Tuesday 27 September 2016

Economists have been getting it wrong for decades. No wonder they oppose Brexit

Allister Heath

Published 20/05/2016 | 02:30

David Cameron has been claiming, over and again, that those of us who support Brexit have lost the economic argument. Photo: PA
David Cameron has been claiming, over and again, that those of us who support Brexit have lost the economic argument. Photo: PA

Over the past few weeks, British Prime Minister David Cameron has been claiming, over and again, that those of us who support Brexit have lost the economic argument.

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Both Cameron and UK Chancellor George Osborne want people to believe that we only really care about "sovereignty", and to accept that this would come at a heavy cost in terms of forgone prosperity.

It's a convenient narrative for the Remain side, and one that underpins its strategy to win the referendum. It's also utter nonsense.

Nobody on the sensible Brexit side should accept that Britain quitting the European Union (EU) would be bad for growth, jobs or wages. The free market, cosmopolitan, pro-globalisation economic case for leaving is stronger than ever; and the people who would run the Tory party, and thus the country in the event of a Brexit, largely believe in it.

They are neither nativists nor protectionists. They are not wannabe Donald Trumps. The hysterical studies claiming that Brexit would ruin the country are grotesque caricatures, attempts at portraying a post-Brexit Britain as a nation that suddenly decided to turn its back on free trade and foreigners.

As Roland Smith of the Adam Smith Institute has argued, leaving would be a journey, not a Big Bang. In the short term, a Brexit would almost certainly mean the UK remaining in the European Economic Area (EEA), like Norway: Britain would be liberated from much political interference and be allowed to forge its own free-trade deals while retaining the single market's Four Freedoms (the free movement of labour, goods, capital and services).

Europe's shell-shocked corporate interests would demand economic and trade stability of its equally traumatised political classes, and they would get it.

Over the subsequent few years, the UK would undoubtedly negotiate a proper British model, leading a new (and growing) group of post-EU European nations.

A sensible Conservative government would seek to stick with as much of the EEA model as possible, while adopting the sorts of liberal, pro-growth but carefully controlled immigration policies pursued by Australia, America or Canada.

Together with supply-side reforms, the UK would become more, rather than less, attractive to global capital. The Armageddon scenarios concocted by the British Treasury, the OECD and the IMF would not materialise.

Remain has only won the economic argument in the sense that most economists and the large institutions that employ them support their side.

A recent pro-Remain letter organised by Tony Yates, an academic, collected 207 signatures; by contrast, the admirable Economists for Britain group has only 26 members. But this merely proves that the truth is not determined by a popularity contest.

Time and time again, the majority of economists make spectacularly wrong calls, and it is a small, despised minority that gets it right.

In 1999, 'The Economist' wrote to the UK's leading academic practitioners of the dismal science to find out whether it would be in the UK's national economic interest to join the euro by 2004.

Of the 165 who replied, 65pc said that it would. Even more depressingly, 73pc of those who actually specialised in the economics of the EU and of monetary union thought the UK should join - the experts among the experts were the most wrong.

Britain would have gone bust had it listened: it would have suffered an even greater asset bubble and financial collapse. The UK would have been begging for handouts.

The vast majority of economists did not foresee or predict the financial crisis or the Great Recession or the eurozone crisis. Yet they now have the chutzpah to expect to be treated like philosopher kings, an all-knowing 'profession' that we are all supposed to bow down to uncritically.

It's dangerous, self-serving nonsense, like all such elitist fantasies.

Remember the 1920s? The economics profession overwhelmingly failed to foresee the great bubble and subsequent crash and depression. The 1930s? It messed up on just about everything. The 1940s and 1950s? It bought into planning, industrial policy and nationalisation.

IN THE 1960s and after, Paul Samuelson's best-selling, dominant economics textbook was predicting that the Soviet Union's GDP per capita would soon catch up with America's. The 1970s? Most economists didn't know how stagflation could even be possible. The 1980s? The profession opposed Thatcherism and the policies that saved the UK; infamously, 364 economists attacked Margaret Thatcher's macroeconomic policies in the 1981 budget and then kept getting it wrong. Very few economists backed the then UK prime minister.

In the 1990s, they botched the Soviet Union's transition to capitalism and assumed that Western central bank independence and inflation targeting would end boom and bust.

In the 2000s, they were proved wrong, yet again. Today, they cannot really explain why productivity growth is so weak, why many Westerners are suffering from falling real incomes or why inflation is so low (and whether that is good or bad).

Of course, economists as a profession have also made many correct calls on free trade or the need for more competition - but a massive dose of humility should be in order. It is not clear that economics has been getting better over time, unlike biology, physics or medicine.

The scientific consensus, as in all disciplines, is often the opposite of the truth and must be subject to falsification. Most economists are obsessed with market failures yet, bizarrely, assume that the intellectual marketplace, as defined by the majority view of their colleagues, is close to perfect.

The problem this time around is that Remain economists assume that leaving the EU would mean reducing globalisation and halting most immigration. They assume that there are only costs - and no benefits - to leaving the EU, and thus conclude that Britain would be mad to leave.

Ultimately, it's a political judgment: I believe that a post-Brexit Britain, run by cosmopolitan Tories and backed by the West's most open society, is the best way to enhance and legitimise globalisation in the UK.

Allister Heath is deputy editor of the 'Daily Telegraph'


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