The obvious answer is because it's the City of London, dolt. But I mean, rather, why is the world's international financial centre, The City, in London and not in Paris, Frankfurt, Amsterdam or elsewhere?
There are those who would argue that it's a deliberate policy choice: "Maggie did it!" or some such. But that doesn't really fly, for we've had two great periods of globalisation, two episodes of the playing out of the international division and specialisation of labour, 1880 (ish)-1914 and the last 30 odd years. Both times the comparative advantage of London has been that very global finance bit, both times Germany has done the heavy industry, the capital machinery bit.
And it's not true either that the UK economy is overly reliant upon finance. The domestic finance industry is broadly in line with that of other similarly advanced economies. It's that we've got that international bit, our largest export sector, The City, on top as well.
So what is it that causes this? What is the comparative advantage that we've got? Do note that comparative (as opposed to absolute) advantage is not about what we do better (or worse) than others. It's about what, of the various alternatives available to us, are we least bad at? We might be better than Germany at both manufacturing and finance: we could be worse than them at both. But if we are better at finance than we are at manufacturing then we should still specialise in finance, sell that product and buy the machinery elsewhere.
My suspicion has long been that it's the legal system we've got. Personal experience plays a part here, I've been involved in a little business adventure in recent months. To set up a UK based legal structure took 7 days (including postal times) and cost £20. The sister structure in Portugal, well, it's 3 months and €3,000 so far and the clock is still ticking. Given that finance is a massively innovative business (even if not all of the innovations are all that desirable) perhaps the speed and effciency with which you can experiment within the commercial legal structure in the UK helps to explain it?
Recent finance scholarship finds that countries with legal systems based on the common law provide better investor protections and have more developed financial markets than civil law countries.
So it would appear that I'm right then, at least in part. There really is a correlation between the Common Law and developed financial markets. So it shouldn't be all that surprising that the home of that Common Law becomes the home of the international financial markets. It's a possible (although not necessary or pre-ordained) result of the playing out of our comparative advantage.
However, there is a slight fly in the soup here:
These findings echo Hayek’s claims of the superiority of English to French legal institutions.
Once again, when I think I've come up with something interesting I find that someone's beaten me to it. The things I manage that are original seem to be less interesting.