John Kay: The importance of history and geography

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The Peninsular and Oriental Steam Navigation Company was founded before legislation permitted the establishment of limited liability companies, and still operates today under the royal charter its self-made founders, Arthur Anderson and
Brodie Willcox, obtained when they won the lucrative contract to ship the Royal Mail to Britain’s eastern colonies.

The 20-year-old Queen Victoria could hardly have imagined that the business on which she bestowed these favours would one day be subject to rival bids from Dubai and Singapore, and that control of its activities might be transferred from Pall Mall – in the centre of London’s club land – to the Peninsula and Orient itself. Another demonstration, it would seem, of the globalisation of world capital markets and the rise of Asia. Not quite. When P&O was founded, India and China enjoyed a much larger share of the world economy than they do today and the world capital market was in important respects more international than it is now.

If there are economic historians around a few hundred years from now, what they will find remarkable may not be the relative rise of China and India in the 21st century, but the relative decline of these countries in the 19th and 20th. Two hundred years ago, no one knew what gross domestic product was, far less how to measure it. But painstaking research by economic historians, notably Angus Maddison, gives us estimates. China and India then accounted for almost half of world production. That was why imperial power and foreign trade, and P&O itself, seemed so important.

Perhaps the most important single event in modern world history is that in the late 18th century economic growth took off in western Europe and not in south-east China, in spite of the apparent similarity of technological and economic development and natural resource availability in the two regions. But, over the next 200 years, that fact transformed not only world politics but determined its economic shape. China and India’s share of world output would fall by half and their share of trade would be reduced even further. Western Europe and north America, with about 10 per cent of the world’s population, now account for about 40 per cent of its production. Most world trade is no longer along the routes that P&O pioneered, but is the exchange of manufactured goods around the northern hemisphere.

The London of 1840 was a centre not just of imperial power but of financial expertise. One city could serve the world because governments did not attempt to control capital flows or regulate transactions and exchange rates seemed as fixed as the number of pence in a shilling. But market making is one of the few industries in which first-mover advantages endure – as Ebay’s success would illustrate anew in the 21st century: people place business in the location where most business is placed. London continues to have a big role in ship broking and marine insurance even though Britain’s days as a maritime power are long gone.

London’s pre-eminence was eroded by the development of the US economy, which made New York an important financial centre, but also by general market expansion and the evolution of trade and currency blocs, which created a role for regional centres. Traders operated through ports: markets developed around them and, where there were markets, entrepreneurial traders bought and sold securities. Dealing rooms today often overlook great 19th-century harbours, as in Sydney and Hong Kong. Singapore and Dubai are centres of enterprise and capital for their surrounding regions.

History’s role in determining economic structures is known as path dependency. Much of the shape of modern business is the product of chance decisions made decades or in some cases centuries ago – where Captain Cook found an anchorage, where railroad magnates placed transportation hubs. Chief executives and business gurus often assert that the world changes so fast that the past is irrelevant to the future. That betrays a deep lack of understanding of the commercial world. History and geography are as important to business as they always were. Only the nature of the impact changes.

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