Economic Profession’s Ignorance Of Cultural Effects

The year 2016 will likely go down in history as either an oddity, or the start of a major shift in something. This week, the British will go to the polls to vote on whether to make a radical change in exiting the E.U. No matter which way the vote goes, it is a virtual certainty that at least 40% of the voters will vote to leave. Because roughly 60% of current British law is handed down in some way from Brussels, this isn’t a normal statement of not liking the Party in power and wanting the other Party to have a shot. No, this says that at least 40% of the U.K. doesn’t like the current SYSTEM of government and wants a fundamental change. In other words, they have lost faith in the institutions.

The arguments that are being made on the “Remain” side involve assertions of economic problems (or disaster) that will befall the country in Britain votes to “Leave”.  These assertions, to put it mildly, simply aren’t having a large effect (and we will see on Thursday if they move the needle enough to win). At its heart, the reason that the conventional wisdom seems to be having difficulty is that the economic profession simply has forgotten culture in its economic analysis.

For the better part of 3 generations in the West, professional economists have dominated economic policy making. In an effort to smooth the business cycle and/or manage economic shifts, they have developed models, mathematical equations, and statistics to enable them to manage the economy competently. The idea of free trade has dominated policy making circles for over two generations. But the economic models that declare that free movement of labor and resources necessarily lead to economically efficient outcomes tend to assume that all labor is equal. In other words, an influx of foreign labor that displaces domestic labor is not thought of as a bad thing (if the foreign labor is more efficient). The assumption is that domestic labor will then do something else that will lead to overall increased wealth creation in society. The disruption in livelihood of the domestic workers is blithely ignored.

In some ways, this is understandable. After all, it is relatively easy to mathematically measure wages, number of immigrants, lower inflation (from lower wage immigrants pushing down the overall level of wages), etc. Measuring the disruption or feeling of being betrayed by your own government who appears to view immigrants as more deserving of a job than the home folks is difficult to quantify. It is easy to say that people should be tolerant of other cultures, and shame on them if they aren’t. But the fact is that national cohesion and social peace is dependent on people thinking of total strangers like family. This is easy to do if a group of people have had similar experiences or seem similar enough. The feeling of unity that many Americans had on 9/11 was based on a feeling that we had all been attacked. There have been other attacks and atrocities around the world that haven’t hit the American psyche the same way. As horrible as those attacks on foreign soil were, Americans didn’t feel that their ‘family’ had been attacked. National cohesion is indispensable for the modern nation state.

The fact is, economists have forgotten about this. If your cousin loses his job due to foreign competition and you are viewed as an awful person if you complain, it is easy to see why frustration would mount. This doesn’t even take into account the conflicts that will inevitably arise when two cultures clash. Focusing on high level numbers as GDP growth, inflation, the stock market, etc. has historically measured the wealth of society, but is leaves out part of the picture (that of people whose lives have been made economically less secure). As the economics profession has become more mathematically oriented, it is hardly surprising that they have discounted variables that don’t lend themselves to easy mathematical expression.

But these costs are real. And they have been rising. And on Thursday, although Britain may ultimately end up staying in the EU, it appears that the vote will be close. This is the effect of ignoring these costs. The political class (and the economics profession) had better start to take notice. Otherwise, it will continue to lose legitimacy in the eyes of the broader population.

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