Nick Shaxson ■ Twenty reasons to shrink your financial centre


(Cross-posted with

The Finance Curse is a concept first developed by the Tax Justice Network. It is a relatively simple idea — and also an original and powerful multi-level critique of the modern global economy.

The core message is “too much finance can make a country poorer,” and this article explains why this is so, by framing the issue in simple terms. (It complements this page showing over 20 academic studies which support the proposition that “too much finance can make you poorer.”)

All this has geographical, racial, gender, and disability-based implications, as laid out here.

1. Shrink Finance to boost prosperity

We all need good finance. A financial sector has a useful core surrounded by a toxic, predatory part. This should be entirely uncontroversial, especially following the global financial crisis.

It seems sensible, then, to shrink finance down to its useful core. A fast-growing strand of academic research, known as Too Much Finance, backs this up.

2. Wealth Extraction vs. Wealth creation

This is closely related to Point 1. The bad part of finance is engaged in predatory wealth extraction, as opposed to the good part, which supports wealth creation (and other socially useful ends.)

It is nearly always the most privileged interests who profit from wealth extraction, while the least privileged tend to be those being extracted from.

Examples of wealth extraction activity include monopolisation of markets to squeeze more from consumers or workers; the use of tax havens to shift the tax burden onto others’ shoulders; Too-Big-To-Fail banking that allows bankers to enjoy the winnings from risky behaviour while enjoying taxpayer-funded bailouts when crisis hits; or financial engineering via tax havens, to extract from other taxpayers.

Other terms that have often been used in this context:

  • Makers vs Takers; or Producers vs. Predators;
  • A US beef farmer I spoke to calls the pillage of US agriculture by giant financialised firms the “Tapeworm Economyand “a mining extraction operation that leaves nothing behind.”
  • An article in The Guardian about the Finance Curse says: “other parts of the economy have struggled to survive in [finance’s] shadow, like seedlings starved of light and water under the canopy of a giant, deep-rooted and invasive tree.”
  • As explained in Time Magazine, large piles of wealth amassed in a financial centre are “like the over-inflated Hoover-bags of wealth-sucking vacuum cleaners: not a sign of prosperity, but the flip side of extraction elsewhere.”

This framing provides exceptionally rich research material, into the many different mechanisms of financial wealth extraction. (For example, here.)

3. Cuckoo in the nest

The Finance Cursebook explains:

The City of London likes to portray itself as the goose that lays the golden eggs. In reality it is a different bird: a cuckoo in the nest, crowding out and killing other sectors that could have made Britain more prosperous.

We’re feeding the wrong bird

Studies have sought to quantify the damage of oversized finance. Here’s one, estimating that the excess size of Britain’s financial sector inflicted a massive £4.5 trillion cumulative hit to British GDP from 1995-2015, which includes the period of the great financial crisis. It explains:

A similar calculation estimated a $13-23 trillion hit to the United States from 1990-2023. These costs are due to misallocation of resources, excess “rents” due to the financial sector, and financial crisis.

4. The tax haven comparison

Tax havens are financial centres that transmit harm outwards, elsewhere, offshore, to other countries. It harms foreigners: “This hurts them.” The Finance Curse, by contrast, transmits harm inwards, to one’s own country. “This hurts us.”

This article in The Guardian, and a longer article for the IMF, both written by a TJNer in 2019, clarify the issue and offer pointers for action.

This frame also helps clarify the boundaries of the finance curse concept. Tax havens certainly do hurt or ‘curse’ people elsewhere, but that’s not strictly part of the finance curse.

5. The Resource Curse comparison

The Finance Curse concept originally emerged from discussions between John Christensen, a former Economic Adviser to the British tax haven of Jersey, and Nicholas Shaxson, then an expert on the “Resource Curse” afflicting many countries whose economies are dominated by oil or minerals or natural resources. Likewise, the Finance Curse afflicts countries with a dominant financial centre.

The key misunderstanding around the Resource Curse is that these countries are poor because elites are stealing all the money. That does happen, of course, but the deeper understanding is that many of these countries are even poorer than if they’d never discovered any natural resources. It also leads to what’s known as “path dependence,” as other sectors wither, leading to a problem known as ‘putting all your eggs in one basket.’

As the “too much finance” literature shows, finance has similar effects.

There is a large overlap between the two “curses,” both in terms of the causes, and the effects: a similar “brain drain,” a “Dutch Disease,” recurring volatility and crises, rent-seeking (or wealth-extraction) dynamics, state capture by private interests, and plenty more. To understand more, see Section 1.0 here.

6. The Telephone Comparison

We need finance, but the measure of its contribution to our economy isn’t whether it creates billionaires and big profits, but whether it provides useful services to us at a reasonable cost.

Imagine if telephone companies suddenly became insanely profitable and began churning out lots of billionaires, and telephony grew to dwarf every other economic sector—yet our phone calls were still crackly and expensive and the service unreliable.

We’d soon smell a rat. All that wealth, and all those telephone billionaires, would be a sign of sickness, not health. (This analogy comes from here.)

7. The Paradox

Another way to frame the finance curse is to couch it in terms of an apparent paradox, which is is that more money or “too much finance” makes you poorer. This again overlaps with the Resource Curse above, sometimes known as the Paradox of Poverty from Plenty.

This also connects with the point that a large portion of finance is wealth-extracting rather than wealth-creating, as Point 2 outlines.

8. Financialisation

This is a term preferred by academics, which overlaps heavily with the Finance Curse. Different people offer different definitions: perhaps the best-known comes from Prof. Gerald Epstein:

“the increasing importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its governing institutions, both at the national and international levels.”

Financialisation essentially involves two trends, particularly marked since the 1970s. First, the growth in size in the financial sector. Second, the increasing penetration of financial techniques, tools, and especially debt into different parts of industry, agriculture, caring professions, and many other parts of the non-financial economy, so that they increasingly resemble financial actors. This involves wealth extraction and is justified by the shareholder value revolution.

This infographic gives just one example of what the second aspect of financialisation looks like. A wealth-extraction pipeline.

9. Shareholder value.

From the 1970s, intellectuals led by Milton Friedman and Michael Jensen argued for that corporations should no longer be run for the benefit of a range of stakeholders (owners, employees, communities, taxpayers, the environment etc.,) but instead should have a single-minded focus on maximising wealth for owners.

This way of thinking encapsulates the ideology behind the giant shift towards wealth extraction on behalf of shareholders since the 1970s. (The shift is described and illustrated in the Private Equity chapter here.)

10. Mafia

The supporters of “more finance” say that the financial sector creates large numbers of jobs, tax revenues, trade surplus, and so on. (For example, here.) For many if not most people, that’s the end of the story.

But one could make the same fallacious argument about organised crime. Mafia-owned businesses create jobs, pay taxes (sometimes!), contribute to exports, and so on. But that is not to say that the Mafia is a good thing. Ideally we want to keep the businesses, but take the Mafia out of them. Similarly, we want to de-financialise our economies.

(We’re not saying here that the financial sector is necessarily like the mafia, though parts of it may be. We’re merely making an analogy, to aid understanding.)

11. Net versus gross

This is another way to challenge the false claims about a financial sector’s alleged contribution to the economy that hosts it (such as those published by TheCityUK) – this many jobs created, that many taxes paid, and so on. These figures they like to put about represent the sector’s gross contribution to the economy.

But the gross benefits are meaningless when it comes to making sensible policy. We need the net contribution. That is, the benefits minus the costs of oversized finance. Here’s one publication that lays out the net contribution.

12. Optimal financial sector size

This is one of several graphs published by the IMF, the Bank for International Settlements, and others. The basic relationship is that a country’s financial sector has an optimal, growth-maximising size.

They recognise that if a country’s financial sector gets too big, it turns predatory and further growth in finance reduces that country’s economic growth. (For more such graphs, see here.)

This graphic, from finance Prof. Gerald Epstein conceptualises the difference another way.

Point D is where an economy would be if there wasn’t a financial sector: little more than subsistence farming. Point A is the optimal point where growth would be maximised, with an optimally sized financial sector serving its useful roles. Point C is where the economy currently is. (Point B is merely an effort to separate out the effects of crisis from other effects.)

For more on this, see here.

13. No trade off: it is not democracy versus growth

Many people labour under a misguided belief that there is a trade off between democracy and prosperity. As in: “If we tax and regulate finance and big business too much, we’ll lose jobs in the City of London and Wall Street.” Better give the capitalists freedom to do what they do best, even if it’s unsavoury. They pay our bills, after all.

The Finance Curse shows us that there is no trade-off. If we tax and regulate the financial sector as democracy demands to curb predatory activities, the finance curse tells us that this shrinkage of the financial sector will make us more, not less, prosperous, as those studies in Section 3 suggest. This is especially true in larger economies. It’s a win-win.

This means that the Finance Curse carries an enormously hopeful, positive message.

14. The pie

This is closely related to the “No Trade Off” point above. Many people think that if we redistribute the pie more fairly, we’ll shrink the overall size of the pie, and it will discourage or frighten away investment.

The finance curse shows that this is incorrect. If we redistribute the pie more fairly by curbing wealth extraction and shrinking finance back to its useful core, we’ll grow the pie. This is the ultimate win-win.

When resources are shared less fairly, the pie is smaller.
The finance curse helps show why.

This links the finance curse to debates about inequality, and to another strand of research showing that more unequal countries grow more slowly.

15. London is not the engine of the British economy

This geographical point applies to many countries, but London is the clearest example because it is unusually dominant.

It is widely believed in Britain that London is the “engine” of the British economy, generating jobs and tax revenues that subsidise other parts of the country. Evidence is wielded to ‘prove this.’

But once we consider wealth extraction, the picture changes. Wealthy parts of London are the headquarters for large wealth-extraction machines (such as illustrated in Point 8 above.) London is quietly receiving rents extracted from other parts of the country, even as tax revenues redistribute some of those rents back to the provinces. As one analysis puts it:

“Can an oversized City of London and the rest of Britain prosper alongside each other? Or, for the regions to prosper, must the City of London be humbled?”

Further reading: Metropolitanisation of gains, nationalisation of losses.

This geographical aspect is, of course, relevant to most countries. U.S. farm economies, for instance, are being extracted from, with the losers in the U.S. Midwest (for example) and the winners in financial centres like Chicago, New York and offshore. And yet there’s a wide misperception that it’s the metropolitan elites that are supporting US farmers. And it is a very dangerous misperception.

16. Race to the bottom

When one country enacts a secrecy law, a tax or financial regulatory loophole, or an environmental free pass, to stay ‘competitive,’ others may follow suit, to “stay in the global race.” A race to the bottom ensues. The result is ever lower taxes and rules and regulations on mobile billionaires and corporations, leaving the rest of us to pick up the consequences. This hurts both ‘us’ and ‘others’, overseas).

This is closely related to questions of “national competitiveness,” below.

17. The Competitiveness Agenda

This is a way to talk about the Finance Curse’s global dimensions, and how they hurt the country hosting oversized finance.

We’re told our countries must ‘compete’ and be ‘competitive,’ or the money will run away to Hong Kong or Geneva or London. We need a ‘competitive’ tax system, they cry, and we need a ‘competitive’ financial centre.

It sounds great! Motherhood and apple pie! Who wants to be ‘uncompetitive.’? This is a potent ideology.

But what do these c-words mean? Countries aren’t anything like companies, and the two forms of competition are utterly different beasts (to get a first sense of this, ponder the difference between a failed company, like Enron, and a failed state, like war-wracked Syria or Venezuela.)

National competitiveness can have many meanings, but the finance curse unpacks the most virulent strain: the Competitiveness Agenda. In a nutshell, this Agenda tells us to hand tax cuts, subsidies, lax regulation, tolerance for monopolies, or for too-big-to-fail banks, or giant agricultural firms, so they can compete on a global stage. In short, we must extract wealth from our society, from ordinary people, and hand it to big banks and multinationals, so as to be “competitive.”

Yet it is easy to see the flaw in this agenda. A more ‘competitive’ economy in this sense will increase the role and size of finance, which the finance curse tells us will reduce growth and cause other harms. So when they call for a more ‘competitive’ tax system, we should do exactly the opposite, to increase prosperity.

The good news is that the Competitiveness Agenda is an intellectual house of cards, ready to fall. Understanding the Finance Curse and how to tackle it provides great hope and vision for the future.

Note: other c-terms include “Open for business” (which means ‘favouring handouts to multinationals.’) “We are in a global race.”

Further reading: the chapter on Charles Tiebout, here.

18. Sabotage

This concept was originally used by the Norwegian-American thinker Thorstein Veblen, who argued that financial sector players engaged in the “conscientious withdrawal of efficiency” so as to sabotage (or rig) markets in their own favour. Their prime tool is via ownership of “industrial” systems, and any “disturbance” in these systems provides “differential advantage” to some (and disadvantages to others.) The distribution of gains and losses depends from such disturbances depends on how the structures of (financial) ownership are set up.

The saboteur-financier is not merely a tollkeeper, sitting at a river dock extracting fees from those who wish to land and trade – but someone who deliberately makes the river narrower, forcing the entire river trade to pass through the chokepoint, multiplying profits, but squeezing commerce.

To promote prosperity, then, we need to end the financial sector’s sabotage.

Further reading: The “Sabotage” chapter in the Finance Curse book explains more, as does this paper, and a forthcoming book by the paper’s co-authors Ronen Palan and Anastasia Nesvetailova, to be called, well, “Sabotage.” (Veblen’s Theory of the Business Enterprise is not for the faint-hearted.)

19. Gravitational Pull

The damage inflicted by an oversized financial centre on the country that hosted it is significantly a result of deliberate financial wealth extraction, but not only so. Other factors abound, such as the “brain drain” sucking talent out of other sectors, and a tendency for the financial sector to suck in public spending, and for policy makers (very often living in close proximity to the financial sector) to fall under its cultural and political sway.

Not only that, but financial centres often suck in investment for themselves, at the expense of the mainstream economy. Here’s a startling picture from the real world, illustrating the excess bloat (source.)

20. Unilateral action is possible

A lot of people who want to “do something” about the race to the bottom focus on setting up international agreements to stem it.

In this context, collaboration is good, if you can get it. But this is hard: like “herding squirrels on a trampoline,” especially when certain countries behave as if they have the incentive to cheat. People feel conflicted, as in ‘we hate undermining poor countries, but (whisper it softly) we like the dirty money coming in.” It’s also hard to get large numbers of people onto the streets to support complex collaborative schemes to help foreigners. So the pushback is feeble.

The Finance Curse, however, offers a completely different approach, because it appeals to selfish national self-interest: “this hurts us.” Once we understand this, then the brakes are off, and we can start really cracking down on this stuff.

And this changes everything.


The Finance Curse is a deep, rich and powerful tool, not just for analysing and understanding many of the most pressing complex economic issues of our time, but also for presenting these to a wide public in a simple way, and providing pointers for deep and widespread reform.

We hope this contributes to public understanding. We’ll amend or add to it as time goes on, and store it permanently on our Finance Curse page.

This blog is cross-posted at

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