The Flat White Economy
Douglas McWilliams
Duckworth Overlook, 256pp, £16.99
“Year after year the annual report of the Uganda Protectorate has referred, under the heading of industry, to a few large undertakings directly sponsored by the government,” wrote the economist W Elkan in 1959. “At the same time the multifarious development of furniture workshops, soap mills, tyre retreading plants, bakeries and brickfields has gone on largely unnoticed. An official who was once asked about Kampala’s industrial area said: ‘There are no industries there – only a lot of furniture works, bakeries, maize mills and soda
water factories.’”
Modern economies are complex and constantly in flux. As a result, understanding what is going on in them and where they are heading next is difficult. You might have thought that civil servants and the economists who work for them would have an advantage over the rest of us. In reality – as the story above shows – their preconceived ideas of what counts as “genuine” economic activity can generate blind spots even more egregious than our own.
There are exceptions. Douglas McWilliams, the founder of one of the UK’s leading economic consultancies, has spent his career trying to get at what is really going on in the UK through that most unfashionable of economic activities: detailed empirical research. In his new book, he shows how surprising the results can be.
His story starts with the resilience of London during the financial crisis of 2008. Many analysts thought that the crash would rebalance the British economy away from the capital. They were wrong.
In 2009, London’s output collapsed and house prices plummeted. But its recovery was exceptionally rapid. By 2013, employment was growing at 4.4 per cent a year. House prices were more than 10 per cent above their 2007 peak, while elsewhere they were still 10 per cent below. London has been leading the UK recovery, not slowing it down. Where did this renewed vitality come from? Rather like those Kampala soap mills, the answer, McWilliams argues, is staring us in the face – and we’ll see it as soon as we shed our preconceptions.
No one visiting east London over the past half-decade can have failed to notice that there are a lot of young people about. They have come from all over Europe and hang out in Shoreditch, Bethnal Green and the rest of the old “City fringes”. They ride bicycles, wear second-hand clothes and have elaborate facial hair (the male ones, anyway). And they drink a lot of coffee – often of the “flat white” variety.
Most of us rolled our eyes at this invasion of the hipsters and assumed, like the Ugandan official, that the real action must be going on elsewhere. McWilliams and his colleagues have crunched the numbers and found that the opposite is true. They argue that this influx of tech-savvy young people is a symptom of the flourishing of what they have termed the “Flat White Economy”: the dense network of digital marketing, computer programming, software publishing and video post-production businesses that have sprung up in and around Shoreditch since 2008. This is no lost generation of frugal fashionistas, in other words, but the economic engine of the future: less Nathan Barley, more Steve Jobs.
The statistics are striking. The Flat White Economy is big. Across the UK, the media, information and communication sectors account for nearly 8 per cent of GDP – the size of the car manufacturing and oil and gas industries combined. It is also growing rapidly. McWilliams reckons that its share of GDP will double over the next decade. Most impressively, though, it is extraordinarily entrepreneurial. Between 2012 and 2014, more businesses were created in the single London postcode of EC1V than in the whole of Manchester and Newcastle put together.
Why has the Flat White Economy taken off in east London quicker than anywhere else? It is all down, McWilliams argues in most orthodox fashion, to supply and demand. On the demand side, the UK is a unique environment for digital business because it has proportionately by far the highest level of online retailing in the world. One study projects that nearly a quarter of all UK retail will take place online next year – twice as much as in Germany and three times the level in the US or Japan. Britons love to shop online, generating a critical level of demand for digital marketing and advertising services.
On the supply side, meanwhile, McWilliams points above all to the availability of young, educated and entrepreneurial people from all over Europe (thanks to freedom of movement within the EU) who want to come to London not because it’s cheap or easy to live in, nor even because they can get rich there, but because it’s cool. It’s an analysis that, unlike a lot of dry economics, chimes with reality. Indeed, the eponymous flat whites prove the point: why else would anyone want to pay £2.70 for a cup of milky coffee?
There has long been a tendency on the left to disdain service industries such as those at the heart of the Flat White Economy as not quite the real thing – from Harold Wilson’s scorn for the “candy-floss economy” in the 1960s to Larry Elliott and Dan Atkinson’s 2007 excoriation of Tony Blair’s Britain as “Fantasy Island”. McWilliams makes a persuasive case that it was these industries that saved us from disaster after 2008 and hold the keys to our economic future. For questioning that prejudice alone, his book deserves to be read.
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