Learning from Brexit

Posted in: i-Blog, The Investor columns on August 21, 2020


This is one of a series of columns that were produced for Moneyweb Investor in which Stuart Theobald explores the intersection of philosophy of science and finance. This followed an earlier series for Business Day Investors Monthly on the same theme. This column was first published in June 2016.

The UK Brexit decision and the rise of Donald Trump and Bernie Sanders represent a new era of anti-establishment politics. The target is the conventional political order, rather than a desire for particular policies. For financial markets this new era is dangerous. The destructive economic consequences of political decisions seem never to have mattered less.

The Brexit decision, most clearly, represents a thorough thrashing of the UK’s political, social and economic elite. Most politicians, economists, academics, business leaders, sports stars and other celebrities had publicly called for a remain vote. Brexit is a sound slap in the face.

This shouldn’t be unfamiliar to South Africans. In many respects the Brexit decision was strongly reminiscent of the 2007 ANC Polokwane conference which appointed Jacob Zuma as president. That was a decision based on rejecting the established order around Thabo Mbeki, perceived as aloof and technocratic. It was an emotional response, rather than a positive endorsement of any policy position Zuma represented. And like Brexit, it took established media commentators by surprise. Then and now the lesson was that the media is generally within the establishment and myopic when it comes to understanding those outside of it.

What is driving this new ethos? There are some intriguing theories. One is that the technology of public opinion has changed. Until the rise of social media, experts held significant power over the public space. Newspaper editors and radio and television producers had to choose whose opinions to share, and the perception of expertise was what mattered, and of course, who the decision makers agreed with. But in the era of social media, the exclusive access of experts has largely dissolved.

Social media works to different rules. Research by the Oxford Internet Institute has found that messages that arouse emotions such as anger and irritation spread rapidly and allow groups to coalesce into echo chambers in which the emotional temperature is compounded, attracting more to join while producing disciples. Political campaigns that are emotionally charged will gain greater social media traction than those which focus on fact-based argument. That was in evidence too after the Brexit vote, with social media aflame with emotional recriminations on both sides.

But reducing this new dynamic to a matter of emotional salience is also dangerously simplistic and belittles those whose pain is being made visible. The anti-establishment backlash is also motivated by the perception that elites have profited at the expense of ordinary people. For the blue collar workers of America’s Midwest, watching the closure of factories that have provided employment to generations of their families, the status quo sucks. They may have little genuine identification with Trump, but the fact that the elites hate him matters. In much of England, the European Union has damaged the social status of ordinary workers, with the economy and wealth shifting to services, especially financial services, while manual jobs are increasingly taken by EU immigrants. Globalisation has led to structural changes in many economies that may leave them overall better off, but have left swathes of discontent.

On both sides of the Atlantic the financial crisis remains a clear example of elites ripping off ordinary people. Being told by economists and other business leaders that a decision is not in your own best interest is received as both patronising and disingenuous. Many Brexit voters were aware that an economic recession is a likely price of leaving the EU, but simply didn’t care if it meant delivering a bludgeon to the largely London-based elite. It has the politics of the hunger strike or self-immolation about it, a political tactic that only works if you follow through. In its self-harm, it also strongly communicates how much you feel about the need for change. It can be a rational negotiating tactic, reflecting the fact that if elites suffer, even a little, they have an incentive to use their power to improve the situation faced by those with little ability to change things themselves.

Can it work? For the elites, Brexit and Trump have made one thing clear: you cannot ignore the plight of those hurt by change. While that may well force policy decisions that are net negative from an economic perspective, such as protecting industries that have become fundamentally uncompetitive, there has to be an evenness to economic development that has been lost. This is not just about inequality, but about protecting the psychological well-being of the members of a nation, giving them a sense that they have a stake in it.

But it also may not work. Brexit is going to hurt everyone and the when the political cards settle, it is not clear that the working classes who voted to leave are going to be better represented, or their interests more important. In fact the likely outcome of Brexit, namely ongoing membership of the common market with the required free movement of people, but without the EU’s development support or labour protections, will be worse than ever.

The Brexit ship has sailed, but others may learn from the experience. One in particular, Hilary Clinton, needs to be a quick study. It should be obvious to her now that a run for the White House needs to credibly promise a better lot for the disaffected, one that finds genuine emotional attachment. Without that she too risks facing the bludgeon.

For investors it is a new world in which it is hard to be brave. Political stability, and the stability of institutions and the policy environment, is less dependable. Inevitably financial assets will pay the price.

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