Pioneering spirit in the global city

The role of the City of London in British economic performance has been a burning issue from J. A. Hobson's Imperialism , at the start of the 20th century, to Will Hutton's The State We're in , at the end. A number of common tropes emerge: an attack on the pursuit of short-term gain at the expense of long-term growth, on passive rentiers collecting their dividends from overseas investment at the cost of investment in production at home, and a neglect of new technology for the lure of gentlemanly amateurism and leisure in the countryside. Unfortunately, this cultural critique has been confused with economic reality, and a closer inspection of the workings of the City of London and the British economy suggests a more interesting picture.

The critics of the City put merchant bankers at the centre of their account. These concerns moved away from direct involvement with trade to the provision of overseas finance and respectability through intermarriage with the landed aristocracy. They have dominated the writings of historians to a much greater extent than they dominated the City of London in the 19th and 20th centuries, and Geoffrey Jones's book should redress the balance. He shows that many merchants did not turn away from trade to become merchant bankers, merely supplying British funds to overseas markets without any control from home and without close links with the domestic economy. As he shows with considerable authority, many became multinational trading companies with a wide range of activities around the world. They might handle particular commodities such as sugar or copper in diverse areas of the world; they might diversify from one commodity in one area into a wide range of goods in that location; they might develop interests in services and transport; and they might take on production in plantations, mines and factories. The names of some of these concerns are still well known, for example Jardine Mattheson, with its interests in China; others are less familiar such as Harrison and Crosfield, one of the major trading houses in tea.

In aggregate, as Jones shows, they were a highly distinctive feature of the British economy. They emerged not only from the City of London but also from Liverpool and Glasgow. The imperial dimension of the British economy was not, as some historians would have it, the outgrowth of London and a non-industrial nexus of land and finance. It was closely connected with the industrial and domestic economy, with its demands for tea and cocoa, copper and rubber.

The neglect of these trading companies by historians and economists arises, in part, from their amorphous, loose form, which makes them less readily identified than the merchant banks, with their obvious presence in the City, in the upper levels of the social elite and on the court of the Bank of England. They have also been overlooked as a result of American models being a measure of rational behaviour and modernity. In the United States, it is assumed, multinationals emerged from production within the domestic economy. Highly efficient technology was transferred overseas and large concerns took over marketing and distribution, capturing the transaction costs within the firm. The distinctive pattern of British industrial production meant that large, multi-plant units were less likely to emerge at home and less likely to be transformed into multinational corporations. By taking the US as the norm, the characteristic form of British trading companies was rendered invisible or seen as outmoded. A case can be made, however, for their efficiency and flexibility. The companies developed their own styles of management culture and organisation.

In most cases, their fixed assets were not large, and they operated with other people's technologies, processes and brands. Their advantage rested on soft skills - on knowledge, information and human relationships. They acted as intermediaries between different regions of the world, with different cultures and methods of transacting business; they judged risk and reputation, and they created trust. Indeed, they might well have reduced the costs of transactions of information gathering and risk assessment much more effectively than multinational industrial concerns. The companies needed to develop this expertise by recruiting and retaining staff - which might involve socialising them into the concern rather than the highly bureaucratic forms of control of US multinationals. And the ownership structure was often complicated, based on interlocking partnerships and subsidiaries.

The implications of Jones's study of these concerns are wide ranging, shedding new light on the vexed issues of the relationship between the City and the domestic economy, on the nature of overseas investment and imperialism, on the nature of British management and on the role of trust and knowledge in economic performance. Perhaps the British trading companies can now be seen as pioneers in a global economy, with their skills in marketing brands and mediating between cultures, rather than as failures.

Martin Daunton is professor of economic history, University of Cambridge.