Efficiency vs Fairness

On Thursday 23rd of June, the British people voted by a majority of 52% to 48% to leave the EU.

This is a monumental event, and it is worth trying to piece together what happened, and what some of the implications might be.

The voter turnout was strong with around 72% of voters casting a ballot. However, the results showed significant division within the UK, with different regions and demographics supporting different sides of the argument.

In England and Wales, a majority voted to leave the EU (53% and 52% respectively). However, within England itself, voters in London overwhelmingly opted to remain. Similarly, 62% and 56% of voters in Scotland and Northern Ireland voted to stay in the EU.

Perhaps even more interestingly, there were significant divides between key demographics. Regions that had a greater percentage of young people, residents with higher education, and higher median income levels were much more likely to vote to remain in the EU. Whereas, areas with older, poorer and less well educated residents overwhelmingly voted to exit the EU.

What does this tell us?

Well, some of the key arguments put forward by the “remain” campaign were about the economic benefits of staying in the EU. Leaving the EU, it was argued, would lead to increased unemployment, lower levels of investment, and lower levels of growth for the UK economy.

On a basic level, these arguments make sense. Economic theory suggests that free trade can increase the overall surplus available to producers and consumers. And investors are also much less likely to invest in a country when there is a lot of uncertainty. Reduced investment can reduce economic growth, and lead to a self-fulfilling prophecy of reduced investment, lower growth and yet still lower investment.

If these economic arguments are valid, and staying in the EU is better for the UK economy overall, then why would 52% of voters opt to leave the EU?

Well, putting the lies of the “leave” campaign to one side, I don’t believe it is particularly helpful to characterize all of the more than 17 million British people who voted to leave the EU as either stupid or racist.

If staying in the EU is good for the UK economy overall and would increase the size of the economic pie, then it may be that many of the people who voted to leave the EU don’t believe they will receive a fair slice of the pie (or any pie at all).

The referendum result highlights a growing tension in the UK and worldwide between the neo-liberal model which favours free trade and deregulation of markets, and a more social-democratic model (practiced in the Nordic countries) which aims to reduce poverty and support universally accessible public services like child care, education, old-age care, and health services.

Even large investment houses are starting to appreciate the risk posed by inequality.

Joachim Fels, a global economic adviser at Pimco, an international investment firm, wrote in a research note: “As I see it, the vote in the UK is part of a wider, more global backlash against the establishment, rising inequality and globalisation.” And Pimco has advised its clients that “… investors must start to anticipate new populist policy responses.”

Immigration was a big issue during the Brexit referendum, however I don’t believe, unlike some of my esteemed friends, that pretty much everyone who voted to leave the EU in order to limit immigration is a racist.

Lack of jobs, rising levels of economic inequality and uncertainty about the future can easily explain why many people might have wanted to limit new immigration to the UK.

That being said, economic stress can lead to high emotions and the desire to find a scapegoat for ones problems. Following the Brexit result being announced, the UK appears to have experienced an increase in racial abuse. For example, London’s metropolitan police say that they have seen a 57% increase in reporting to the “Stop Hate Crime” website.

Racism is a serious problem, but I believe it is a symptom rather than a cause of the division that we are currently witnessing in the UK.

People in the UK with the money and power to do so need to look for ways to reduce inequality and provide opportunities for the most marginalized members of their respective communities. And in doing so, they might benefit by taking a closer look at the social-democratic model adopted in the Nordic countries.

Increasing the size of the economic pie is an admirable goal, but if the system is set up in such a way that a growing number of people get no pie at all, then we shouldn’t be surprised if hungry people manage to find a way to spoil the party.