29 March 2015

CapX Reviews: Can the Flat White Economy save London?


  • A new book examines the impact of techies on London’s economy
  • Jobs in creative, digital and online industries have almost made up for those lost in the financial sector.
  • The Flat White Economy is neither a profit machine nor a provider of steady, well-paid jobs.

London at the end of 2008 stood as if on the edge of a precipice. In the four lean years that were to follow, 130,000 jobs in the financial sector – the goose that had laid golden eggs for two decades leading up to the crisis – would disappear, according to a study by the Confederation of British Industry. In 2009, 6% of the city’s economy would be wiped out, and house prices would lose a fifth of their value.

Yet from this most unpromising of starts, London bounced back. Unemployment rates remained surprisingly low and house prices began soaring again. Somehow, the crisis of capitalism didn’t lead to soup kitchens, but to a revolution in street food and a host of new restaurants. Having suffered worse than the country as a whole in the immediate aftermath of the crash, London’s GDP began to grow faster than other areas. The secret, according to the economist Douglas McWilliams, lies in something called the Flat White Economy.

Most of us by now have heard of the government’s efforts to promote Silicon Roundabout, or a Tech City stretching to a former Olympic Games site in Stratford, East London. But how best to define this mythical sector is harder to say. Indeed, it has become easier to define the sector by the people who inhabit it, the places they work, and the beverages they drink; hence the essentially digital, Old Street-centred, coffee guzzling industry, though Flat White Economy says it better. When it comes to the data, McWilliams uses several classifications, admitting that the jobs in question include most, but not all of those in advertising, computer consultancy and IT services.

If the boom in digital has become noticeable to the untrained eye through the growth of bicycles and coffee shops, the economic facts are still more startling. At 7.6% of the country’s GDP, the sector is a bigger part of the British economy than oil and gas or car manufacturing, McWilliams suggests. And by adjusting the sector’s GDP contribution to include software purchases, which are often chalked down as a short-term investment, he estimates that 40% of economic growth since 2008 has been driven by the Flat White Economy. Furthermore, the sector has added 120,000 jobs since 2008, almost making up for losses in the financial sector. Meanwhile, 32,000 businesses were created in the Old Street postcode over a two-year period to May 2014. As the sector bloomed, office rents in Old Street briefly eclipsed those in the City of London.

This is bracing stuff for those who still think – as Harold Wilson did in 1961 – that this is a “candy floss” sector, with little real value as an export. Indeed, McWilliams quotes a Deloitte study that suggests the UK exports £2 billion worth of advertising, while online shopping is expected to account for 15% of all retail this year. By the year 2025, McWilliams believes a third of the British economy will be related to the Flat White Economy – 16% directly and the rest through a multiplier effect. That could be an overstatement, based as it is on the assumption that digital firms are generous buyers of other people’s services, but the notion that this sector will continue to grow can hardly be doubted.

Naturally, politicians and business groups have begun to think about how best to protect this fortuitous economic advantage. TechUK, an industry body, has called for government intervention, investment and procurement. McWilliams, a more liberal economist with links to Conservative ministers, wants government to play a more limited role, allowing as much immigration as the capital can bear, subsidising tax cuts in the UK’s regions from London’s tax receipts, and intervening only to provide more housing and office space.

But the book, so clearly rushed out in order to influence May’s general election, could have benefitted from a slightly more thorough investigation. At one point, the author notes breathlessly that if all those 32,000 companies had employed ten workers, we would solve unemployment. Self-evidently, that hasn’t happened, and labour market statistics have suggested a surprising growth in self-employment. In particular, McWilliams could have looked to insolvency statistics for clues as to how successful the sector really is. Perhaps most importantly, McWilliams makes little attempt to engage with questions of economic equality, or the stagnant wage levels that have been prevalent in the UK’s economic recovery.

The Flat White Economy is promising, but it is neither a profit machine, nor a guarantor of a steady stream of jobs.

The Flat White Economy. Douglas McWilliams,  Gerald Duckworth & Co Ltd, RRP £16.99

Josh Black is a financial journalist.