A behavioural economic case for Brexit

Is there an economic case for Brexit after all?

Superficially, it seems not. Almost all serious economists agree that less close trading arrangements with the EU and tougher immigration controls will make us poorer than we would otherwise be even in the event of a smooth Brexit, and the Minfordians protestations to the contrary are not credible.

Behavioural economics, however, suggests there might be a case. This rests upon two pillars.

Pillar one is the Easterlin paradox – the finding that long periods of economic growth in developed economies have not made us much happier. This suggests the blow to well-being caused by slower GDP growth will be very small.

Now, I know some of you think the Easterlin paradox is a statistical artefact arising from the fact that GDP is unbounded whereas well-being is tightly constrained, somewhere between “ain’t dead yet” and “all right, I suppose”.

I’m not entirely sure. There paradox draws attention to important facts.

One is that people adapt. We become accustomed to prosperity so it doesn't make us much happier. By the same token, we also adapt to ill-fortune. Andrew Clark, for example, has shown that after apparently nasty events such as divorce or even bereavement happiness returns to its baseline quite quickly: the merry widow is a real thing. And Christoph Merkle has shown that financial losses hurt people much less than they expected.

The other is that for many of us, our well-being depends upon relative income (pdf) more than absolute. For example, one survey by Sara Solnick and David Hemenway found that most people would prefer (pdf) an income of $50,000 a year when everybody else get $25,000 than an income of $100,000 a year when everybody else has $200,000.  If all of us become worse off, therefore, well-being doesn’t fall much: we’ll be comforted by the fact that we’re all in the same boat.

You might object that this is only true of Brexit ex ante. Ex post, some will suffer more from it than others. But this can be said of the normal everyday creative destruction of capitalism. And few oppose this.

Our second pillar is a finding by Matthias Benz, Bruno Frey and Alois Stutzer. They show that there’s such a thing as procedural utility. They say:

Participation rights provide procedural utility in terms of a feeling of self-determination and influence.

This is one reason why the self-employed tend to be happier than employees.

A sense of control over one’s destiny, and of having a right to a say, makes us happy even if we don’t actually exercise that right and even if the outcomes of decisions are the same.

You might object to this that nobody other than a minority of cranks much cared about sovereignty before 2016. True, but irrelevant. They care now. And this is what matters.

If we put together the Easterlin paradox with the finding that procedural utility matters, we have a clear implication: the loss of income caused by Brexit won’t much hurt us whilst the gain to national self-control should increase well-being.

Brexit trades off income against sovereignty. Behavioural economics suggests this is a bargain which many people might rationally want. The fact that a slim majority chose to make this trade-off is therefore reasonable - perhaps more so than they knew at the time.

So, how convincing is this argument? I'm not sure. I’ve two quibbles with it.

One is that the Easterlin paradox is a story about economic growth, not about the lack of it. Just because growth doesn’t make us much happier, it doesn’t follow that the lack of it will be harmless. In an environment in which we might well suffer capitalist stagnation anyway, Brexit raises the risk of a flatlining of incomes for a long time. Maybe 2% real growth per year versus 2.5% is no big deal. But 0.5% versus 1% might be. As Ben Friedman has shown, weak growth creates intolerance and closed-mindedness. For some Brexiters, of course, this is a feature not a bug but I disagree.

Secondly, there must be less cack-handed and divisive ways of increasing procedural utility than Brexit – such as greater worker democracy or means of giving clients a greater voice in the provision of public services.

I’m not sure, therefore, that all this is a convincing argument for Brexit. But it is, I think, a strong one – and certainly better than almost all Brexiters have managed. Which for me raises a puzzle: why haven’t they argued more along these lines?

Comments

[oldcobbler]

Why doesn't the Green Party welcome Brexit, since it is likely (at least in the short- and medium-term) to lead to lower consumption and perhaps increased self-reliance ?

[Sophia Grene]

Because they’re not clever enough. Also, it would be hard to sell voters on the proposition that they will be poorer, but they won’t mind.

[Mark]

Economists seem over-reliant on aggregate GDP, whereas GDP per capita is relevant to voters' lives. Brexit may mean a lower population, due to reduced immigration from EU nations, but higher GDP per capita as immigration is likely to be focused on higher earners.

Also bear in mind that even if GDP per capita is lower under Brexit than EU membership, the distribution matters more than the mean. It's possible that the owners of capital will lose out (protectionism, migrant labour) whereas those who sell their labour into a more protected marketplace for such skills and who consume basic products that benefit from enhanced competition and reduced tariffs may well be better off.

[Jwatson1]

Does Brexit entail any gains to national self-control though? Seems to me it will actually lead to a significant loss of sovereignty. All that lovely investment the Brexiters are so keen on is likely to have major political strings attached. We are unlikely to be in a position to protest.

[Dave Timoney]

I think Brexiteers have made this argument, but specifically in terms of the trade-off between higher growth and lower immigration. This has allowed it to be dismissed as the price of xenophobia, marginalising the "procedural utility" angle.

[Ian Bright]

Reasonable arguments, Chris. On procedural utility, another way to look at it is that some outside the main cities feel neglected – that “Westminster” is not listening to or care about them. I suspect there is feeling that EU money spent on structural adjustment funds (“the EU funded this road / community centre”) would be “better” even if exactly the same money on exactly the same project came directly from the central government – rather than going through the EU first. In that sense there may be a feeling of taking back control.

[e]

Your arguments lead to Lexit which has little to no backing, or so it seems, among those well described here as needing/wanting to regain self-determination and influence – a better descriptor than working class racist – though of course just like the middle classes we have some of these too.

[David_AC_Grant]

They used the second argument a fair bit, surely? "Take back control" and all that. The first, not at all. We saw this in Scotland in 2014 as well. The politician or pundit who is prepared to say, "You can take back control but you very well might be worse off" is practically non-existent. I think I know only one nationalist - out of dozens - who was willing to acknowledge that independence would almost certainly mean people would be worse off, at least in the short-run.

[Dipper]

People often say that the EU has prevented war in Europe. And that is fine as an argument. But there is no reason why policies that are designed to prevent war should automatically be policies that produce widespread economic benefit. Hence the many economists who say, Brexit is terrible, being part of the EU, even the Euro , is best, but inexplicably the ECB pursues policies that impoverish nations and they should implement different ones. Quite, but they don't.

[Jim]

You'd have gone down a storm in the 50s and 60s when all those Empire colonies were going independent - don't vote for independence, you'll all be worse off!!!!!

[Martin]

Nice try. But the arguments may both founder if Brexit, as seems quite likely, further increases inequality as well as making us relatively poorer in aggregate. The Green Party opposes Brexit because the single market at least potentially avoids the race to the bottom on environmental standards. And it isn’t obvious why we should be happy if GDP per head rises on account of high earning immigrants.

[CHL]

The procedural utility argument has some force. Note though, that this implies that the bulk of the UK population accepts the referendum as a fair procedure. I would be more careful on the argument built from the Easterlin Paradox. Perhaps the best recent paper on the Easterlin Paradox (ftp://repec.iza.org/RePEc/Discussionpaper/dp8914.pdf) by Jan Emmanuel de Neve and others suggests that the Easterlin Paradox is caused precisely because people are more sensitive to negative shocks than they are to positive ones: economic growth has only a marginal impact on life satisfaction while recessions have a large negative impact. If this is true (and I find De Never fairly convincing) then the Easterlin Paradox suggests we are likely to underestimate the negative impact of the economic consequences of Brexit...

[marku52]

Why should the average worker care about "growth" when none of it has been returned to him in wages or benefits for at least the last 30 years (in the US at least)?

To him, the presence or lack of it is irrelevant. All the presence of it does is present a slightly lower chance of being laid off.

[Ralph Musgrave]

It occurs to me that an increased used of the word "phobia" in the Brexit debate would improve the standard of debate.

Muslims and their supporters chant the word "Islamo-phobia" at anyone with any doubts about the amazing culturally enriching characteristics of Islam: genital mutilation, homophobia, mistreatment of apostates, etc. And that's a good debating technique as it suggests one's opponents are both wrong and nutters.

So Brexiteers should chant "Brexit-phobia" at Remainers and Remainers should chant "Remain-phobia" back.

Just an idea.