Wednesday, 28 October 2015

The Science Of Economics: The Truth About Britain Leaving The EU

We've heard a lot this week from EU-friendly politicians (which is pretty much everyone outside of UKIP and a few Conservatives) about the dangers to the economy and the job losses if the UK leaves the EU. The irony seems to be lost on so many - so let me try to explain why this narrative is largely a confused one.

Here's pretty much the bulk of the reality (barring a few exceptions). The vast majority of the jobs that would be affected by the decimation of the EU are the jobs currently taken up by the stuffy EU bureaucrats whose roles are to interfere in the market processes, create documents, employ delegates to push those documents back and forth, and generally just construct protocols and working practices to justify their roles. In many cases these people’s very existence in the job market is only justified because of the EU in the first place (and if you can’t see why that is a problem, you should read this Blog post of mine on opportunity costs).

There is no reason that jobs in the general sphere of trade require the EU to function - in fact, quite the opposite. It's no small irony that the majority of jobs affected by leaving the EU are going to be primarily the extraneous number of bureaucratic roles that are in place because of this monolithic EU structure.

Quite frankly, we would easily be able to enjoy all the benefits of Europe (free movement of people, greater multi-state cooperation, to give two examples) whilst obtaining the national freedom to trade openly and freely and make all our own laws as we see fit. To misunderstand this is to fail to comprehend exactly what a healthy free trade system looks like.

Economics as a science
The best way to explain this is to show how economics works when it is tendered most closely to its scientific principles. The principle it most closely resembles is nature’s principle of parsimony – the law of least effort. People who get this are people who are likely to understand why the market need not be so hampered by so many bureaucrats and their socialist impediments to free trade.

When it comes to how to deal with economics, humans could easily view the natural world as a very influential mother, because the fundamental principle of least resistance is written into the mathematical code of nature. Profligacy is not her game; she leaves nothing to spare on matters of efficiency, and she is always parsimonious with her energy expended. For example, when light travels it reverts to the path of least time; a hanging chain reverts to the shape of lowest centre of mass; and soap bubbles revert to the shape of least surface area and volume. In a similar vein, economics, if left to many of its natural paths of efficiency, would be in a much better state, and also it would be more science-friendly.

Just as nature's laws find themselves running according to the principle of maximum efficiency, so too would economics if it were left to the principles of economic laws based on prices, supply and demand. You may object that unlike chemical elements, economics involves that complex and erratic phenomenon known as human behaviour, but that's not a valid objection, for as Adam Smith reminds us, the invisible hand acts as a social mechanism that channels collective objectives toward meeting the needs of the people that make up that society, by ensuring competition between buyers and suppliers, which channels the profit motive of individuals into providing products that society desires at prices which are rarely above cost.

This means that in a market in which consumers are free and happy in being able to make mutually beneficial transactions, something resembling nature's fundamental principle of efficiency should play out across the economy.

Applying this to the problematic nature of the EU, we can see the issue more clearly by looking at chemistry. Chemistry is a noble science, and one which returns reliable and consistent empirical data. The main reason for this is that natural laws that underpin the material constituents are not compromised or retarded through human interference. When considering gaseous compounds, the masses of one constituent that combine with a fixed mass of the other constituent are in the ratio of (small) integers to each other. If scientists interfered in this law so that it was no longer obeyed by all gas mixtures, the fundamental constituents of chemistry would be undermined.

This applies pretty neatly to economics as well, at least to the greatest degree. Economics resembles science in that its truths are based on empirical observations and patterns distilled from data. If we treated economics as rigorously as we did chemistry we would find one of the golden rules of economics - the fundamental principle of least resistance (otherwise known as maximum efficiency) - playing out much more prominently.

Not to impute any kind of over-arching sentience to the market, but using sentience analogically here, prices are the result of billions of individual units of activity going on in the global market. Prices are, of course, dynamically in flux according to changes in supply and demand, but what all this amounts to is the fact that no politician, ideological group or economist knows the market better than the market knows itself.

Consequently, top down management or interference from on high are always going to be inadequate to the task of the way markets themselves know the price signals in response to supply and demand activity. Prices are to markets as the path of least resistance is to the natural world – and pretty much everything EU bureaucrats do to interfere in this process makes the European trade market worse off - which means we should have absolutely no qualms about leaving it and enjoying greater freedom to trade with whoever we want.

Edit to add: Of course, it's worth adding that although the natural flow of the economy tends towards the path of least effort, this is in some places a key reason why some kind of light regulation puts the brakes on some undesirable activity. For example, given the human tendency to do things as parsimoniously as possible, some regulatory protocols that guard workers and consumers against potential health and safety dangers in the workplace, product safety, built in obsolescence and some forms of asymmetry of information are quite welcome and necessary. What impedes the process is when politicians interfere in ways that are best left to the market forces - most notably, anything that artificially interferes with prices and the information-carrying signals they exhibit: be that the minimum wage, rent controls, tariffs, business subsidies and so forth.