The Medici effect is real in levelling up

It has been a couple of weeks since the publication of the levelling up white paper. The initial reaction involved some piss-taking at references to ancient Jericho and Medici Florence, together with scepticism about how the 12 perfectly laudable “missions” can be achieved without additional funding. But it is worth looking at the whole document, all 300 pages of it, because it says many sensible things

The document is the work of Andy Haldane, who gets joint billing on the preface with Michael Gove. He is a former chief economist at the Bank of England, and his analysis of the problem is spot on. The solutions are perhaps less convincing, but then again that is because they are not easy.

The joint preface says that “while talent is distributed evenly across the UK, opportunity is not”. The authors consider levelling up to be a mission “part economic, part social, part moral – to change that for good”.

The first part of the report documents these geographic disparities with maps showing productivity, income, skills and health. The most affluent parts of the UK also have the highest skills and the best health – and the gap between the richest and poorest areas is both wider than in other OECD countries and widening.

The only measures to buck the trend are life satisfaction and disposable income. Here London does particularly badly, causing the report to say that “the costs of spatial inequality are experienced in London as well as struggling areas”. Poor them.

The pattern of spatial inequality is both big picture and very local – a fractal pattern that repeats at different scales. The north does less well than the south; industrial towns, coastal resorts and peripheral rural areas do particularly badly; and then there are pockets of intense deprivation in cities not picked up in the local authority averages.

Traditional economic theory predicts that low- and high-growth areas should converge as capital seeks out lower costs. The problem is that spatial disparities are very sticky and go back a long way

These “second cities” like Manchester and Birmingham may appear to be doing well but underperform badly compared with similar cities in other countries. This is partly because of London’s dominance but also because of poor transport infrastructure and insufficient density of population to trigger the “Medici effect”.

So, what is this magical effect and how does it work in terms of levelling up? Right at the beginning, the report quotes Joseph Schumpeter’s idea of “creative destruction”. Economic cycles mean that some places rise while others fall. The fall is painful and needs to be mitigated for the people affected, but in the end it allows places to be reinvented. Much later, the report explains that traditional economic theory predicts that low- and high-growth areas should converge as capital seeks out lower costs.

The problem is that spatial disparities are very sticky and go back a long way. Traditional economic theory is clearly wrong: what we need is “new economic geography”. I have written previously in this column about the work of Geoffrey West, who demonstrates how cities become more efficient as they grow, while the opposite is true of companies. The report doesn’t reference West’s work but makes the same point: economies of scale, agglomeration, diversity of activity and density of people is what drives growth. These are complex systems, and the recipe is more important than the individual ingredients. This is the Medici effect.

It means that successful places are steaming ahead while others are being left behind. The cycles of growth and decline predicted by economic theory have got stuck. The winners continue to win while the left-behind places are in a vicious circle of decline. The question is how we break out of this pattern.

Back to economic theory: the report quotes Krugman’s maxim that a place’s “ability to improve its standard of living … depends almost entirely on its ability to raise output per worker”. This is achieved through physical capital (investment in machines, infrastructure and housing) and human capital (training, skills and knowledge). To these the report adds intangible capital (innovation and ideas), financial capital (access to money), social capital – (community structures) and institutional capital (the quality of local leadership). The last includes a welcome recognition that “the depletion of civic institutions, including local government, has gone hand in hand with deteriorating economic performance”.

These six types of capital hold the key to turning around left-behind places. The report develops them into five pillars and 12 missions. There is not the room in this short column to review the recommendations, and in any case they have been well covered by others, but the analysis is sound.

The problem is how to change things when it requires “rewiring Whitehall to put place at the heart of decision-making”. For all the talk of moon landings, the problem is that a strategy that requires everything to change generally means that nothing will – but we can always hope.