The battle for ideas in the Brexit debate comes down to two basic economic approaches. The neo-Keynesian macroeconomists in the permanent establishment, who manage the state as economic planners and regulators are on one side. They are naturally sympathetic with the policies and ideals of their EU counterparts. Against them are those who argue that in economics free markets must have primacy over the state.
It is turning out to be a modern rerun of the socialist calculation debate. In a communist economy, even if one puts to one side the question as to whether the planners’ goals actually align with the public good, planners still require prices to be set in free markets. It is impossible for them to decide the efficient allocation of economic resources when free markets don’t exist, as the collapse of Soviet communism proved. Neo-Keynesians think they have resolved the problem by sanctioning market prices. But they are not free because they are rigged through government planning, spending and regulation, while the central bank corrupts the unit of account. By advocating socialism-light, they think they can avoid the more obvious consequences of full-bloodied state control, when instead they are only storing up trouble for the future, reflected in mountainous accumulations of debt.
It explains to a large degree the statists’ dependence on statistics, mathematics and general equilibrium assumptions, which are expressed in economic modelling. It is obvious, at least to genuine free-marketeers, that the fallacy lies in not appreciating that an economy is always a dynamic, ever-evolving aggregate of individual actions, which cannot be replicated by a static model. If Brexit is going to work favourably, this central argument has to be addressed and debated, particularly with respect to free trade.
Meanwhile, the battle lines for trade in the Brexit negotiations are being formed. On the one hand, there is the EU as ever playing hard-ball, believing in the dire consequences for Britain of going it alone. And on the other, the Brexiteers, whose minority arguments for freer trade seem to be clarifying and becoming more coherent. Meanwhile, the Remainers in the permanent establishment, who are essentially neo-Keynesian planners uncomfortable with free markets, are quietly undermining Mrs May’s Lancaster House declaration, that Brexit means Brexit.
However, if Brexit is to be delivered, then it must be before the next credit crisis interrupts the process. A crisis of some sort is widely feared in financial and banking circles, as evidenced by stock and bond market commentaries, the research that emanates from bodies such as the Bank for International Settlements, and the desire of the Fed to reduce its balance sheet so it can act as lender of last resort again.
Time is very much of the essence, not only because of the short Brexit deadlines but because of the evolution of the global credit cycle. It is becoming obvious, to those who have studied it, that on a global scale capital is shifting from financials into non-financials, which is always a late-cycle development. The consequences are rising bond yields (already evident) followed by accelerating rising prices, setting about an increase in interest rates sufficient to disrupt credit demand. As night follows day, a debt crisis always ensues, and given today’s record accumulation of global debt, the upcoming crisis will almost certainly be a major financial and economic disruption.
Based on the observable credit and market dynamics, the time taken to reach this unhappy state is probably no more than a year to eighteen months and is the one event that central banks cannot defer. Consequently, there is a strong possibility that the Brexit process will not be completed by the time of the crisis, particularly if a transition or implementation period is included in any agreement.
All this weighs in favour of an early acceptance of a free trade option as the only sensible objective, instead of a negotiated outcome. For anyone who understands free markets, the best result would be to abandon all negotiations with the EU and state to its negotiators that Britain is going to remove all tariffs. The reasoning behind such a move is fully explained here, and anyone who is not familiar with the economics of trade is recommended to read it.
To summarise, the economic case for free trade is an immediate Brexit, no implementation period, and the removal of all tariffs. Any delay is time wasted. Therefore, it is only politics which we are dealing with.
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