The Brexit Brouhaha

Polls opened Thursday and citizens of Britain voted on whether their country shall remain in the EU, or quit itself from the union. It was a fraught decision, and the lead up to the vote had been marked by water-spewing boats playing pop music in the Battle of the Thames, and the assassination of Jo Cox, a pro-Remain member of Parliament by the pro-Brexit Thomas Mair. (When asked to give his name at magistrate’s court hearing, he shouted “Death to traitors, and freedom for Britain!” The case is being treated as a terrorist trial.) Many Americans are fuzzy on what the fuss is all about, and others are keeping a close eye on their portfolios in the wake of the decision. Opinion polls showed the two sides neck and neck, with just the slightest lead given to the pro-Europe “Remain” faction. However, the markets were predicting a 75% chance that Remain would take the day, much as they correctly predicted with the Scottish referendum, which also had similar neck-and-neck polls. And yet, they were wrong: in the wee hours of Friday morning, it became clear that Britain, the first among all European states, had voted to Leave. The bottom dropped out of the British Pound Sterling, and the markets, predictably, went wild, and are likely to remain volatile for the immediate future.

The fall of the British Pound, from the Washington Post

Britain first joined the European Economic Community in 1973, and a referendum in 1975 was held that kept it in -- the only time that a referendum has been held on the issue until now. When the EU formed in 1993, Britain was included. But not everyone has been happy with this, and unrest has grown over the past few years as the economy, immigration, and trade all come to a head. Prime Minister David Cameron of the Conservative party (or “Tories”) was under considerable pressure, as his party has split between Eurosceptic and Europhilic factions, and individual Tory members of government were essentially free to back whichever side they want. Cameron didn’t want to hold this referendum, and didn’t want the UK to leave the EU: he was forced into holding it by his fractured party and the parties further to the right, and in the wake of the vote, Cameron has announced that he shall resign come October.

1975 and 2016 results, from the BBC

Those in favor of the “Brexit,” or leaving the EU, argue that the EU is a very different body than the EEC in 1973, and the scope of influence and control covers cultural, judicial, and other issues not originally within the jurisdiction of the EEC. They argue that the institution is non-democratic and undermines their national sovereignty, especially in the case of controlling their borders and limited immigration. The justification is that this would reduce pressure on housing, jobs, and other public services. In addition, they hold that severing themselves from the EU would allow it to make their own trade deals, as well as free themselves from what they see as over-regulation and useless bureaucracy. The “Leave” campaign says reducing that red tape would create more jobs and aid small and medium size companies who trade domestically; but the “Remain” campaigns says far more jobs would be lost, in addition to loss in status as an international trading partner. The UK’s fisherman are overwhelmingly in favor of leaving (92%), citing the EU’s Common Fisheries Policy, which sets a quota on fish one is allowed to catch, and many believing that leaving the EU would benefit their industry. And much of the red tape the pro-Brexit faction resents are employment rights and environmental protections (like fishing quotas) - which the UK could easily reproduce in British law if they left the EU, nor would costs disappear overnight, especially if the UK chooses to remain in the EEA.

Some in favor of the Brexit, such as UKIP’s Nigel Farage and Republican Presidential nominee Donald Trump, see the EU as a stepping stone to the total erosion of national sovereignty, and the creation of a United States of Europe. Related to this is the rise of nationalist populist parties, like UKIP and Britain First, akin to the rise of similar parties elsewhere in Europe, including France (the National Front) and Hungary (Jobbik). A great many are anti-immigration, both from European economic migrants (many from less affluent states like Poland and Portugal), and Muslim refugees fleeing ISIS, suspecting them of being a fifth column and resenting the lack of integration, as well as stoking fears of terrorists in their midst. This has been exacerbated with the rise of immigration to the UK from Europe in 2004-2014 from 25% to over 50%.

Xenophobia isn’t new to Britain, but the huge increase has made this sentiment more politically relevant, and immigration a contentious, loaded issue. EU law requires open borders and permits unlimited migrants from other EU states, and the accession of poorer, post-Communist states has exacerbated this, as has the economic ruin of formerly wealthy countries like Spain, Italy, and Portugal in the 2008 collapse, and the inability to stem the flow frustrates many British. 77% of Brits believe immigration should be reduced, and this has given new life to anti-EU populist parties like UKIP, which has heavily engaged in anti-immigrant and Islamophobic rhetoric, saying that they “steal jobs.”  Because Farage and half the Conservative party believe that Britain can’t reduce immigration without leaving the EU, the Brexit has become a top priority and thus the referendum forced. And harsh anti-immigrant sentiment is so normalized, that the Remain campaign hadn’t mounted many arguments to counter it, which means it will remain a contentious issue for a long time, even after the Brexit vote.

All economists agree that leaving the EU would cause short-term economic volatility, but some argue that the UK would ultimately be better off in the end. They compared the EU to a “walled garden” with its tariffs on imports, goods, and services produced outside member states, and breaking out would open up new trade horizons. Patrick Minford, a professor of economics at Cardiff University, Wales, said that food prices would fall once the UK quit Europe, because of ducking such tariffs. He and others also criticize those who argue in favor of remaining for the benefits of members due to the EU’s weak economic performance in recent years, and add that London would still remain an important global financial center.

Andrew Lilico, a British economist at consulting firm Europe Economics, thinks that the EU is the one who would be better off without Britain, and indeed was inevitable once the UK refused to join the euro. While both benefited from each other geopolitically in the beginning, especially in absorbing post-communist and post-fascist states and aiding them integrate as democracies, that project is drawing to an end. Indeed, Lilico believes that the euro can only work well if the eurozone becomes a single integrated superstate, and that the inclusion of the UK is the single biggest obstacle to this desirable end; a very different point of view from the nationalists who desire the opposite! But as long as they remain, Lilico contends that economic catastrophes like have befallen Spain and Greece will continue to plague the continent. But as a unified state, the eurozone can better offset economic setbacks with fiscal transfers to enable struggling populations to get by, by regional subsidies, benefits payments, and tax breaks, rather than mass migration. This means much more money flowing from the richer parts of Europe, like Germany and Northern Italy, to poorer parts, like Greece, Southern Italy, and Spain. But such deep economic integration cannot occur with states that aren’t part of the eurozone - which means that the UK should get out of the way. However, there is also resentment between Germans and Greeks already over money given to the latter, with the Germans unwilling to shoulder Greek debt and perceived financial recklessness, and Greeks saying that Germans are too stingy; such feelings are likely to hinder greater economic integration. Former Pimco executive Mohamed El-Erian also asserts that a Brexit may be the necessary evil that secures the future of the European political bloc, despite the likely short-term economic volatility that is sure to result.

In contrast, the “Remain” camp, including Cameron, the IMF, President Obama, and the UK Treasury, argues that the UK gains significant economic benefits, security cooperation, and global influence by remaining attached to the EU, and leaving would diminish their power, hurt their economy by the implementation of trade barriers, cause delays in investment and increase job losses, and jeopardize their security, as they’d no longer have access to commonly held European criminal databases. The pro-Europe think tank, Centre for European Reform (CER) also adds that cutting immigration will not aid Britain's economy but hurt it, as migrants contribute to the workforce in the face of an aging British population. Big businesses, with few exceptions, were in favor of remaining, because being part of the EU makes it easier for them to move money, people, and products around the world. And though Europe receives more money from Britain than it gives back, leaving the EU would pressure their government to replace agricultural subsidies, educational and research funds (around 16% of university research funds come from the EU), business investments (15% of the EU business investments go to the UK), and other subsidies with domestic monies. And while EU exports to the UK are worth 3% of the EU GDP, UK exports to the EU are worth 13% of the UK GDP. Making up that shortfall would be difficult indeed.

There isn’t any argument about whether Britain can leave the EU - it most certainly can. Article 50 of the Treaty of the European Union specifies that any member state can leave, and all relevant treaties will cease or be re-negotiated. As the Leave camp has won the Brexit vote, the UK will be the first state to do this, and therefore any actions regarding such are entirely unprecedented, and the UK’s subsequent relationship with EU states could take several forms.

Some argue that the whole thing is a tempest in a teapot, and that in the end, not much will change. Now that the Brexit was voted in, Parliament will strike deals with Brussels to maintain much of the status quo (or try to), giving the illusion of change without much of the substance, especially as the political classes, civil service, and big businesses were unabashedly pro-Europe in the first place, and disentangling their close ties and interdependence with the European market  --  both in terms of British money flowing out, and foreign capital supporting British industry -- would spell utter chaos. The referendum is not legally binding, and does not hold the government to any specific actions, which was also true of the Scottish independence referendum in 2014, though ignoring it is political suicide. Still, the votes show that the population of Britain is very nearly evenly split on the issue, and the result is very possibly a Britain that only leaves symbolically rather than actually.

The younger voters overwhelmingly voted to Remain, and many among that demographic are angry and disheartened at their narrow loss, especially among 16 and 17 year olds who were prohibited from voting, but will have to live with the results. The folks in their 30s seemed to be evenly split between Leave and Remain, but the scale tipped for those in the 40s, and those in their 50s and 60s and above voted heavily towards Leave. Regionally, London, Scotland, Gibraltar and Northern Ireland voted to Remain, with the exceptions being mostly working-class East London and Wales, who voted to Leave. Education and national identity also played roles, with those who had less education and those identifying as English tending to vote Leave. 

Prime Minister David Cameron had said that if the referendum results in a vote to Leave, he will begin working on exit negotiations right away, first alerting the European Council of the decision to withdraw, after which the the UK will no longer take part in EU decision making. Then talks about the nature of the UK’s new relationship to Europe begin, but the UK will be at a disadvantage during these negotiations, and there is a two year time limit to complete them. As Cameron is stepping down this October, those talks will be done by his successor. If the UK rejects an offer, the EU can simply let the clock run down, forcing the matter. Considering the EU’s cool attitude towards the vote and its results, the Leave camp may not get the results that they hoped the Brexit would bring them. This would be especially true if Cameron’s replacement is more conservative or is unwilling to accept the restrictions that would come with a Norway-style deal, or if the EU decides to strike a hard bargain to discourage other member states from following suit.

Some alternatives would continue to allow the UK access to the internal EU market, including remaining within the European Economic Area (EEA) as a European Free Trade Association (EFTA) member, or renegotiation trade terms with member states similar to how the Swiss function. Joining the EEA as an EFTA member would leave the UK with less bargaining power than it had as an EU member, and still be required to contribute to the EU budget in exchange for access to the internal market - but without the say that they had as an EU member. However, the UK would be free to set their own policies in agriculture and fishing, customs, and security, which would please and displease Brexit-supporters in various degrees, as the UK would lose power in some ways and gain independence in others. It would be, in short, an associate status like that of Norway, that would maintain the single market and freedom of movement. But the point of the Brexit was to put an end to those very things.

Supporters of the Brexit wish to curb immigration, but there is no guarantee that they’d be successful at this, as the EEA agreement and agreement with Switzerland cover the free movement of both goods and people. So EU citizens seeking work in the UK will be just as free to enter as they already are, which means a core tenet of the Brexit supporters is fundamentally unfeasible. Or, alternately, if Britain tries to restrict EU and EEA citizens access to the UK, Europe could respond in kind and demand visas, paperwork, and other hurdles of British citizens to live and work elsewhere in Europe that is not currently required.

In such a scenario, moving to and working in Britain will certainly become more difficult than it is now, and we may see British national law operating on the borders until an agreement is hammered out between the EU and UK anyway. Border staff would need to establish if arrivals meet requirements for entry, including proof of income, intention to return home, and lack of intention to work, whereas those migrating in order to work would need to show proof of employment. This would be a huge disincentive in areas with low job security, such as the arts. EU nationals might, absent a deal, also no longer have access to scholarships or student loans at UK universities. In theory, Britain could have a policy that prefers Germans over, say, Romanians or Polish. But as aforementioned, such cherry-picking who of the EU could enter with greater ease would undoubtedly result in retaliations via visa restrictions on British nationals, including integration obligations for British nationals living abroad, such as language requirements in Spain. In this grim scenario, the border between Northern Ireland and the Irish Republic will quickly become the “back door” into Britain from the EU, and some warn this would lead to increased borderline tensions along what is already one of the most politically sensitive borders in Europe. But the Brexit could also signal a sea change worldwide about the treatment of migrants. Indeed, many politicians and economists see the Brexit vote as a gauge of rising xenophobia and anti-immigrant sentiment in border beyond Britain’s, and some now posit that Trump’s chances at presidency, riding on the very same sentiments, is more likely. Certainly, ethnic minorities in the UK are feeling discomfited, many of whom are EU citizens, but not British ones.

Brexit supporters argue that leaving Europe will be better for them economically and politically, as they’d save money once no longer obligated to contribute money to EU coffers, and would be able to negotiate trade on their own terms for themselves without being shackled to EU regulations and red tape. Nigel Farage of UKIP argues that trading independently of such regulations will aid Britain's economic revival, while opponents argue that leaving the EU would isolate them in international trade. Since the vote took place, the markets have been in flux, which seems to bear out what the Remain camp warned about. Europhiles say that the economic uncertainty and trade barriers could cost thousands of jobs, making them all worse off than before. Some even say that 3 million jobs could disappear, though this estimate is misleading, as jobs are associated with trade, not being a member of a political group, as author Ryan Bourne asserts in his paper “The EU Jobs Myth.” Such a dire outcome would manifest if leaving the EU is accompanied by the erection of trade barriers, but such a result is hardly guaranteed. One estimate does say that the UK GDP after a Brexit would be permanently reduced by 2.25% because of lower foreign investment, but economists at the Centre for Economic Performance (CEP) said that were the UK to fail to negotiate favorable trade terms with the EU, the GDP could drop between 6-9.5%, a drop similar to the one experienced during the global financial crisis of 2008. If the UK is able to negotiate free trade agreements with the EU, they’d still face a GDP loss of 2.25%.

Ultimately, a lot depends on the types of trade agreements that the UK is able to procure, and how restrictive they are. (Free trade agreements, free of restrictions, with emerging economies would be the best.) But the ability to negotiate such favorable terms is by no means guaranteed, especially as the UK would lose bargaining power once it leaves the EU, especially if other countries are irritated with the UK in the face of such a decision (which is likely).  Right now, Britain is one of Europe’s “Big Three,” routinely punching above its weight due to its considerable influence; but that is very likely to be severely reduced in the face of the Brexit. However, with unfavorable agreements, the market may very well adjust; prior to the financial crisis, the UK saw 4 million jobs created to 3.7 million jobs lost, which is pretty much the exact scale of the estimated 3 - 4 million jobs associated with exports to the EU. Ultimately, the likely result of a Brexit is somewhere between the worst imagined by the Europhiles, and the best imagined by the Eurosceptics.

That doesn’t mean that all is well within the EU. Leaving is undoubtedly already causing the UK economic damage (the British pound is the lowest it’s been in 30 years), but the EU bureaucracy and overregulation is harmful to the economies of all its member states. Still, leaving the EU means less ability to influence it, especially considering how its current status as a member has allowed the UK to inject deregulatory and free market logic into EU policy making (even if not enough for the likes of many of the British who voted for the Brexit). And leaving might not change the austerity dynamics that are the mark of current EU economic politics. The entirety of Europe is aging and losing its global market share and global political influence - managing decline is not solely a British problem.

Some are concerned that the Transatlantic Trade and Investment Partnership (TTIP), a proposed trade agreement between the EU and the USA, would threaten the public services of the EU member states, and Labour leader Jeremy Corbyn, who is pro-Remain, has pledged to veto the agreement, fearing it would shift more power to multinational corporations, undermine public services, and threaten basic rights. But quitting the EU puts the UK outside of this agreement, and would mean that the UK would need to negotiate their own trade deal with the USA. The TTIP, which would create the biggest free trade area the world has yet seen, but the UK might not have the access they’d prefer once outside the EU.

The volatility we have seen in the markets is not likely to dissipate soon. Growth is likely to be hurt in both the short and medium term, even according to economists who favored the Brexit, though they say (or hope) the UK will be better off by 2030. The value of the pound has already dropped, which was predicted. UK-based stocks are likely to continue declining, especially banks and other financial shares. Stocks and commodities, such as oil, are also likely to suffer. Money will leave the country and likely be parked in government bonds in the US and Germany, and gold will get a big lift as it is seen as a safe investment in times of financial volatility. The US dollar is already stronger against foreign currencies, and will likely remain so. Some warn that the Brexit could precipitate a stock market crash, but this is not the most likely outcome. More likely is a recession if the British exit is poorly managed. Possibly, London would take a hit as Europe’s financial capital, though pro-Brexit supporters argue that this is unlikely and inconvenient for all the activity already deeply entrenched in the city. However, if Britain's exit is mismanaged, resulting in high tariffs and other trade barriers, companies might find it in their interest to shift their workforces to other European capitals. In times like these, there is both risk and opportunity, if one is bold enough to take it. But even in the best of circumstances, Britain will see diminished political and economic influence whilst it continues to live by EU norms.

The Brexit has raised another specter: that of the fracturing of the EU and of the UK itself. Scotland voted to remain as part of the UK back in 2014, but this time, the vast majority voted to remain part of the EU. This could bring the Scottish Independence question back on the table, and former Labour Scottish First Minister Henry McLeish has said he’d support Scottish independence under these very circumstances. Current Scottish First Minister & leader of the SNP Nicola Sturgeon has already announced plans for a second referendum. And upon the UK’s exit, many of the powers of the EU’s institutions would be repatriated to the Scottish Parliament in Edinburgh, not the British Parliament in Westminster. However, Scotland exports 3.5 times more to the UK than to the rest of the EU, and some suggest that the country would face trade barriers with a post-Brexit UK along with re-entry costs into the EU, should they strike out on their own. Still, it is extremely likely that Scotland will be voting again, and soon, on their own independence as a direct result of the Brexit vote. Wales however voted in favor of the Brexit, and so are likely to stay with the UK - or what is left of it.

Enda Kenny, Taoiseach (or Prime Minister) of Ireland has warned that the Brexit could damage the peace treaty between themselves and the UK, but Northern Ireland Secretary Theresa Villiers denounced that statement as “scaremongering.” Northern Ireland also voted to Remain, but unlike Scotland, will not be holding a referendum or border poll re-considering their position with the UK. However, nothing is stopping the UK and Ireland from drawing up a quick agreement as part of the Brexit negotiations either.  In short, if England votes to leave (and it did) and some of the other countries in the UK vote to stay (and they did), the UK is unlikely to continue in its present form.

But this vote could set a dangerous precedent for the rest of the EU, and the markets might take another wild ride come Monday, June 27, after the Spanish vote on their government, 6 months after the last inconclusive vote. If the far-left Podemos group make big gains, as it is expected to, as a populist anti-austerity party, they might seek to quit the EU as well. Even if they don’t take this option (it is possible, but not the most likely), the party demands a change in the economy, and getting more power will make the markets rightly nervous.

One territory is in a particular pickle: Gibraltar, a piece of the Iberian peninsula owned by the British and claimed by the Spanish, and a longstanding piece of contention between the two nations. The Spanish have been wanting it back since 1713, when Britain took it as part of the Treaty of Utrecht. The British residents of the little peninsula overwhelmingly voted to Remain, and Spain has already proposed co-sovereignty, and eventually hopes for Spanish control of the Rock. But Britain refuses any change of sovereignty against the wills of its citizens living there, who in 2002 overwhelmingly voted to remain solely British and rejected co-sovereignty. Due to the reliance on trade over the border with Spain and the rest of the EU, many British Gibraltarians are confused and worried about their future.

Gibraltar is also famous for its monkeys

As for Greece and its perennial troubles, many remember Syriza’s standoff with the EU and IMF, and while they ultimately backed down, it was a hair-raising event, and Greece is still struggling to pay off their debts. In fact, the country is due to repay 2.3 billion euros to the European Central Bank this July, and supposedly there is a deal to roll over its seemingly endless bailout; but the country seems to run into a new crisis nearly every summer, and it’s a safer bet another is on the horizon than assuming one isn’t. If they can’t find the money next month, Grexit will also be back on the agenda.

Moreover, the strikes in France seem to be escalating, and might even lead to a total meltdown. Union strikes are over a tweak to the labor laws, and as a result, refineries have been shut down, fuel is in short supply, and the country has already been dipping into its strategic fuel reserves - which could already be running dangerously low, especially if motorists buy in a panic. If President Francois Hollande’s government collapsed amidst a wave of protests, it could be the opening for right-wing populist nationalist anti-Europe politician Marine Le Pen to seize power - and precipitate a Frexit. This is unlikely, but it is not impossible. The Brexit could collide with the exodus of France, Spain, and possibly even Greece, which means a total meltdown for the EU as a political bloc and economic power.

It is likely that this wave of collapse will not occur, but as the first to take the Leave option, the UK has paved the way for others to follow suit, and this alone makes the EU a more brittle thing than it was just a few days ago. And that makes for a bumpy ride.

If they wanted, the UK could opt to re-join the EU. However, they would have to start the process from scratch and enter into accession talks with the EU and earn approval from every member state before being let back in. And with elections looming elsewhere in Europe, and the irritation they feel with Cameron and the UK, member states might not be feeling particularly generous to any UK demands.

However, no one need fear losing an important shared cultural touchstone: As members of the EBU, the European Broadcasting Union, the UK is still permitted to participate in Eurovision.

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Government Cannot be Run Like a Business

by Michael Makovi, Guest Writer

We sometimes hear that government is inefficient and wasteful because it is not run like a business. The implication is that if only government were run in a more businesslike manner, its performance would not be so unsatisfactory. In a way, this criticism is true, but not in the way its advocates intend it. Government really would be more efficient if it were run like a business. But the only way to achieve this is through privatization and deregulation. By its constitutional nature, government cannot be run like a business.

In fact, even the most accomplished business person could never run government like a business. If a business person were ever elected or appointed to political office, he or she could not help but execute their office in a typically bureaucratic manner. Only businesses can be operated in a businesslike fashion. There is a fundamental constitutional distinction between government and business, and it is not not the person which makes the office, but it is the office which makes the person. Anyone occupying government office cannot help but behave as a bureaucrat, no matter how accomplished of a business person they might have been previously. The Austrian economist Ludwig von Mises (1881-1973) explained why in a passage worth quoting at length. The following comes from his landmark 1920 article, "Economic Calculation in the Socialist Commonwealth", translated from the original German and reprinted in F. A. Hayek's 1935 collection, Collectivist Economic Planning (https://mises.org/library/collectivist-economic-planning):

A popular slogan affirms that if we think less bureaucratically and more commercially in communal enterprises, they will work just as well as private enterprises. The leading positions must be occupied by merchants, and then income will grow apace. Unfortunately "commercial-mindedness" is not something external, which can be arbitrarily transferred. A merchant's qualities are not the property of a person depending on inborn aptitude, nor are they acquired by studies in a commercial school or by working in a commercial house, or even by having been a business man oneself for some period of time. The entrepreneur's commercial attitude and activity arises from his position in the economic process and is lost with its disappearance. When a successful business man is appointed the manager of a public enterprise, he may still bring with him certain experiences from his previous occupation, and be able to turn them to good account in a routine fashion for some time. Still, with his entry into communal activity he ceases to be a merchant and becomes as much a bureaucrat as any other placeman in the public employ. It is not a knowledge of bookkeeping, of business organization, or of the style of commercial correspondence, or even a dispensation from a commercial high school, which makes the merchant, but his characteristic position in the production process, which allows of the identification of the firm's and his own interests. It is no solution of the problem when Otto Bauer in his most recently published work proposes that the directors of the National Central Bank, on whom leadership in the economic process will be conferred, should be nominated by a Collegium, to which representatives of the teaching staff of the commercial high schools would also belong. Like Plato's philosophers, the directors so appointed may well be the wisest and best of their kind, but they cannot be merchants in their posts as leaders of a socialist society, even if they should have been previously.

Let us parse this passage more closely. "A merchant's qualities are not the property of a person . . . The entrepreneur's commercial attitude and activity arises from his position in the economic process and is lost with its disappearance." It is not the person which makes the office but the office which makes the person. A business person behaves as they do because of the institutional constraints of the position. A business person must satisfy voluntary and willing customers who are free to take their dollars elsewhere. It is the phenomenon of profit and loss which fundamentally shapes the character of the business person's activities. The free-market business enterprise faces no captive market and it can take nothing for granted. Either the firm produces products which willing customers voluntarily purchase, or else it goes bankrupt. The business person behaves as they do because of these institutional constraints, not because of anything peculiar to the person him- or herself. "It is not a knowledge of bookkeeping, of business organization, or of the style of commercial correspondence, or even a dispensation from a commercial high school, which makes the merchant, but his characteristic position in the production process, which allows of the identification of the firm's and his own interests." Therefore, "with his entry into communal activity he ceases to be a merchant and becomes as much a bureaucrat as any other placeman in the public employ."

By contrast, a government bureaucracy possesses a monopoly. Its customers cannot choose whether or not to purchase from the bureau. They have nowhere else to turn. Furthermore, the bureau is subsidized by taxes whether it satisfies customers or not. Compare a car insurance company to the DMV, for example: the insurance company must strive to serve its customers at least as well as its competitors, or else it must compensate for worse service with equivalently lower premiums. If it fails to do so, its customers will all abandon it for its competition. Contrariwise, the DMV has no fear that its "customers" will leave it for another. The citizens have nowhere else to turn to obtain their licenses. And whether the citizens are satisfied or not, the DMV receives its funds from taxation. The DMV is paid whether it does its job or not. Therefore, the DMV has no incentive to operate efficiently or to provide satisfactory customer service. The difference between the insurance firm and the DMV is not that the manager of the one is a better business person than the manager of the other. Rather, the fundamental distinction is the conditions under which each operates. Again, it is not the person which makes the office, but the office which makes the person. Therefore, it will do absolutely no good whatsoever to appoint a proven business person to political office. With the loss of their position in the market system, they lose everything it is that ever made them a business person. "Like Plato's philosophers, the directors so appointed may well be the wisest and best of their kind, but they cannot be merchants in their posts as leaders of a socialist society, even if they should have been previously."

Mises made a similar argument in his 1922 book, Socialism (https://mises.org/library/socialism-economic-and-sociological-analysis) and by now, the reader should be equipped to interpret it without assistance:

If the work of a body of officials appears unsatisfactory, there can be only one explanation: the officials have not had the right training, and future appointments must be made differently. It is therefore proposed that a different training should be required of future candidates. If only the officials of the communal undertaking came with a business training, the undertaking would be more business-like. . . . It is not difficult to expose the fallacies inherent in such notions. The attributes of the business man cannot be divorced from the position of the entrepreneur in the capitalist order. "Business" is not in itself a quality innate in a person; only the qualities of mind and character essential to a business man can be inborn. Still less is it an accomplishment which can be acquired by study, though the knowledge and the accomplishments needed by a business man can be taught and learned. A man does not become a business man by passing some years in commercial training or in a commercial institute, nor by a knowledge of book-keeping and the jargon of commerce, nor by a skill in languages and typing and shorthand. These are things which the clerk requires. But the clerk is not a business man, even though in ordinary speech he may be called a "trained business man."

In summary: if a political candidate ever promises he will run government like a business, do not believe him or her. He or she cannot run government like a business. It is simply impossible. The difference between government and business is the difference between monopoly and competition, between compulsory taxes and voluntarily paid fees. The institutional constraints of the office make all the difference, and the person him- or herself is almost an afterthought. This is not to say that free-market business enterprises are necessarily superior to government bureaus. Perhaps regulation and publicly-owned corporations are necessary. But let us not confuse the matter by believing that the one can be operated on the same basis as the other. Private and public firms operate within totally different contexts and the principles of one cannot be applied to the other. If regulation is necessary, so be it, but let us be frank and admit that insofar as government is necessary, it is precisely because it is not business like and it never can be.

Do Capitalists Manipulate, Deceive, and Cheat? Not as Much as Politicians Do

by Michael Makovi, Guest Writer

Real-world markets, according to Nobel laureate economist Robert Shiller, are all about manipulation and deception.

So he argues in a New York Times article summarizing his new book, coauthored with fellow Nobel laureate economist George Akerlof: Phishing for Phools: The Economics of Manipulation and Deception. According to Shiller, merchants and vendors regularly “phish for” ignorant consumers who they can mislead into acting less in their own interests and more in those of the phishermen.

Shiller claims that the theoretical defense of the free market depends on consumers being rational and well informed — a condition that doesn’t hold true in the real world. Drawing on behavioral economics, he argues that consumers are often possessed with cognitive biases that allow them to be systematically deceived by unsavory merchants. For this reason, Shiller argues, consumers need government regulation to protect their interests. The internal forces of the market are not sufficient.

Deus ex Nirvana

But government regulation is not an infallible deus ex machina. The question is not whether the market fails, but whether the government is more likely than the market itself to correct those failures. Economist Harold Demsetz coined the term “nirvana fallacy” to make this point: it is not enough to find flaws in the real world; one must prove that some feasible alternative is likely to be less flawed. James Buchanan, one of the fathers of public choice economics, compared advocates of government regulation to the judges of a singing contest who, after hearing an imperfect performance from the first contestant, immediately award the second contestant, reasoning that he must be better.

No, the market is not perfect, and consumers are often ignorant and manipulable. But the real question is this: Will government do any better?

Just because the first singer offered a less-than-perfect performance is no proof that the second singer will be any better. Ironically, Nudge author and former member of the Obama administration Cass Sunstein, no friend of economic freedom, accidentally makes this very point in his positive review of Shiller and Akerlof’s book.

According to Sunstein,

Bad government is itself a product of phishing and phoolishness, for “we are prone to vote for the person who makes us the most comfortable,” even when that person’s decisions are effectively bought by special interests.

So yes, people behave irrationally in their capacities as market participants, but they are no more rational in how they cast their votes than in how they spend their dollars.

Buying What You Don’t Want

The difference is that in a market, there are feedback signals, however attenuated. If a vendor cheats his customer by holding back information about his product, at least the customer will learn about the product’s faults after he purchases it, and he will buy from someone else next time. He will likely warn others, too. The consumer may have cognitive biases, but he has the opportunity to learn from his mistakes, prevent others from making them, and correct them in the future. The deceptive merchant will develop a bad reputation, and paying customers are motivated to learn about merchants’ reputations — especially as 21st-century technology develops ever-more-robust reputation markets, accessible through anyone’s smartphone.

By contrast, there are fewer feedback signals in politics and even fewer opportunities to act on that feedback. One vote barely counts, and each voter must vote not for specific policies, but for politicians with a range of policies. Electoral politics doesn’t really offer a choice so much as it imposes a bundle. A vote for a particular candidate implies endorsement of all the policies in that bundle, when the truth is more likely that the voter has selected the least bad option. In the market, customers can easily split their “dollar votes” to purchase only the specific products they want.

In Freedom and the Law, Bruno Leoni notes that we are all doubly unrepresented by politics: we vote for A, but B defeats A in the election. Then, when B is sitting in the legislature, he is outvoted on a bill by C. So in the end, a person is governed by politician C who beat B, who in turn beat the voter’s preferred choice, A.

When Phoolishness Is Rational

In such a situation, it makes sense for voters to be rationally ignorant of the effects of government policies they are helpless to affect. Politicians are free to peddle shoddy products when they know voters have few opportunities to learn from their mistakes — and even fewer opportunities to correct them.

Meanwhile, markets tend to concentrate benefits and costs on the consumers who use a specific product. This internalization of costs and benefits promotes learning and feedback. In a market, a person must bear the consequences of his or her own actions.

In politics, benefits are concentrated on those whom the politician wishes to favor — such as financial donors and special interests whose attention is narrowly focused — while costs are dispersed among those whose attention is elsewhere, including many who focus on producing wealth instead of transferring it.

The combination of rationally ignorant voters and informed and motivated special interests encourages rent seeking. Private benefit and social cost diverge as the political process encourages the creation of new externalities. While markets tend to internalize the costs, politics encourages externalities.

So yes, consumers are often “irrational” and deceived and make mistakes. But, as Sunstein himself tells us, this is true in both politics and markets. The question is, Which institutional environment is more likely to promote learning from mistakes? And which institution — the market or politics — maximizes a person’s ability to correct those mistakes? Shiller and Akerlof have failed to prove that government regulation will detect or correct mistakes better than the market itself can.

This article was written by guest writer Michael Makovi, and was originally published on the Foundation for Economic Education, and can be seen here.