Can Post-Brexit Britain Learn?

How good government is at correcting its mistakes is one of the key questions in this debate. If Ryan is correct that “a British democratic system, taking more decisions closer to the people, would be preferable and more likely to self-correct in a way conducive to prosperity and freedom than an EU bureaucracy in Brussels,” we should be quite optimistic about long-run governance in post-Brexit Britain.

But is he right? In areas where we have control already, has Britain’s state shown that it learns from its mistakes and the successes of its neighbours?

Learning and adaptation by institutions is best understood as response to feedback mechanisms. Hayek may have overstated the amount of knowledge available in an economy when he argued that an entrepreneur’s “local knowledge” was superior to that of a government official. A simple ignorance-based model could work like this: we assume that everyone is equally ignorant and is making their business and policy decisions based on guesswork. Whatever system was best at eliminating the “wrong” guesses was the one that would end up producing the best results. The market tends to beat government as a discovery process simply because it has more guesses going on at once, and a more aggressive selective death rate.

In this kind of model, the case for political decisions happening locally rests more on pluralism than on local political knowledge. It is better to have Manchester and London making different political “guesses” because the chance of at least one of them guessing right is higher, the costs of error are lower, and people can leave one for the other if one manages to succeed – not because Manchester’s local government understands Manchester better than central government in Westminster. Neither entrepreneurs nor government officials are privy to any special knowledge at any point – it is the selective death rate that eliminates failure, and the winners are simply the people who got lucky with their guesses.

Ryan’s argument makes sense, but if instead of well-informed local politicians we imagine policymaking to be a series of random guesses with much less of a built-in corrective mechanism than exists in markets, the case for “taking back control” in order to improve self-correction may be weak.

It is probably true that Britain making its own decisions on, say, competition law will mean more experiments in policymaking. But are the corrective feedback loops much shorter in London than in Brussels? As we have seen, domestic UK politics does not suggest that in areas where the EU is not involved, such as health policy, we are especially good at learning from our mistakes or the relative success of our neighbours. Jeremy Corbyn, whose Labour party probably has a 50/50 chance of winning the next election, has just today announced plans to introduce rent controls across the country, a policy that will likely prove popular despite its almost unanimous opposition by economists and its repeated failures around the world.

Indeed most of the problems the country has are the result of extremely poor decisionmaking by the government in the face of evidence from close neighbours. Our housing situation resembles that of New York City or San Francisco, except across an entire country. Tight regulatory constraints on supply, like zoning and unreasonable building codes, have led to extremely expensive housing and a large knock-on hit to growth, as workers cannot move to where they would be most productive. Despite our proximity to the simple, permissive rules-based systems of many continental European countries, where housing is much more affordable and construction is much easier, we do not seem to have learned anything at all.

On taxes, we have gone backwards in many respects. The former Chancellor, George Osborne, was widely hailed by free marketeers for his cuts to the headline corporation tax rate, but to avoid having to cut spending he cut allowances for firms to write off their property and machinery investments from their tax bill. The effect was that for firms that invest in things like machinery and property, the effective marginal corporation tax rate has barely fallen at all, and for some it has risen. The success of countries like Estonia that have designed their corporate tax systems so that they do not fall disproportionately on firms that invest their incomes has not yet made its way to Britain’s policymakers.

As most discussants have agreed, the country’s immigration system is self-destructive, and is making it harder and harder for highly skilled workers from places like India, China, and the United States to move to Britain even when they have a job offer in hand. We have not learned from our neighbours – let alone our English-speaking cousins in the United States, Canada and Australia – that highly skilled immigrants are a substantial boon to natives, and less skilled immigrants no burden.

Policy pluralism within countries, through federalism and political devolution, is attractive for another reason apart from self-correction. As Ilya Somin has argued, people move from states with bad policy to ones with better policy, voting with their feet. This is more applicable when cultural and language barriers are low, as they are between U.S. states. But over one million Britons live in other EU countries, and once Britain leaves the freedom of movement rules of the EU single market, this foot voting exit mechanism will be diminished.

If self-correction has not worked in many of the areas we already control at home, it does not seem to be an effective mechanism to rely on in the areas that the UK will control after Brexit. Adam Smith once remarked that “there is a great deal of ruin in a nation” – something all of us should remind ourselves when political developments feel truly bleak. But it has another meaning too: there is already so much ruin in British governance, it is optimistic to imagine that adding some more will really improve things.

Also from this issue

Lead Essay

  • Daniel Hannan reviews what Britain stands to gain by leaving the EU, as well as what it should seek to preserve. An economic common market has always been a desirable goal, he argues, but the same cannot be said of a common goverment. Obstacles to free trade tend to be local and concentrated interests, while consumers tend to benefit most, albeit in a dispersed way. Britain’s economy is healthy despite the naysayers, and it will be better able to pursue free trade agreements outside the EU once Brexit is completed.

Response Essays

  • Dalibor Rohac challenges the claim that Brexit wasn’t about immigration. Leave voters overhwlmingly wanted to restrict immigration, and they responded to anti-immigration messages issued by various groups in the Leave campaign. As a result of the vote, Britain’s place in the Single Market may be in danger, and without it, economists generally agree that the British economy will suffer. The promised free trade agreements that were to arise before Brexit seem not to have materialized. All of these, he says, are sound reasons for concern.

  • Ryan Bourne sketches the way forward for an independent Britain. He begins by looking at what Leave voters appear to have wanted, namely, a return to parliamentary sovereignty and a rejection of political integration into a supra-state. Leave voters were not anti-trade so much as they were in favor of using local institutions and local rule as the instruments to oversee it. The current political leadership may be less than inspiring, Bourne writes, but Brexit is a long-term proposition, and it tends toward greater freer markets, he believes.

  • Sam Bowman of the Adam Smith Institute explains why he does not view Brexit with much optimism. The best available models predict that trade will probably suffer on net. This is already reflected in a drop in the value of the British pound. Not only that, but socialism remains popular at home and will now face no EU controls to slow it down. Most Britons are neither xenophobes nor free market liberals, and the political climate is unsettled enough that Britain stands to suffer genuine harms from leaving the EU.