Written by John Lounsbury
Eric Lonergan has pointed out to me an article from The Telegraph published 17 days before the UK Brexit referendum: ‘Irritation and anger’ may lead to Brexit, says influential psychologist by Ambrose Evans-Pritchard. This article discusses the referendum debate as a classic case study of economic irrationality.
From The Telegraph:
British voters are succumbing to impulsive gut feelings and irrational reflexes in the Brexit campaign with little regard for the enormous consequences down the road, the world’s most influential psychologist has warned.
Daniel Kahneman, the Israeli Nobel laureate and father of behavioural economics, said the referendum debate is being driven by a destructive psychological process, one that could lead to a grave misjudgment and a downward spiral for British society.
Kahneman said:
“The major impression one gets observing the debate is that the reasons for exit are clearly emotional…. “The arguments look odd: they look short-term and based on irritation and anger. These seem to be powerful enough that they may lead to Brexit.”
And, of course, it did.
But Evans-Pritchard does not absolve the Bremain side in this discussion. Their efforts were no less irrational:
The counter-critique is that the Remain campaign is equally degrading the debate, playing on visceral reactions and ephemeral issues of the day. In a sense the two sides are egging each other on. That is the sociological fascination of it.
Where are the “logical agents” guiding the political economic ship with “rational expectations”? That ship must have hit an iceberg and is now settling below the waves, heading to join the Titanic. Mainstream economic theories would have suggested that unsinkable ship would have sailed through calm and sunny seas to arrive at the correct destination safely.
There are those who will argue that ‘in the long run’ a free and independent Britain will be a stronger economic entity with global trade arrangements that are more tailored to its specific needs than the arrangements molded to suit an amalgamated European market. It remains to be seen if those arguments have any merit, but it will take a long time to get there. The two negatives with the process are, in short, that (1) ‘in the long run’ we are all dead (HT JMK) and (2) before we reach that distant future time there will be great pain in the near- and mid-term.
Some of the pain coming is already evident: The pound sterling is tanking, down 21% over the past year and 15% since Brexit won. The decline has had two waterfall cascades since 23 June with many thinking there is still much more to come. We hear credible arguments for parity with the euro (another 9% lower) or even with the U.S. dollar (17% further decline).
So let’s review this situation:
The Brexit voters were predominantly those who were feeling left behind by economic changes and felt that leaving the EU would reverse their declining fortunes. They thought immigration would be slowed or reversed and the money presumed to be sent by London to Brussels would stay home and increase the domestic pie. They never thought they would lose purchasing power for whatever savings they had or income they received.
How ironic that the results so far have reduced their meager purchasing power for all things imported and not increased their employment prospects in any recognizable manner.
On the other hand, the Bremain crowd is benefiting (or at least losing much less) as the crashing currency is creating an asset boom with stocks hitting successive new highs. The irony continues.
Shift to America:
With the leading vote getters this presidential season (Trump, Clinton and Sanders) all taking anti-trade positions, the U.S. appears to be considering a ‘Brexit’ of its own. The promise of ‘bringing jobs back to America’ is the appeal being made – and it’s getting a lot of traction with the voters.
I will suggest there are at least the following problems with this thinking:
Reducing imports will not bring many jobs back. If domestic production is restarted for things now imported the workers with be replaced with machines.
Restarting domestic production will cost money and prices will rise.
Restricting imports by means of high import duties will raise domestic prices.
If imports are reduced, almost certainly exports will be also. More domestic job losses will result.
Voters are angry at the economic trends of the last 30 – 35 years. There is an emotional current coursing through America which thinks that the system is rotten and would best be destroyed to set up a start-over. Before they go that route they should contemplate that along the way, after the destruction, many of them would have nothing.
‘Restructuring’ sounds much more rational than ‘destruction’. But that requires moving beyond raw emotion and getting down to thinking. And, as has been attributed to both Henry Ford and Albert Einstein:
“Thinking is hard work; that’s why so few do it.”
