Thursday, 30 November 2017

Britain, Trade Histories & The EU

A reader emailed to ask about Britain's historical relationship with free trade and Europe, and whether the current uncertainty surrounding Brexit makes things precarious for us. Here's my reply:

There was little free trade in Britain until it was taken up consciously as national policy around about the mid 19th century. Previously, tariffs were sometimes sky high, as in the case of the French against British wool products, British tariffs against Indian cotton cloth, etc.

But also there was no mass immigration because welfare was only available locally to select inhabitants. The nearest thing we came to it, except very recently, was the French Huguenots in the early 1700s fleeing persecution. As expected, Londoners kicked up a stink and a special Act had to be passed allowing them to stay. Excise taxes at border posts, as before, could be very high.

Of course, Europe then was far different to now - it amounted to lots of principalities with border posts. Germany had a score of them and Italy a dozen until late in the 19th century - so any merchants travelling down the Rhine had to repeatedly pay excises at border posts. Only a few cities in Europe, such as Antwerp and Hamburg were freer.

It was only when Ricardo's arguments about free trade started to become more widely appreciated that cities became freer. David Ricardo would often be heard in the House of Commons in the early part of the 19th century extolling the virtues of removing tariffs, but the most the UK responded with was Imperial Preference - whereby, free trade was freer with its colonies but not with other nations.

Then two world wars interrupted the free flowing migration of widespread trade, and as well as mass murder on an unprecedented scale, socialistic tyrannies were spread across lots of Europe via the Russian, German and Italian dictatorships. Consequently, many of the resultant post-war government interventionist policies that followed the world wars set precedents for the economically stultifying State meddling that we've become so used to in the past six decades.

Once upon a time, the idea that Europe would need a bunch of unelected socialist bureaucrats for its nations to enjoy the free movement of people, goods, services and capital in a "single market" would have been ludicrous - but alas, that is what we have with the current EU from which we've just promised to distance ourselves.

During the next sixty years or so, Britain became more diverse in its trade agreements with the rest of the world, and although there have been some serious peaks and troughs, generally we have been going in the right direction. This has been the beauty of a freer market unbound by over-regulation and special preference blocs. If it’s beneficial for Britain to trade with France for wine, Germany for BMWs, China for steel, Kenya for coffee and Brazil for bananas, then that’s what will (should) happen.

All any country wants in terms of trade is to import goods in which foreign exporters have the comparative advantage, and export goods in which they have the comparative advantage – and within that process find the nations that have the most attractive comparative advantage. The Netherlands may have a comparative advantage over us in terms of fuels and metals, but if there is an even greater comparative advantage by having a fuel and metals trade deficit with the United States and Japan then that option is preferable.

So trading with anyone with whom a mutually beneficial transaction occurs is the desired result. Apart from a few exceptions regarding meeting quality standards, the idea of even having to talk of 'having access to a market' by going through doors in a politically constructed labyrinth is preposterous.

One shouldn't forget that, ostensibly, the post-World War 20th century was unprecedented, and the nations that came together to co-operate in the reparation job deserve a lot of credit. We live in the most peaceable Europe we’ve ever seen, and no doubt attitudes to union and unity have helped. The problem is, I think it has gone way too far, and there are interferences in our freedoms, and in prices too, which go way beyond the desire to secure peaceful co-existence.

The European Union has effectively put up a de facto wall around its bloc to protect its own European agents from more competitive prices outside the EU, which makes it more difficult for poorer African, Asian and South American traders to compete. If the EU opened its barriers to free trade with, say, Africa on farming, and stopped subsidising its own farmers, as one example, it would be the first big step towards the revival of the developing nations' agricultural industries.

Rather like our own NHS on a smaller scale, the EU is the world’s best living example of the limit of economies of scale, where once an institution becomes too fattened up you get dis-economies of scale**, where scores of extra management are added to the workforce, along with such increased bureaucracy and self-preservation that lack of communication and inadequate understanding from the top to the bottom, and sideways too, means there are more problems than solutions. I think history will show that our coming out was a good thing for us, and a catalyst for good in Europe too as other nations will follow suit.

Then of course there is another charge to level against big bureaucracies - it's what's called the Ringelmann effect, which is the tendency for individual members of a group to become increasingly less productive as the size of their group increases. A good example is in a tug of war event, where you'll usually find there is an inverse relationship between how many of you there are pulling your team's side of the rope, and the magnitude of each agent's individual contribution to the total effort.

Another example, when you're in a crowd and the speaker enters the stage and says good morning, there is usually a murmured response. When he says "come on you can do better than that", the reciprocation is much louder. The volume of the words you utter will be less loud than if you were asked to respond on your own.

This phenomenon of increased group size resulting in lower individual effort or productivity is also known in psychology as social loafing. Large institutions like the EU, the civil service, and local authorities are going to be replete with social loafing, particularly when you factor in Parkinson's law and the Allen curve, which is even more reason why we're better off out of it.