascended to the more sublime business of helping merchants invest their profits and other money-directing activities ever further removed from mere stuff.
Still, until the 1980s, the UK economy continued to do plenty of stuff-making. The City was merely a big sector - probably more than a first among equals, visible for colourful characters making themselves rich, a favoured area of employment for the already wealthy, but not overwhelming. No one had heard of Goldman Sachs. Being a promising employee at Barclays meant being a young assistant bank manager. City salaries were perhaps twice as high as regional salaries.
Over the past 30 years, the City has grown to become overwhelming. And overweening. I am not going to quote you the City's share of GDP, which would be too specific to match my meaning. But you know where I'm coming from. Try this statistic (from a government report dated 2007): the gross value added per head of London population is two-and-a-half times the UK average. And that average itself was significantly pulled up by London's contribution (10 of the 11 other regions comprising the rest of the UK were below the average). Think of it like this: Londoners are three times as prosperous as everybody else; but that's average Londoners. City Londoners are probably 10 times as prosperous as everybody else. Goldman Sachs is so significant, huge and visible, that everybody has heard of it. Everybody. And Barclays doesn't employ assistant bank managers any longer (at least not in the old sense) because it wants to be like Goldman Sachs. City salaries are 10 times regional salaries. Careers geographically or functionally close to the City have been sucked into its biosphere.
Now, on the face of it, there is nothing particularly objectionable in any of this, at least not to me. Great prosperity is not of itself a sin. The leading lights of busy businesses should be wealthy. Capitalism may have been compromised over recent years, but I cannot imagine how a world in which successful endeavour did not hold the prospect of serious wealth would work.
But not far below the surface of the City lies a societal conundrum. The profits of rich merchants are now but a modest portion of the wealth managed by the cadre of brains. Instead of the large wealth of the few, the City's daily business is the management of the small wealth of the many. It's your Isa, my unit trust and her endowment policy. It's our pensions. Hedge funds are not investing their own money. They're not investing the money of rich clients. Well, they are but that's not how they have grown huge in the past 20 years. Hedge funds are investing money directed towards them by pension funds. Sovereign wealth funds; whose money is that? Definitely - to the extent that it's not raided by third-world kleptocrats - it's the money of the common man. Private equity? That, too, would be but a fraction of its current size if institutional investors had not directed our money into it.
And while the City and its biosphere advanced from just being prosperous 30 years ago to being bloated, it is doing very little for the rest of us. In fact, since the millennium the City has done basically nothing by way of advancing our wealth and arguably a great deal to diminish it. Pensions? Where did THEY go?
Well, they didn't entirely disappear down the City's maw. But the fact that the background music to their gradual decantation has been the soft, satisfied chorus of City burping sets the scene.
So a dilemma has crept up on UK policy makers. Should the savings industry serve savers? Or should it serve the savings industry? Dare anyone attempt to shift the balance? How would you do that? This week's Kay Report is a radical attempt to grapple with this problem. In fact, it's beyond radical. Having set the scene this week, I shall deal with the report itself next week.
