U.K. a victim of its own ideas

by Brad Glosserman

By almost every analysis, the stunning decision by the British public to leave the European Union reflected fears of lost sovereignty, dwindling economic opportunity and diminished security that resulted from U.K. membership in the EU. To be more precise, the vote signaled a rejection of globalization, free trade and open borders. Ironically, then, Brexit is the triumph of the very ideas that Britain has long cherished.

British economists provided the theoretical framework for the policies that dominate modern economics. Adam Smith is the originator of much of that theory. David Ricardo honed Smith’s thinking by adding the notion of comparative advantage, arguing that if one country can produce a good more efficiently than a trading partner, then it should specialize in the production of that good, even if it isn’t more efficient in absolute terms (i.e., even if the other country can make every good cheaper). This specialization yields the most efficient use of resources and maximizes benefits to both countries. This critical insight is the basis of much, if not most, international trade.

Equally, if not more, important was John Maynard Keynes, the 20th-century British economist who was one of the most influential thinkers of his era. Keynes was a revolutionary in many respects, challenging the prevailing orthodoxy, which argued that market forces would produce full employment. Instead, he insisted that governments had to actively intervene in markets to smooth out the inevitable cycles of boom and bust.

Most significantly for Brexit, however, Keynes was instrumental in setting up, after the end of World War II, the Bretton Woods international financial system. The Bretton Woods system was premised on the belief that free trade was critical to promoting and securing peace and prosperity. Policy makers should strive to create a single global market for goods and services. To that end, borders should be increasingly permeable, tariffs kept low and markets unfettered by government intervention as much as possible. Those are the guiding principles of the international financial institutions that are the core components of the Bretton Woods system, and as a package they are often referred to as “the Washington Consensus.”

Ironically, despite his central role in the creation of the Bretton Woods system, Keynes opposed free trade, arguing that it threatened to impoverish nations. For him, Bretton Woods institutions were intended to stabilize the international financial system and keep countries out of debt. Nevertheless, the Washington Consensus has probably done more to put out of reach Keynes’ goal of balanced trade accounts than any other policy.

A fourth key player in this intellectual inheritance is British Prime Minister Margaret Thatcher. Few people consider her an intellectual, but she was passionately committed to a set of beliefs that had a profound effect on her country. Thatcher’s preference for small government, low taxation, balanced budgets, free trade and free markets recalibrated Britain’s political spectrum, establishing a new center and pulling the political discourse (and most politicians) to the right. Thatcher, working with U.S. President Ronald Reagan, helped set a new normal for international economic policy, one that in combination with preference for small government, launched Britain inexorably toward Brexit.

This lineage produced contradictions that culminated in Brexit. A commitment to free trade and open markets yielded economic efficiencies that transformed established industries when the Cold War ended and millions, if not billions, of people entered labor markets. Cost curves shifted and workers in the industrialized world were battered by these new forces.

At the very same time, however, commitment to small government meant that there were few mechanisms, if any, to soften the blows to the working class that was hammered by these new realities. All developed countries have been hit by this phenomenon, but the United Kingdom has had the farthest to fall, given its former prominence as a manufacturing country. Consistent with this logic, a powerful strand of protest against the EU has been the attack from the left that it is controlled by antidemocratic, capitalist elites who prevent labor and unions from better protecting their members and the working class.

At the same time, Britain has experienced a wave of immigrants in recent years. The EU’s expansion to Eastern Europe opened doors for hundreds of thousands of people who sought economic opportunity. That flow intensified after the 2007-8 global financial crisis. EU law guarantees that citizens of one EU country have the right to travel, live and take jobs in other EU countries, and many of them went to Britain. As a result, the foreign-born population in Britain doubled from 1993 to 2014; in 2015 alone, the U.K. absorbed 330,000 new people.

This influx has taken many of the service jobs that natives would have once claimed or reduced wages by increasing the pool of labor. Some complain that they are a drain on the national budget by consuming national services. All the charges have fueled the nativist belief that the country is being overrun by immigrants: 45 percent of Brits identified “immigration/race relations” as the top issue for their country and 77 percent want immigrations levels reduced.

There is also the assertion that these immigrants are a security risk at a time of rising fear of terrorism triggered by Muslim extremism. Attacks by Islamic radicals are conflated with lines of refugees and the chaos of those pictures is seen as cover for terrorist infiltration.

These fears and frustrations drove a majority of Britons to vote for Brexit. The impacts of that decision are just beginning to reveal themselves and they will continue for years. Last week’s vote is a cautionary tale to other countries and their elites about complacency toward populist movements and the casual acceptance of the downsides of globalization as just “another cost of doing business.” It is also time to revisit old orthodoxies and figure out how to soften their sharp edges to ensure that the human cost of globalization is not so severe and the political consequences less chaotic.

Brad Glosserman is executive director of Pacific Forum CSIS, a Honolulu-based think tank.