Wanted, a new Canute

"Buy London and the southeast – sell Merseyside" says Matthew Lynn in Moneyweek.

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.

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.

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.

Yet another example of how improved population density makes us better off, but also an illustration of an observable effect that populations tend to centralise over time. This is nothing new. In the C19th, William Cobbett was railing against "The Great Wen", London, sucking all the life out of the countryside and leaving the towns and villages depopulated.

Regional centres themselves only grew at the expense of their hinterland and even in the hinterland the effect is visible, with villages that once supported a couple of shops, three pubs and a church now have none of them, the inhabitants now having to travel to a larger centre of population for these services.

What makes all this government "support" for the regions particularly pointless is that most of it is counter-productive. Billions has been spent in subsidies and grants that have simply ended up as higher rents and land prices. More billions have been spent on improved transport infrastructure, which simply ends up enabling the hub to compete more effectively with the rim.

Once the fast new road is built from Exeter to Barnstaple, for instance, all the businesses in Exeter can compete more effectively with those in Barnstaple for the local custom, whilst incoming businesses are more likely to relocate to Exeter, with all the benefits of being in a larger centre of population, if they want serve Barnstaple. So the millions of pounds spent on a new road to "help Barnstaple develop" has precisely the opposite effect.

The government needs a new Canute to show them the futility of opposing natural forces.