21 June, 2024


Referendum: Decision Under Uncertainty

By S. P. Chakravarty –

Prof. S. P. Chakravarty

Prof. S. P. Chakravarty

The referendum on British exit from the European Union is a symptom of the rise of the politics of identity over the politics of prosperity. Both sides in this debate have made forecasts of the economic outcome. Forecasting organisations, barring a couple of dissenters, have expressed fears of a sharp decline in the economy, at least in the short run, if the Brexit camp wins. The Brexit camp counters these gloomy forecasts arguing that the economy would adjust to a new pattern of trade in no time and enter into a new era of prosperity by leaving the EU. In any event, these arguments about economic forecasts are simply a distraction for those that wish to leave. The Brexit camp places greater store on sovereignty — taking control over the legal definition of human rights, dispensing with much of the regulations governing commerce and industry, and setting rules for immigration. Once the vote is cast to leave, there is no point of return. The decision criterion of minimising the maximum potential disruption to the economy is the only rational choice given the impossibility of computing the probabilities of predicted consequences of the outcome of the vote. This criterion favours a vote to remain a member.

We know what it is to live with membership, and we have some idea about the likely success of agitating for change to make institutions within the UK and also in the EU more responsive to the voter. Institutions of governance are always under the scanner in a democracy. Within the UK, composition and selection rules of the upper chamber and devolution of power between regions is not a settled matter. Likewise, the question of democratic legitimacy of distribution of powers amongst various institutions within the EU is being debated, and not just in the UK. In a pluralistic democracy, not all citizens wish to subscribe to the same agenda for change, and even an encompassing view which might emerge would remain under scrutiny. A referendum is not the best way to proceed.

A difference between parliamentary elections in a system of representative government and voting in referenda is that the voter imposes on herself and the rest of society a greater burden of any unintended and unwelcome consequence of the outcome. This is especially so when the status quo is severely jolted in pursuit of ideas which cannot be measured in terms of their impact on our living standard.

In electing representatives to govern, the voter has the luxury of voting for government on a policy platform, but judging the government on consequences of that policy. Casting a vote for candidates expounding, for example, a tough stance on immigration does not constrain the voter from criticising a government thus elected if food prices rise in consequence or if the availability of medical care is compromised due to lack of qualified staff.

Mrs Thatcher secured a parliamentary majority in 1979 on a policy platform comprising, inter alia, a vow dramatically to reduce the share of government expenditure in the GDP. The ratio had climbed to 45 per cent. Notwithstanding this harsh rhetoric, government expenditure and its share in the GDP continued to increase in the initial years driven by unforeseen fiscal pressure of a sudden and sharp rise in unemployment. The ratio finally came down, but only to 40 per cent of the GDP, when she left office a decade later.

This is not to say that representative governance entails cavalier disregard of promises made at election but to suggest that the promises need to be interpreted in context. The context is the need for elected representatives to engage with complex technical issues and tedious details of policy coherence once in government to avoid chaos.

Those that have voted for a government which commands a parliamentary majority by expounding policies which appeal to the voters’ gut feelings have the option of defeating the government in the next election if the outcomes of following these policies turn out to be unappealing. This paradox is understood by representatives and they moderate in application promises made at election.

Governance by referenda, where policies are prescribed by the electorate, is a different matter altogether. Unforeseen consequences can be more disruptive in a referendum than in representative democracy. That is why stable democracies choose representative forms of government, and governance by referenda is shunned.

A textbook example of the disruptive nature of referendum politics is the story, reported in the New York Times on the 5th of March 1995, of the three strike sentencing referendum in California. A woman was brutally murdered by a repeat offender recently released on parole after a period in jail. In the background of emotive press reports, a referendum was held on whether to mandate a harsh prison term of 25 years to life, without any possibility of parole before 20 years, for all repeat offenders. Professionals engaged in the maintenance of law and order advised against voting for a law imposing such an inflexible mandate on the judiciary. The advice was ignored by a majority of the electorate. Soon after the referendum was passed, a young pizza thief, he was in the habit of going into restaurants eating a slice of pizza and then escaping without paying, was sentenced to a term of 25 years to life with no hope of parole before 20 years. Even those that had voted for the referendum mandating this harsh punishment were aghast. The law was eventually repealed but not before causing disruption to the criminal justice system.

The ensuing referendum on continuing British membership of the European Union is an exercise in making decisions under uncertainty. Whilst the referendum ballot provides a binary choice, whether to remain in or to exit from the EU, the voter is not faced with a binary decision. There are multi-dimensional effects of the decision. The protagonists have forecast vastly different consequences for British trade and prosperity and also for world peace. They seldom emphasise that the probabilities of potential outcomes of the vote for economics can only be assigned subjectively. In our view, even the assignment of subjective probabilities requires knowledge of the unknowable, and the best course of action is to minimise the potential for maximum harm. That is to stick to what we know and shun the temptation to take an irreversible plunge into the unknown that is also unknowable.

Britain is a trading nation where international trade counts for slightly less than a third of its GDP. Roughly half of that, 45 per cent to be precise, is trade with the EU. The EU aspires to a single market which entails companies being able to compete for government contracts across frontiers within the EU without discrimination.
Those in favour of withdrawing from EU membership discount the prospect of any adverse effect on British trade. Their argument is four-fold. Firstly, they assert that access to European markets could be swiftly negotiated without necessarily having to comply with the rules for free movement of labour within the EU and without having to follow EU directives specifying, for example, labour rights at work and environmental conditions in production. A second line of argument is that it does not matter if negotiations stall. Any adverse consequences of disruption to trade with the EU could be ameliorated through improving trade relations with countries outside the Europe. This assumption is oblivious of the fact that the leaders of some of the largest economies outside the Europe with whom the Brexit camp aspires to increase trade have advised against British departure from the EU. A third line of argument derives from the belief that hitherto untapped energies would be unleashed in the British economy freed from EU regulations. A fourth line of argument from Brexit, put forward by some in the left, is a modified version of the above. It is the EU bureaucracy which holds back the ability of a British government to determine for itself policies on selective subsidy to make the economy flourish. Some in the Brexit camp would be prepared to accept a reduction in prosperity to get back sovereignty, but leaders campaigning for leaving the EU, on the whole, do not accept the premise of a trade off between sovereignty and prosperity.

The Brexit camp refuses to engage with an essential feature of trade amongst EU nations, the single market to which the EU aspires. Government expenditure is around half of the GDP in the prosperous countries of Europe. The single market allows non-discriminatory access to government contracts in all EU countries to companies based in any of the member nations. What is the likelihood that British companies could continue selling to the public sector in the EU without conforming to labour regulations and environmental standards agreed at Brussels? What is the probability that British exporters would be allowed to sell to companies in the EU goods and services which are used in fulfilling public sector contracts there? It is true that Norway is outside the EU but the country enjoys single market access. It has done so by surrendering the Brexit view of sovereignty, agreeing to implement EU regulations including the free movement of labour.

The idea that dispensing with environmental and labour standards would necessarily make British products more attractive outside Europe is questionable. International competitiveness does not necessarily improve by reducing labour rights and embracing polluting technology. For example, sharp reductions in the right of workers in the 1980s did not increase the share of British manufacturing in international trade. In fact, Britain lagged even behind France, one of the most regulated labour markets, as observed by the Adair (now Lord) Turner in his address to the Confederation of British Industry in 1996.

Both sides in the debate put forward their assertions about the impact of membership. Those that wish to remain cite the absence of war within the member states which in the past used to engage in periodic violence against each other if not against their own citizens. For them it is an article of faith that the democratic and cooperative ideal of the European Union has contributes to peace in Europe. The anti-EU campaigners disagree. Some prominent members in the Brexit camp claim to be fearful of German hegemony. They have got off on the wrong track.

It was not German malevolence which caused the Iraq war. It was not too much interference by the EU but, alas, too little influence on British policy of the German Chancellor and the French President that led to one of the worst military adventures, destabilising the Middle East, undertaken by Prime Minister Blair.

It is true that German economic policy aimed at generating relentless year-on-year trade surpluses is a detriment to long term financial stability even in Germany. When good are sold to those who cannot pay and the trade imbalance is not corrected at an early stage, problems develop. The international banking system, following financial liberalisation in the late 20th century, has developed tools of financial engineering to postpone adjustments in trade imbalance, thus creating huge financial bubbles that eventually burst contributing to economic instability. This is a case for the reform of the dysfunctional international banking system which has emerged in recent years. Conflating the spectre of a banking collapse with the spectre of German hegemony as a threat to peace misses the point that modern Germany is a moral force in support of democracy and human rights in Europe and is not to be conflated with the caricature of Germany in post-war British cartoons aimed at children. It is a conservative German Chancellor who has fearlessly urged on a moral stand on the refugee question to her colleagues at home and abroad.

What is more worrying for peace is the resurgence of the kind of identity politics about language and ethnicity which destroyed much of Europe less than a century ago. As explained by Peter S. Goodman (New York Times 20 May 2016) the main appeal for Brexit is angst over British identity “masquerading as an economic debate”.

British exit could become a catalyst for reawakening destructive nationalism in countries where pluralist democracy has not yet established deep roots.

A vote in the referendum balancing the arguments of the two sides, according to some, entails forming an informed judgement on the probabilities of potential consequences of exercising the choice to leave or remain. Thus a House of Commons Select Committee has criticised protagonists on both sides for failing to lay down the facts correctly for the voter to make an informed choice. In our view, the Committee has missed the point about the nature of this referendum. Placing correct information in itself does not address the fundamental problem of voting in this referendum. Objective probabilities cannot be computed because Brexit is a unique event. Attempts at calculating subjective probabilities would be frustrated by the problem of infinite regress.

It is not simply that the voter has to decide what type of information that is needed to be collected to judge whether potential outcomes are good or bad, and the probabilities of the outcomes. Before making that decision, she has to know how to make sense of the data. To know how to make sense of the data, the voter has to decide on the relative reliability of different ways of making sense of the data. The point is that we have to collect information to decide what type of information to collect. An arbitrary deadline needs to be imposed cutting off the infinite regress of collection and analysis of evidence.

Whilst this difficulty of rational choice is also present in the selections of representatives to govern in a parliamentary election, ex post realisation of errors can be corrected albeit with some cost. No such opportunity exists in a vote in this referendum. Once a decision, especially a decision to leave, has been made, that is final.

It would be a rational course for the voter to dispense with attempts at weighing up incomplete information, imparting a spurious sense of precision on an exercise in infinite regress which is cut-off at some arbitrary point. It would be prudent instead to heed the principle of caution before disrupting the status quo of membership. There are more pressing problems for the well-being of the nation than a naval gazing angst over identity and sovereignty.

*S. P. Chakravarty – Emeritus Professor of Economics, The University, Bangor, Wales, UK

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Latest comments

  • 0

    I am not a resident of UK. I have nothing to lose by any decision Britain makes. That makes it easy for me to take a stand. I would support exiting the European Union.

    EU is loose-knit outfit. Loyalty is not involved or expected.

    The pizza thief story is a diversion. A term of 25 years to life, with no hope of parole before 20 years, shouldn’t have been the sentence, in the first place, for thieving pizza.

    (Recently, a judge decreed that thieving food – not repetitive though – was pardonable when committed in a state of hunger!)

    S. P. Chakravarty, Emeritus Professor of Economics, has valid arguments against breaking out of the Union. His theoretical arguments are sound. Would they be sound in our empirical world, I wonder.

    • 0

      The British are an educated and well-informed lot and as the advantages of remaining in the EU far outweighs leaving it, I am confident they will vote to remain. You only have to look at the bigots and racists who support the leave campaign. There’s Nigel Farage of UKIP whose scapegoat is the immigrant forall British ills, Boris Johnson, Michael Gove and Ian Duncan Smith who have ruined British Schools System and the Welfare State are the major supporters to leave.

      • 0

        Brexit or not the Brits are going under. Only the Asian immigrants are doing well and they are the only hope for Briton.

  • 0

    Has it occurred to anyone that Brexit is a ploy by the British government to go ahead with austerity measures including curtailment of social security?
    Whether GB stays or leaves, austerity is surely on the cards.

    However, UK risks break-up if it leaves. Not just Scotland, even Gibralter is talking of ‘joint sovereignty’ meaning being partly owned by Spain.

    It is hard to work for two masters, especially for one who is still not free from old memories of an empire whee the sun never sets.

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