The Hidden Damage of Brexit

On the 29. March, the UK is suppose to exit from the EU. That day is not very far away, and yet it is still not clear how exactly this exit is going to happen. Possibilities range from a clean, no deal break, to no Brexit at all, and everything in between. As I argued in my last piece, I expect there to be a very soft Brexit. Either the UK or the EU is going to give in to a compromise at the last minute. But there is a possibility that either side is so afraid to make concessions that we are going to get a clean break.

A lot of people seem to be very frightened by that possibility. We are being bombarded with horror scenarios in case the UK will “crash out” of the Union. The most pessimistic ones are even predicting an outright breakdown of the economy, with shortages in important products like food and medicine. But how much is there really to these negative predictions? Are we dealing with genuine concerns, or is this a deliberate “project fear”?

Of course, governments can cause a lot of damage to the economy, no question. In fact, most of what governments do is damaging. But if economic history has taught us anything, it is that market are robust systems. We are always getting the combined wisdom and luck of all participants. It takes a hell of a lot of interventions to visibly disrupt markets.

A majority of the damage caused by governments is not directly visible. Yes, regulations and taxes are damaging the economy, but most of the damage comes in the form of misallocating resources.

This misallocation has two effects. On the one hand it causes an artificial boom in certain industries. If, for example, we are going to get more tariffs then this will cause a boom in people dealing with the bureaucracy of these tariffs. This is the most visible side to the intervention. Usually, most people do not perceive this to be a problem. After all, what they see is that jobs are being created. What could be wrong with that?

What is wrong with that is that the resources being used to create these jobs are not available for the real needs they where suppose to satisfy. This is the damage side of the regulation. Unfortunately, this damage side is not very visible at all. We do not easily see the opportunity costs that are lost from a government intervention. The great 19. century economist Frédéric Bastiat already described this phenomenon in his famous article “That which is seen, and that which is not seen”.

Libertarians know this phenomenon all too well. The fact that the damage is not easily visible is the main reason why it is so difficult to argue against government interventions. Theoretical arguments like this are not very persuasive. At the very least, they are less persuasive than to argue that visible jobs are being created. Arguing against job creation appears to be cruel. In addition to that, the interventionist argument is also being supported by a number of economists at Universities. These academics think they are very smart by showing the visible side in statistics to “proof” that government interventions work. In reality they are clueless.

Strangely enough, it is a lot of the usual interventionists who are now hysterically pointing out the destructiveness of government interventions. Be that as it may, there can be no doubt that Brexit has and will cause economic damage. Tariffs and access barriers are a big disruption to the free flow of markets. If Brexit is going to be a long term economic success, the UK government will have to use it to abolish more barriers and regulations than Brexit creates. Given how protectionist the EU is, this, in principle, should be easily doable. But we are talking about governments here. Nothing is easily done with governments.

In the short term however, there is no way around Brexit causing some economic disruption. In fact, we have already seen quite huge damages since the 2016 vote. The value of the Pound fell by over 15%! That is a hell of a move for a major currency. It means every asset valued in Pounds has lost at least 15% of its value, an enormous damage for the UK.

In addition to that, since the referendum, all international businesses with activities in the EU had to reallocate resources to plan for the exit. And since May’s government was unable to lay out a clear plan for its Brexit strategy from the beginning, or really at all, businesses had to plan with an additional amount of uncertainty. Nothing is more destructive than uncertainty for a business. Consequently, this too has added a lot of unnecessary damage.

How much of that damage was visible though? Sure for people who buy a lot overseas or run an international business, it has been very visible. This however, is a minority of people. The average person in the street probably has not noticed much of it. That does not mean they were not effected, it just means they did not notice.

Here is where the no deal horror scenarios get it completely wrong. They are not wrong that Brexit has and will cause damage. At least in the short term, it will! But where there are wrong is that this damage will be very visible to most people. In fact, we have probably already seen most of the damage. Sure, in the last 2 ½ years, businesses had to put resources into planning the exit. This damage, however, is probably mostly done by now. Going forward, we are unlikely to see anything close to the disruption we saw in 2016.

I am always amazed how good markets are to solve problems. Like many libertarians, I have expected the economy of most western countries to collapse under the burden of welfare states and central banking by now. It has not happened. I still think it is going to eventually, but I have clearly totally underestimated the ability of markets so solve problems. Somehow, entrepreneurs always seem to find new ways to optimize wealth creations and get around regulations.

The fact, for example, that we still have car manufacturers, able to produce cars profitably, is nothing short of a miracle. This industry has been bombarded with a constant tsunami of new regulations, and yet they have not drowned in it.

That is not to say that governments are incapable of breaking the economy. Markets are not indestructible. We have seen many governments succeeding in causing an almost total collapse. The most resent example is Venezuela. Chávez declared an outright war on the market. Nevertheless, it took the openly socialist government in Caracas a number of years before the economy finally completely broke.

A lot of damage has to accumulate for it to become clearly visible. And by the time that happens, the connection between interventionism and the decline in wealth is not that obvious anymore. Governments often have no problems blaming the damage on the market rather than their own doings.

That is why many libertarians almost long for a collapse of the system. Not because they are cruel and want to see people suffer. But only if the damage becomes visible enough, we will be able to win the argument against interventionism. At that point we could finally move to a better system.

Realistically, however, even if we get to that point, we will only see the state being moved back just enough to make the damage less visible. Once the damage is reduced enough, interventionism continues to triumphs again.

The same will be true for Brexit. Don’t expect there to be too much visual disruptions of a no deal. I know, the remain crowd longs for big Lorry queue and empty supermarket shelves. Not because they are cruel, but because they want to be proven right. But even though, at least in the short term, they are right, they are not going to be visibly proven right.

For that to happen, governments would need to decide that they want disruption. They would need to actively decide to control every Lorry, and take their time doing it. But that is unlikely to happen, given that this would cause enormous damage to both sides. The political pressure to not do that is significant, and most likely bigger than the gain from visible disruptions.

But even if it happened, that would just cause lorry queues. There is almost no chance of product shortages in the UK. While there might be a very small possibility that the EU will decide to actively disrupt the flow of goods, there is not much incentive on the UK side to do that when it comes to imports. The UK government has a strong interest to make Brexit look like a success. So they are going to let the goods in, unchecked if necessary. Many Tories have already said that they would take unilateral measures to ease import disruptions.

The only imports that No.10 seems hell bound to disrupt is immigration. Theresa May has declared that she will do everything to stop foreigners from coming in large numbers. And unfortunately, she will probably succeed. Meaning, that particular disruption is mostly still ahead of us. But again, it won’t be that visible for most people. Brexit is only as good as the government that does it. And the UK government is pretty terrible at the moment.

Explaining The Democratic Brexit Chaos

The last 2 ½ years, since the UK decided to leave the EU, have been quite a political journey. Not a good one, but an interesting one. Much can be learned about politics observing this spectacle. As a libertarian, I know that politics is useless when it comes to solving problems. I also understand that it is very difficult, if not impossible, to reduce the size of the state.

States are like gigantic machines that keep on moving into one direction, no matter what lies in their path. Most of the time, the only thing that can keep them from growing is when they reach the point where their sizes suffocates the ability of society to function. Not that there is an inherent moral limit to stop growing at that point. But if society cannot function, it also cannot produce enough resources to fuel the machine. And so, like any machine running out of fuel, it has no choice but to slow down.

From a libertarian point of view, Brexit is an opportunity to shrink the size of one state, the EU, before it starts to suffocate society. But even shrinking the size of a state like the EU, which has no army, no police and no taxing power, turns out to be very very difficult indeed. Even just leaving seems difficult.

One reason for that is that not everyone who wants to leave the EU is motivated by liberalism. It has long been clear that there are two very different groups of Brexiteers. One group wants to get rid of the control of Brussels and replace it with nothing. They want open borders for goods and people. The other wants to gain back control from Brussels and give that control to Westminster. And we need to be honest about this, the latter group is far bigger than the former.

What we have seen in the last two years is a demonstration that democracy is not in itself freedom. The process of politics remains to be a civil war between different groups of interest. The only accomplishment of democracy, and why it might be worth having, is that this war stays largely cold rather than hot. The loosing party is encouraged to accept their defeat and continue fighting peacefully in the next election.

Many people do not perceive the democratic process to be a war. I bet that has changed since the referendum. This has caught many by surprise. As far as I can tell, there are two reason why the condition of a cold war has become more apparent. The most obvious one is that the change proposed is larger than usual. It is so large that the loosing site will not be able to simply reverse the decision in the next election. But the prospect of another battle in the imminent future is a major motivation to convince the losers to keep the war cold and civilized.

The other reason which makes this war messy is that it is complicated. The two war parties, remain and leave, are roughly the same size. In addition to that, the two camps are split on major issues themselves. As far as I can tell, there are at least five different interest groups in this battle.

Firstly there is the camp of liberal Brexiteers. Their main interest is to just get out of the EU. Their motivation is big picture politics. The EU needs to be stopped before it really starts to suffocate everyone. Since this is all about the long term future, this group is not too concerned with the short term disruptions the exit might cause. In the long run, leaving will be better for everyone. I am personally, very much in this group.

Secondly, there is the Brexit camp that likes protectionism. They want a strong state, as long as they see themselves in control of it. A lot of them have the strongest opposition to the most liberal aspect of the EU, like free movement. But they are mostly interested in specific issues, and not so much in the big picture. A lot of them are perfectly willing to make compromises with the EU, as long as their issue of interest is fixed.

Then there is the group of EU enthusiasts. Ironically, this third group is probably the biggest one. There are a few libertarians in this group, who mainly like the EU for its enforcement of free movement and opposition to nationalism. The waste majority of people, however, like the EU precisely because it is a giant state. They love the state.

They understand full well that we live in a world of global markets. Shutting oneself off from these markets will have bad consequences. But allowing these markets without global governments will weaken the state very much. Producers and taxpayers can move flexibly. They will play those little nation states against each other like a fiddle. Consequently, the ability to do politics will be weakened significantly. Forget about high taxes and welfare expenditure. Their argument for the EU is essentially mine against it.

Ironically Theresa May, and most of the Tory party, is in this third group. May in particular really loves a powerful government, the bigger the better. She clearly believes that less state control equals more chaos, and negotiates with the EU in that spirit.

The fourth group is a group of remainers around the labour leader Jeremy Corbyn. Just like the third group, this group loves the state. But unlike them, Corbyn does not understand the huge benefits of global markets. He things he can beat globalism by organizing the national economy from the top.

In other words, this group is really very much like group two. However, for political reasons, it pretends to be in group three. Corbyn very much wants to get out of the EU. But since he is in the opposition, he cannot say that openly. His interest, therefore, is to not disrupt the Brexit process to the degree that Brexit won’t happen. At the same time, he has an interest in making the government look as incompetent as possible, in order to provoke another general election.

Lastly, there is a very bizarre fifth group. It is small but significant. It is an interest group in Northern Ireland. They are hardcore UK nationalists, but ironically, that does not make them Brexiteers but strong supporters of remain. I am sure I will not have to explain the details of this, as my readers will know. Despite its size, this is really the most disruptive group. There truly is no logical way, how the UK can genuinely leave the EU without a border in northern Ireland. The only possible solution is an officially existing border which is practically not enforced, and therefore stay invisible.

So, to sum up, we have a battle in which the loser cannot hope for a second chance in the near future; we have five different major interest groups with very different agendas, neither of which has a majority; and on top of that we have an EU enthusiast in charge of Brexit and a Brexiteer in charge of opposing the process. What could possible go wrong?

Looking at the situation, the most reasanable outcome is a giant compromise. Every group will have to give a little and take a little. If we assume a fair compromise, we can expect the reasult to be 20% liked and 80% hated by each group. In reality, it won’t be a completely fair compromise. But by and large, theoretically, the most likely outcome of this is a compromise that almost no one likes. And it looks very much like that is exactly what we are going to get. So the political model described above seems to represent reality well.

That is not to say that Theresa May did a good job. There certainly could have been a better deal with a more competent negotiator. But then, the fact that we have such a bad negotiator also is an outcome of the political process. That means it is not entirely accidental either. In a democracy, a leader needs to be elected. And in this process, all the different interests that I described above come into play. So instead of expecting the leadership to be won by some idealistic Brexiteer, we should expect someone to win who resembles a ruthless pragmatic compromise that no one likes. Which is what Theresa May pretty much is.

Still, the analysis above is not entirely accurate. With the current deal on the table, the liberal Brexiteers don’t really get 20%, they get pretty much nothing. The deal essentially agrees on the worst protectionism of both worlds. Free movement, the best and most liberal thing about the EU, will be ended and all the other regulations will stay.

Why did the liberal voice turn out to be excluded from current proposals? One possibility is that they really got unlucky. That is possible, but not likely.

Another possibility is that the system is rigged against liberalism. The problem with achieving liberal politics is, that it fundamentally opposes all other interest groups together. Liberalism is idealistic and therefore not well suited for compromises. Every compromise feels like a total defeat. In this particular battle, the liberal Brexiteers have portrayed everything but an essentially no deal departure as a betrayal of Brexit. But in a battle where you can realistically hope for 20%, asking for all or nothing will most likely get you nothing. Realistically, we would need to get lucky to get no deal.

There is, however, another possibility. Maybe I am simply fooling myself to believe that the liberal Brexiteers are a significantly large group in all of this. Maybe there are really only four and not five groups, all of which are like protectionism in some form.

The political process within states can neither solve problems, nor will it likely lead to a serious reformation of the status quo. Unless the state has reach the point where it starts to suffocate society, and the status quo itself is in a crises, Leviathan usually continues to grow. The best outcome, libertarian Brexiteers like myself can hope for is that by some giant accident, the different groups hate each other so much that they don’t end up agreeing on anything, and we get no deal by default.

Hope springs eternal. It is not really that realistic, because the fact that a no deal needs to be prevented is the one thing that all of the other parties can agree on. That means the more likely outcome from such a chaos is that there won’t be much of an exit from the EU at all. The only question with such an outcome will be, whether it will keep the civil war cold. In this country, however, it probably will.

Brexit is often described as one of the biggest democratic events in the history of the UK. In an ideal democracy, we would get the rule of the average opinion. What else could the will of the people be than that?

The problem wth averages is that they can be completely detached from reality. The average woman in England has 1.8 children. I, however, have never met one single woman that actually has 1.8 children, how could she? The statistical average for every woman does not actually describe a single real world woman.

If democracy is supposed to represent the average opinion of the people, in other words, the will of the people, than it is possible that the policy resulting from this, while it describes the will of all people, does not describe the will of any single real human being part of that same people. I don’t think that a lot of democracy advocates understand this simple truth. They clearly assume that the will of the people needs to satisfy most people.

The latter, however, is only the case if society is largely in agreement on issues. The more opinions there are, the more likely democracy will deliver a result that no one likes. Alternatively, the system will simply end up paralyzed. And as I have described above, when it comes to Brexit, opinions differ hugely. So democracy probably really did win, and was not betrayed, when it comes to Brexit. It is just foolish expect democracy to produce good outcomes. In reality, democracy really is that messy. It is the wrong system.

The principle of the state is that one size always has to fit all. For this to work, at least most people need to roughly have the same size. The more sizes differ, the more likely it is that the average size, that is supposed to fit all, fits no one. That is why, state advocates always end up to be some kind of egalitarians. Only then, at least the illusion can be kept up that the whole thing actually works.

But in reality, people are not equal. They differ in many ways, and they certainly often do not agree with each other. The only peaceful and harmonious solution in that kind of reality is liberty. Instead of asking how can we find a size that fits all, we need to instead ask, how can we minimize the rules that need to be enforced on everyone. That would be the only universal size we need to find. Of course there need to be rules to make society function. But these rules should be at the absolute minimum possible. In other words, we should have a maximum of interpersonal liberty. That way, everyone can wear their own size.

It is, however, naive to expect liberty as an outcome from the political process within the state. By promising that the war will be cold and civilized, the state has legitimizes the process of everyone fighting against each other. And since it is very much a war, one cannot expect this process to stay harmonious and peaceful forever. Eventually, the conflicts of interest will become so large that people will definitely hate and eventually most likly even fight each other. For that not to happen, we should really hate the game and not the players. And to be clear, the game is not Brexit. Brexit is just a battle within the game. The actual game is the monopoly that is the state.

Brexit: What is going on?

On the eve of the commons vote that Theresa May has now tried to defer, we gathered to work what is going on, what we want and what is happening next.

The panel included:

Christian Michel – Philosophy and Economics Meetup Organiser
Lucy Harris – Leavers of Britain
Catherine McBride – Senior Economist, IEA Trade and Competition Unit

In their opening statements the panellists gave their point of view. I started by asking Christian why “people” wanted to be part of the EU in the first place?

Christian does not know why “people” want to Remain, but knows why he wants to Remain. This is because he feels that the EU destroys respect for the concept of a state. There is no love for the EU in the same way that there is love for nation states. States that are remote and undemocratic lack moral authority and the end result, he says, will be that the EU exerts less authority than would be wielded nationally.

Catherine, was working in Australia as the EU developed from the EEC into the EU. For her, the institution was an “OPEC for developed nations”. In particular this is what it was presented as in Australia, making its evolution into a sovereign entity with broad and deep powers a bit of a surprise. Such was also the experience of people here, she felt. Catherine also feels that had the EU stuck to the 9 first countries (Belgium, France, Italy, Luxembourg, the Netherlands, West Germany, Denmark, Ireland and the UK) it might have worked out better. However the UK in particular was the “oddball” and had different economic needs and alignments, tending to develop ahead of the EU nations thanks to US influence. This meant the UK was incompatible from the the beginning.

Lucy, laments the rapid “twitter feed” progression of events in the current climate. Lucy felt that what the country needed now was a new leader from the Leave side who would be able to be braver and more bold than Theresa May and deliver the result of the vote. This deal, she says, is not Brexit and not the will of the people because it leaves us in the Customs Union. She says the Brexit we need must include “no connection” with the ECJ, freedom of movement, the customs union or single market. The reasons for Brexit are not especially tied to immigration and is not a racist phenomenon.

The panel went on to discuss, in some depth, the nature of democracy and the attitude of the Remain camp toward Brexit voters, and the likely direction of events.

 

Brexit looking shaky

So, in case you had missed it, a Brexit deal is now on the table. It introduces a transition phase while the new relationship is being discussed and keeps us in the Customs Union (and much else besides) while that process continues. After 2 years of negotiating an exit it crucially fails to assure Britain that a meaningful exit is possible at all. Since the passage of the Lisbon treaty there has been the Article 50 get out clause, but bizarrely, no such mechanism to leave is contained in the withdrawal agreement.

This is a ludicrous version of Brexit and cannot really be given the name. It has been described as capitulation, giving Britain the status of a vassal state. Regardless of your views on Brexit, or participation in politics generally, the passage of this agreement would be a disaster.

The question must now be asked: what should be done?

If the choice on the table is between Remain and this deal, then the only sensible decision is to Remain. Exit on WTO terms seems to be an incredibly unpopular option at present, and seems even likely to pass the necessary Commons vote. I greatly prefer No Deal to the present option, but the task of campaigning for it seems quixotic. It is perhaps made possible by the fact it is presently the default in law, but there are attempts underway to change that fact also.

There does seem to be some momentum behind the idea of creating an alternative deal, either by making small but important changes to this deal, or invoking the Norway option (EFTA / EEA membership). There are even a few people in the cabinet working on a fix.

The conventional wisdom is that there is no time for a second referendum, but there does seem to be a degree if political will in favour it. Should libertarians aim to begin influencing that process?

Perhaps it is better, since we are ourselves divided, to avoid taking a corporate libertarian view on the matter. This might be reasonable, but a concern is that this means sitting out one of the largest political controversies of our time.

‘Kingsman’: a Brexit explainer?

So much has been written about the rise of ‘Populism’. Many commentators have speculated on its origins while others struggled to work out what it all means and why it has come out. Examples of this populist wave include Trump, the Italian Five Star Movement and the British vote to leave the European Union.

You might not think that Matthew Vaughn’s Kingsman:The Secret Service, a gratuitous adventure in violence and comedy, could shed any light on populism. But think again.

Kingsman tells the story of ‘Eggsy’, played by Taron Egerton, a working class lad recruited into an international secret service called Kingsman. Independently funded, these super sleuths represent old-fashioned values of chivalry and are the epitome of the English gentleman. Before you rush off to a safe space, women can become Kingsman too. If you haven’t seen the film and are trying to work out what his type of agent would look like, then imagine Jacob Rees-Mogg with a martini.

The villains of the piece is Valentine played brilliantly, as always, by Samuel L Jackson. Valentine is a tech billionaire worried about global warming. He was donating large sums to research to deal with the problem but frustrated by a lack of results and politicians inability to act, he hits on another plan. Valentine reasons that the things that people do are over-heating the planet. If they can’t be persuaded to change heir behaviour then the only answer is to eliminate the problem, as someone recently said on TV, literally.

Valentine’s conspiracy to wipe out billions of lives to save the planet requires the help of the rich, politicians and Royalty. Not all agree, notably a Swedish Princess who, like others who resist, is kidnapped.

Valentine claims he cherishes humanity. To save it from itself, from its overpopulated ways, it needs to be culled while saving the elites who will create a new world. Meanwhile ordinary people get on with their lives, oblivious to the fact that others are making life and death decisions about them.

The forces stopping this are the gentleman, and gentlewoman, dedicated to being on the side of the people. It is no coincidence that the film also has Royalty objecting to this Malthusian plan.

The villains here are the people who think they know best, who are self-serving and selfish while claiming to be selfless.

Kingsman is an outlandish film. It is a homage to, and resetting of, the Bond genre. But it also reflects the spirit of the age: decisions that affect how people live are made by distant elites. Inevitably people kickback. They want to control their lives and are opting for politicians who are challenging the political consensus. That might not be the best option, as many of these politicians peddle Nativist theories and will undoubtedly be as addicted to power as their predecessors. But there is another alternative: freedom.

 

 

Alex Chatham

Alex has been an occasional blogger for Liberal Vision.