Why Brexit maybe should scare you.

Well, at least if you’re British.*

In the long run?

If there’s a consensus inside the big tent that is the Brexit camp, it is that following any short-term economic effects, there will be a bounce back to trend — and depending on the exact terms of the deal, opportunities to thrive.

An alternative view

I grew up in South Yorkshire and I got to watch as the Miners’ Strike, the closure of the collieries and steelworks and subsequent events reshaped the economy of the area. There were many predictions that while the economy would struggle in the short term, eventually things would bounce back to trend. I remember in university stumbling across a set of papers (headed by one from Paul Ormerod) built around showing how the bounce back had already begun. Alas, as we see the best part of 25 years down the line, prosperity didn’t come back to these areas — and this prompted some very high votes for Leave. I feel compelled to invoke the cliched Keynes quote:

“But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again.”

Why should the travails of one small region matter? So what if it has taken the prime working years of a generation for the coalfields to struggle towards economic stability, with no real sign they have gotten there yet? How does this relate to Brexit?

To understand that we need to look beyond cliches about unions, socialism, laziness, underclass and all the rest that are used as excuses for the situation — and look at the structures of a modern economy.

The viability of a place.

The basic factor for the prosperity of a place is the historical formation of an ecosystem of firms. This could be as a result of natural resources (e.g. S. Yorks coal and steel), or could be thanks to historical developments (e.g. City of London finance and law). Either way, the ability of a place to serve as an economic centre depends on the vitality of the ecosystem of industries — and of course as times change, replacing old ones with new ones.

What happened in S. Yorkshire (and many other “left behind” places in Britain) is that the old industries declined very rapidly, often with little shock absorption. What economists expected, as the Brexiters expect, was an eventual bounce back. As people who could left and industries disappeared, surely new ones would come in to take advantage of the low cost of living, the availability of a workforce, the cheap facilities? To some degree this happened, but what’s clear is that the region never recovered from the shock and the old levels of economic activity just never came back. And the key reason is that people and facilities are cheap.

It hurts me to say this about my hometown (and many other places) but they are nothing special. The people are averagely hardworking and have various virtues and vices. The ecosystem of knowledge and engineering skills built around traditional industries withered as those industries disappeared. In the end, there’s little that you can’t replicate closer to London (for knowledge industries) or closer to the main ports (for exporting) or just elsewhere (access to finance being a particular issue.)

The fundamental dangers of Brexit

So what are the lessons for Brexit? There are number of different proposals for Brexit out there, but I want to inject some realism into understanding the industrial reconfigurations likely under any Brexit settlement that seriously disrupts existing industries. The canonical example of this would be one where changes to trading arrangements carry a substantial portion of London’s financial services industry away to another location inside the EU.

The size of the financial services industry means that this would be a shock not unlike that suffered by various industrial areas in the 1980s. It is then vital to ask ourselves, what is actually special about this place we live in? In particular, if we’re no longer a good place to invest in for trading with Europe, what do we actually have? (Good place means, crucially, better than the alternatives — and there are plenty of alternatives across Europe for various sectors.)

Harsh realities

Brexiters have recently been celebrating the friendly noises coming from Australia about a Free Trade Agreement. They also place a lot of hopes in further agreements with China, India and the USA. What seems to be missing from this optimism is any analysis of what would make the UK an important cog in trade with any of those places. We are far away from all of them, transport time and costs are significant. Remember that not only would wages have to go lower to compete, they’d have to go all the lower to make up for the costs of distance. Time difference issues and lack of free movement agreements play into greater difficulties in ramping up the export of knowledge work and other services. Each of these areas already has a satellite location which will be fierce competition for Britain as a location. (Hong Kong, Singapore, New Zealand, UAE, Canada.) Business is not charity and globalisation doesn’t stop just because we voted “Leave.” Businesses will choose their location according to objective criteria, not some romantic attachment to our nation. London will retain the aura of a “world city” for a while, a sort of rainy, cold Dubai. But just as Dubai struggles to support a hinterland, so will London.

Britain as a backwater

Bottom line: Any Brexit agreement that doesn’t keep us integrated into the European single market runs a high risk of turning us into a backwater. This home made economic shock starts a process of realignment and when you look at it objectively, a Britain detached from Europe just doesn’t have many major competitive advantages. Industry will often choose other locations and Britain, just like South Yorkshire, will slowly decline for 25 years or more… and there’s no sign that direction will be reversed.

*Yes, I know Scotland might escape, but that’s for another day.