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Brexit - For Richer or Poorer?

24 October 2016  17:18 GMT    Gary Reynolds

“So long, farewell auf wiedersehen EU”
(with apologies to Rodgers & Hammerstein)

Brexiteers say that Britain will be significantly better-off outside the EU - they are right, but not for the reasons they think. The UK is at a crossroads - one route leads to utopia, the other to dystopia. I am an optimist, I believe our country will choose the former, but my dream may be a Brexiteer’s nightmare because a Britain flowing with milk and honey is based on free trade and free movement of workers that many Brexiteers, and some remainers, may not tolerate.

The Brexiteers’ hero, and strong advocate of Britain leaving the EU, is Professor Patrick Minford, CBE. The 73 year old economist has had a glittering career as a champion of free-trade and free-markets. His greatest moment came in 1981 when Prime Minister Margaret Thatcher shocked the vast majority of economists by proposing an increase in taxes at a time of recession. Three hundred and sixty-four economists, including future governors of the Bank of England, and former and future Nobel Prize winners, signed a letter to The Times saying that there was no basis in economic theory or evidence to suggest that the budget would be successful, and that if it were introduced, it would threaten our social and political stability. The story goes that in a fierce debate with MPs, the beleaguered Prime Minister was asked to name two economists that agreed with her. She named Sir Alan Walters (the economist responsible for the supply-side changes that formed the backbone of Thatcherism) and Professor Minford. It has been reported that when returning to Downing Street one of Margaret Thatcher’s civil servants said “it’s a good job you were not asked to name three economists that agreed with you Prime Minister!” 

The 1981 budget was voted-in and the economy began to recover shortly afterwards. The 364 signatories to the letter to The Times were wrong, Alan Walters and Patrick Minford were right. Professor Minford is also right about Brexit, but not for the reasons that many Brexiteers think.

Professor Minford’s arguments are built on the principles of free-trade. These state that irrespective of the advantage that one country has over another in the production of goods or services they will both be better off if they trade. This may sound counterintuitive, but it was proved by David Ricardo over 200 years’ ago and set out in his 1817 book “On the Principles of Political Economy and Taxation”. 

You may think that a country that was more efficient at producing all its goods and services than another country would find no benefit in trading with that less efficient country. Wrong!  It is ALWAYS better to trade because it allows both countries to concentrate on the goods and services that they are most efficient at producing. This is what David Ricardo called “comparative advantage” and it is the reason that global trade has been so effective at boosting world-wide GDP (Gross Domestic Product) for over 50 years. For those of you wanting proof, check out my explanation of free trade using hot dogs in the appendix.

The advantage of free-trade is the reason Professor Minford says we would be better off outside of the EU. His argument goes something like this. EU tariffs increase the price of goods imported from outside of the European common market. This causes EU consumers to buy less of the tariff protected goods while EU producers are induced to produce more of them at the expense of goods they would produce more efficiently. The resulting misallocation causes an economic cost that affects everybody. Professor Minford argues that liberated from these tariffs (ie., outside of the EU) Britain would “… face world prices (free-trade) on all our goods, exports and imports. This is beneficial to us because our trade would be governed by our comparative advantage: consumers would benefit and our production would gravitate to more efficient industries"1

In Patrick Minford’s Brexit utopia, bilateral trade agreements would be things of the past and unnecessary for a freely trading UK outside of the EU. We would not need brigades of civil servants negotiating trade agreements, we would simply abolish them. Those imposing tariffs on British imports would fail to benefit from comparative advantage, whilst Britain would simply find other markets for its goods and services and, as a relatively small country, with a population of only 63.5 million (just 0.88% of the global population), we would benefit from what is known in trade theory as “the importance of being unimportant”.

Apart from Brexit breaking the shackles of EU tariffs that Professor Minford says have blighted British trade, he also believes that it would free-up the labour market due to the abolition of both the EU restrictions on hiring and firing workers and the additional powers that it awards trade unions. Minford believes that labour regulations imposed by Brussels raise the cost of labour to UK businesses and increase unemployment. It was largely due to concern about the UK having less vigorous labour laws outside of the EU that the TUC recommended its members vote to stay in Europe. The RMT (National Union of Rail, Maritime and Transport Workers) took a different view, believing that Britain outside of the EU could enact laws that would give greater protection to UK employees, making the British labour market less flexible.

Brexiteers were fast to seize upon Minford’s estimate that the British economy would immediately be 4% better off outside of the EU2, but I don’t think any of the pro-Brexit politicians dared to explain that the abolition of all trade tariffs and a relaxation of UK labour laws were the basis upon which the venerable Professor reached his conclusion.

Your view on the future for the UK economy will depend on whether you think that Brexit will lead to defensive British tariffs on imports, a lock-down on free movement of workers and a loss of access to the EU common market, or whether it will turn into Professor Minford’s utopia of free trade, relaxed labour laws and free movement of workers. The world tends to move towards greater freedoms, wider democracy and more open, globalised, markets: so I am optimistic, despite what many populist politicians may say.

Appendix - The Benefit of Free Trade Proven with Hot Dogs

Download


1. Balance of Competences Review, Setting Business Free: Into the Global Economy: The Hampden Trust

2. Cardiff Business School Working Paper No. E2015/17, November 2015

Video Transcript

I think there are obvious signs that Britain is changing. The rally around the decision to leave, even by some people that were in favour of staying in the EU like the Prime Minister, has not just been a rally round the decision, it's been a rally round the principles behind that decision. And so what you've seen recently, is that Britain is preparing itself to deal with what a lot of the Brexiteers believed was an ingrained immigration problem.

So I think you will see a lot more hard-talking on border controls and therefore our borders will not be as open, and we're beginning to send signals that they won't be in the future. The other thing you’re starting to see is a discussion as to what type of Brexit we are going to have. There is a polarised view on this. On the one hand you've got people like the RMT, a very powerful union that would want a Brexit where Britain has stronger labour laws. Then on the other you've got a Brexit where Professor Patrick Minford, very famous economist, says we should have looser labour laws. Both are Brexiteers, both voted out, but for entirely different reasons and there is going to be a lot of debate on which faction - the Libertarians or the “let’s lock everything down” - which faction’s going to win?

What I think is interesting is that the argument for Brexit, where you have a better economy and a better standard of living for everybody, is the Libertarian one. So the message was let’s take control, but then let’s abolish tariffs completely, let's just scrap them. There's totally different views on what would work, so the situation that works best for Britain, is to say we'll take control and we're going to trade with the world, tariff-free. We're going to abolish it, and that would be amazing. We would get an improvement in GDP (Gross Domestic Product). Comparative advantage - we would concentrate on the things that Britain is best at. But there's another by-product of this, and it’s that it will benefit poorer countries because the common agricultural policy puts a high tariff on the import of agricultural goods. A lot of those goods are exported by poorer countries, so we actually create poverty and unemployment through those tariffs. We should scrap them, and that would be good for the poorer countries, and it would be good for us too.

You've got a “wait and see” view going on with lots of businesses. The international businesses that are manufacturing here, or offices providing a lot of services here, are almost saying they’re going to wait and see. And what they want to know is, will Britain still have access to the European common market? What has definitely changed is that until that question is answered, you are going to get a reduction in long term investment in Britain. There is no way that you are going to get major investment decisions taken by companies in other countries about investing in Britain, until the boards of those companies can be certain that they've got some stability and know exactly what the trading relationship will be like with the rest of the world. So that's an effect. And possibly you've seen it more in the banks than anywhere else, they are already starting to fret about their access to financial markets - European being the single biggest block in the world. And that's huge for people like Goldman Sachs, JP Morgan, Citigroup, and the other big international banks in the city. What we've heard recently is a lot of noise they're making about the future. We haven't yet seen the exodus, but I think what's starting to happen is projects that may have been invested in in Britain won't come here. You won't notice it until twenty, thirty, forty years down the road. You suddenly realise that the growth of the city as a financial centre has lagged other major centres around the world.

So why did I use hot dogs to explain the importance of free trade? Well, let me just say that the economies around the globe are infinitely complex, and a trick of economists is to distil all that into a simple example. And hot dogs, because they need a roll and a sausage to make the one product, were a great way of going about it. But I can't take credit for it, because Paul Krugman wrote about hot dogs in free trade in the late nineties, ninety seven. So I unashamedly stole the idea from a man much better known and much brighter than me. And then I nicked the other idea for the ratio of hot dogs between two competing countries from David Ricardo, who wrote about it back in 1817. So again I nicked the idea from a very, very world renowned economist so that I could take two brilliant ideas from two brilliant economists, stick them into my hot dogs and explain why free trade is the best thing about globalisation.

So, Minford is not the only economics professor that is pro Brexit, but he is perhaps the most extreme with regard free trade. You are asking if he is unhinged. Absolutely he is unhinged. I think he has been unhinged all his life like most great people, coming up with fantastic ideas, they don't think the same as the rest of us. I've got to say I am not sure the UK, or the world, is ready for an economy based on the thoughts and principles of Patrick Minford. But it's a pity because I think if we were, we'd have the most scintillating, electric, open, wealthy economy in the world and we would blitz everybody. So let's hope that Brexit means we take on the views of an unhinged economics professor.

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