Keep it foolish: London’s “cool” has built an economy around tech-savvy young people. Photo: Wayne Tippetts/Rex
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Love or hate them, East London’s hipsters have fuelled a vast economy

Most of us rolled our eyes at the invasion of hipsters, but the “Flat White Economy” is flourishing.

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. 

 

Macroeconomist, bond trader and author of Money

This article first appeared in the 14 May 2015 issue of the New Statesman, The Tory triumph

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After Richmond Park, Labour MPs are haunted by a familiar ghost

Labour MPs in big cities fear the Liberal Democrats, while in the north, they fear Ukip. 

The Liberal Democrats’ victory in Richmond Park has Conservatives nervous, and rightly so. Not only did Sarah Olney take the votes of soft Conservatives who backed a Remain vote on 23 June, she also benefited from tactical voting from Labour voters.

Although Richmond Park is the fifth most pro-Remain constituency won by a Conservative at the 2015 election, the more significant number – for the Liberal Democrats at least – is 15: that’s the number of Tory-held seats they could win if they reduced the Labour vote by the same amount they managed in Richmond Park.

The Tories have two Brexit headaches, electorally speaking. The first is the direct loss of voters who backed David Cameron in 2015 and a Remain vote in 2016 to the Liberal Democrats. The second is that Brexit appears to have made Liberal Democrat candidates palatable to Labour voters who backed the party as the anti-Conservative option in seats where Labour is generally weak from 1992 to 2010, but stayed at home or voted Labour in 2015.

Although local council by-elections are not as dramatic as parliamentary ones, they offer clues as to how national elections may play out, and it’s worth noting that Richmond Park wasn’t the only place where the Liberal Democrats saw a dramatic surge in the party’s fortunes. They also made a dramatic gain in Chichester, which voted to leave.

(That’s the other factor to remember in the “Leave/Remain” divide. In Liberal-Conservative battlegrounds where the majority of voters opted to leave, the third-placed Labour and Green vote tends to be heavily pro-Remain.)

But it’s not just Conservatives with the Liberal Democrats in second who have cause to be nervous.  Labour MPs outside of England's big cities have long been nervous that Ukip will do to them what the SNP did to their Scottish colleagues in 2015. That Ukip is now in second place in many seats that Labour once considered safe only adds to the sense of unease.

In a lot of seats, the closeness of Ukip is overstated. As one MP, who has the Conservatives in second place observed, “All that’s happened is you used to have five or six no-hopers, and all of that vote has gone to Ukip, so colleagues are nervous”. That’s true, to an extent. But it’s worth noting that the same thing could be said for the Liberal Democrats in Conservative seats in 1992. All they had done was to coagulate most of the “anyone but the Conservative” vote under their banner. In 1997, they took Conservative votes – and with it, picked up 28 formerly Tory seats.

Also nervous are the party’s London MPs, albeit for different reasons. They fear that Remain voters will desert them for the Liberal Democrats. (It’s worth noting that Catherine West, who sits for the most pro-Remain seat in the country, has already told constituents that she will vote against Article 50, as has David Lammy, another North London MP.)

A particular cause for alarm is that most of the party’s high command – Jeremy Corbyn, Emily Thornberry, Diane Abbott, and Keir Starmer – all sit for seats that were heavily pro-Remain. Thornberry, in particular, has the particularly dangerous combination of a seat that voted Remain in June but has flirted with the Liberal Democrats in the past, with the shadow foreign secretary finishing just 484 votes ahead of Bridget Fox, the Liberal Democrat candidate, in 2005.

Are they right to be worried? That the referendum allowed the Liberal Democrats to reconfigure the politics of Richmond Park adds credence to a YouGov poll that showed a pro-Brexit Labour party finishing third behind a pro-second referendum Liberal Democrat party, should Labour go into the next election backing Brexit and the Liberal Democrats opt to oppose it.

The difficulty for Labour is the calculation for the Liberal Democrats is easy. They are an unabashedly pro-European party, from their activists to their MPs, and the 22 per cent of voters who back a referendum re-run are a significantly larger group than the eight per cent of the vote that Nick Clegg’s Liberal Democrats got in 2015.

The calculus is more fraught for Labour. In terms of the straight Conservative battle, their best hope is to put the referendum question to bed and focus on issues which don’t divide their coalition in two, as immigration does. But for separate reasons, neither Ukip nor the Liberal Democrats will be keen to let them.

At every point, the referendum question poses difficulties for Labour. Even when neither Ukip nor the Liberal Democrats take seats from them directly, they can hurt them badly, allowing the Conservatives to come through the middle.

The big problem is that the stance that makes sense in terms of maintaining party unity is to try to run on a ticket of moving past the referendum and focussing on the party’s core issues of social justice, better public services and redistribution.

But the trouble with that approach is that it’s alarmingly similar to the one favoured by Kezia Dugdale and Scottish Labour in 2016, who tried to make the election about public services, not the constitution. They came third, behind a Conservative party that ran on an explicitly pro-Union platform. The possibility of an English sequel should not be ruled out.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.