The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.

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Bruges Group Blog

Spearheading the intellectual battle against the EU. And for new thinking in international affairs.

The New Project Fear

John Bull280

Since Theresa May's Lancaster House Speech in January of this year, two new Project Fears have sprung up. The first (from The Labour Party, EFTA4UK, Liberal Leave, Leave HQ and Dr Richard North) states that “We need to remain members of the EU's internal market after we officially leave the EU”, even though there are over 50 countries outside of the single market which have free access to it via free trade agreements. The second (from Nick Boles, Lord Hague and Chancellor Philip Hammond) states that “We need to have a transitional period of up to four years during which time we would still be members of the single market and the customs union”.

 

Before we pay these campaigns and their claims any attention, we should bear in mind just how wrong the previous Project Fears, which were often run by the very same people, really were.

 

The first Project Fear said “We need to join the European Economic Community (EEC or so-called 'Common Market') and, if we do, we'll export more to the EU”. The exact opposite has happened – we've exported less and less to the EU and, in 2016, we had a record high trade deficit with the EU of £78.1 billion. The second said “We need to join the European Exchange Rate Mechanism (ERM)” but this was then a disaster for us and led to Black Wednesday. The third said “We need to join the Euro and, if we don't, London's business will grind to a halt”. The exact opposite has happened. The fourth said “We need to stay in the EU and, if we don't, there'll be a recession in the immediate aftermath of a leave vote”. We've instead had record levels of prosperity since the Brexit vote.

 

All of Project Fear's economic predictions were wrong except, I will admit, for their prediction about sterling. They correctly predicted that there would be a significant fall in the value of the pound sterling in the immediate aftermath of a leave vote and the pound has fallen in value by about 15% on average. However, remoaners seem to want to think that the value of the pound is the only, or at least the main, indicator of the strength of the UK economy. This is, as any economist will tell you, nonsense. There are other indicators such as the FTSE 100, the FTSE 250, our output, our exports, our unemployment rate, the amount of foreign direct investment we attract and the rate of our economic growth which are equally as important, if not more important, than the relative value of sterling. All of these factors must together be taken into account before a judgement can be made on the strength of the UK economy.

 

The FTSE 100 has hit four new record highs since the Brexit vote: in December 2016 (6 months after the Brexit vote), in January 2017 (7 months after the Brexit vote), on 1st March 2017 (9 months after the Brexit vote and 2 months after the Brexit plans' release) and on 17th March 2017 (9 months after the Brexit vote and 2 months after the plans' release). The FTSE 250, which is widely acknowledged as being the best gauge of domestic economic sentiment, also reached a record high on 15th February 2017 (8 months after the Brexit vote and a month after the revelation of the Brexit plans). I include the relative timings in brackets as remoaners constantly told us in the months after Brexit that the reason why there still hadn't been a recession due to Brexit was because the Government hadn't revealed its position on the single market and the customs union and as Article 50 hadn't been invoked yet. However, a year and three months after the Brexit vote, eight months after the Government revealed its Brexit plans in the Lancaster House speech and six months after the invoking of Article 50, we are still waiting for this recession.

 

We were told that, after a vote to leave, unemployment would rise by 9,000 per month for the rest of 2016 but unemployment has actually fallen by almost exactly that amount and is now at a record low of just 4.4% - the lowest level since 1975. We were told that we would experience two successive quarters of negative economic growth but we actually grew faster in the six months after the Brexit vote than we did in the six months leading up to the vote. At the end of 2016, we finished up as the most successful major economy in the entire world, the fastest growing economy in the entire of the western world and the fastest growing economy in the G7.

 

The Department for International Trade has attracted £15.8 billion of foreign direct investment (FDI) from August last year to January this year and the UK still attracts more FDI than any other country in the whole of Europe. Since the Brexit vote, we've seen a record increase in financial services trading figures and a record increase in service industries growth. As of 30th June 2017 the UK attracted more FDI in financial services than any other country in the whole of Europe. Developers have continued to press ahead with the construction of more office spaces in London, showing fears of a post-Brexit business exodus (a so-called “Brexodus”) to be yet more scaremongering. UK car sales increased by 3.3% and reached their highest level in 2016 after the Brexit vote. Cake and cheese exports have both increased by 25% since the Brexit vote and the UK now exports more food, drink, bread, cakes, pastries and biscuits than it ever has before. Over the last year UK exports increased by 11.5%. As of 31st July last year, 27 non-EU countries with a combined GDP of over £40 trillion reportedly already wanted to sign new trade deals with the UK once it has left the EU and this potential market rather dwarfs the EU’s internal market which is worth only about £12 trillion.

 

Even if we are to take the value of the pound sterling in isolation, the remoaners are far from telling the whole story. Firstly, they all just presume that they can *know* for certain that the devaluation was indeed *caused* by the Brexit vote alone. Correlation does not, however, prove causation - it could just be a coincidence or other factors could be involved. Jacob Rees-Mogg MP has pointed out that both the OECD and the IMF said before the referendum that the value of the pound was too high - even strong remainer Ken Clarke MP has admitted this. Lord (Mervyn) King, the former Governor of the Bank of England, has said that the devaluation is a welcome fact. Therefore, a devaluation was only a matter of time and the Brexit vote merely brought forward this already-inevitable devaluation. The columnist Peter Hitchens foresaw a devaluation way before the referendum and states that the devaluation has nothing to do with the Brexit vote and would have also happened if we had voted to remain.

 

However, remoaners go on to presume that this devaluation has only been a negative thing for the UK economy. This is false. It has not led to out of control inflation as many predicted - inflation actually fell in October of last year, 4 months after the Brexit vote. Jacob Rees-Mogg has pointed out that the last two significant devaluations before the Brexit vote (in 1931 and in the early 1990s) both resulted in lasting periods of prosperity and rising living standards. News of the devaluation has been happily received by UK exporters who have said that the value of the pound has been too high for too long. The devaluation has made their exports cheaper and more competitive relatively-speaking and has consequently increased demand for our exports overseas. In fact, in September of last year, UK exports reached their highest level in 20 years. Finally, remoaners are always negative and pessimistic about our chances of getting a good free trade agreement with the EU agreed by midnight on 29th March 2019. However, even in the most unlikely and worst-case scenario of there being no Brexit deal at all by then, the average ~15% devaluation would easily dwarf an average most-favoured nation (MFN) goods tariff with the EU of just 5%.

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Barnier's career of wacky ideas and EU power-grabs

Michel Barnier is quickly becoming a pantomime villain in the UK, with his regular grandstanding and puerile PR stunts. But a lot of British commentators still give him far too much credit - we can only guess they haven't looked into the wreckage of his political career.
michaelbarnier
(Photograph courtesy of Foto-AG Gymnasium Melle)
Barnier's track record, described below, is marked by wacky EU-federalist ideas which have been his undoing on several occasions.
From his less-than-subtle effort to force the EU Constitution onto all of us through to the range of smaller proposals for EU power-grabs, which resulted in criticism, rebukes and a dismissal.
The Brexit talks show that he might never learn from these errors.
Despite having absolutely no elected mandate in his current role, he is stuck in the EU Commission mindset and trying to boss Britain around.
Any eurosceptic would have known that EU intransigence would soon surface in spite of David Davis's efforts to create an amicable and respectful exchange of views.
We highlight eight of his career low points here:


1. As French Minister for Foreign Affairs...
...he helped write the despised EU Constitution, a massive EU power-grab, that was trashed and rejected by French voters in a referendum and later in a Dutch referendum.

 
 
2. Sacked as French foreign minister...
...because his EU Constitution campaign was so roundly trashed in the French referendum. He later complained he was "unfairly singled out" for the referendum defeat, but he still didn't learn his lesson as the next items shows.
 
 
 
3. As French nominee to rewrite the failed EU constitution...
...he was asked to produce a new document to replace the constitution alongside other panellists. An unrepentant Barnier and his colleagues instead produced virtually the same list of power-grabs in the controversial and hated Lisbon Treaty. Co-writer Valéry Giscard d'Estaing confirmed it was "substantially the same as the EU Constitution".
 
 

4. As EU Commissioner for Regions...

...he oversaw the EU regional funding team which proposed a much-criticised funding project of more than EUR 60 million to the Spanish enclave of Melilla including millions spent on a luxury golf course next to a refugee fence and refugee reception centre. Although he oversaw the team which wrote the funding proposal and gave the initial approval, final approval to the criticised scheme was by his successor Jacques Barrot.
 
 
5. As adviser to José Manuel Barroso...
When asked to look into civil emergency response, he was ridiculed for his proposals for an EU Civil Protection Force which turned into an obvious power-grab for the EU Commission. He is credited with invented the phrase 'the cost of non-Europe' and his civil protection paper includes the bizarre phrase: "As the tsunami so tragically bears out, the price of non-Europe in crisis management is too high". He was also a Barroso adviser when Barroso made his famous gaffe, "the EU is our empire".
 
 
 
6. As EU commissioner for the internal market...
He was criticised repeatedly over: Solvency II insurance regulation; EU Commission power-grabs; toothless bank reform proposals; and half-baked banking reform proposals. He was also criticised by the UK Government for his banking reform proposals and the Alternative Investment Fund Managers' Directive which was especially punitive to the UK financial services industry.
Slammed over the Solvency II legislation process
Criticised for toothless proposals
Criticised for half-baked banking reform proposals:
Criticised by UK gov for his first draft of banking reform
Faced Uk gov criticism over AIFMD
 
 
7. As defence adviser to Juncker...
He helped create the concept of the European Defence Fund and the European Defence Action Plan. From 2015 to his appointment as EU Commission Brexit negotiator he helped plan the EU's defence powergrab which was eventually rolled out in a legislative onslaught at the EU Council between November 2016 and June 2017.

8. As co-president of the Albertville Olympic Committee...
...saw the event costs escalate to more than double its intended budget. UK analysts later found the event suffered a cost overrun of a whopping 137%.
 Flyvbjerg, Bent; Stewart, Allison; Budzier, Alexander (2016). The Oxford Olympics Study 2016: Cost and Cost Overrun at the Games. Oxford: Saïd Business School Working Papers (Oxford: University of Oxford). pp. 9–13. SSRN 2804554 Freely accessible.
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A challenge to the TED talks: Brexit is ending the control of outmoded hierarchies

Technology is driving changes that remote bureaucrats have yet to imagine. Brexit is about openness. It’s about people realising their global role and forging new links with counties and other people. The British people, through Brexit have embraced what made this country so dynamic; freedom of information and limited top down control.

13th March 2017
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As reported in the Memo Chris Anderson, Founder of the renowned TED talks series of lectures has criticized Brexit and poured cold water on the possibility of Brexiteers speaking at his events. Stating that TED are pro-globalisation. Clearly he has jumped to the wrong conclusions about Britain’s EU exit and perhaps has globalisation very wrong.

Some cannot distinguish between internationalism, working with others, and the brand of globalization being pushed by supra-national institutions. Organisations like the EU are, in the words of Dr Anthony Coughlan in Tackling the EU Empire, ‘imperial arrangements like the Austro-Hungarian Empire, once known as a “prison-house of nations”, where different countries are ruled by a centralized bureaucracy in a far-away imperial capital.’ That model failed then and will fail again.

Supranationalism, what Chris Anderson must be confusing with Globalisation, is according to Dr Coughlan ‘the opposite of internationalism, which is a benign and progressive concept. Internationalism – from Latin inter, “between” – implies the pre-existence of sovereign Nation States. It refers to relations of co-operation between the States that constitute the international community, but with each controlling and deciding its own domestic and external affairs in accordance with the wishes of its people. Recognition of States based on the right to self-determination of nations and peoples is a basic principle of modern democracy and international law.

‘Supranationalism, in contrast to internationalism, implies a hierarchy, with the supranational level on top. Internationalism implies legal and political equality between the parties. Properly understood, internationalism is opposed to all forms of chauvinism and xenophobia. It implies coexistence among progressive “nationalisms” – that is, broad nationalisms rather than narrow, using the positive rather than the negative sense of that word in English. It implies patriotism and love of country, combined with respect for the many national communities into which humanity is divided and admiration for their varied cultural and other achievements.

‘Internationalism delights in the diversity of nations. Supranationalism seeks to erode national differences, either because they threaten the dominance of a particular ruling power or they make it more difficult for transnational big business to establish a world of homogenized consumers and employees. Supranationalism seeks the erosion of State sovereignty. Internationalism seeks to establish and maintain it.

‘The glory of European civilisation has been the diversity of its national components – in culture, science, political institutions, economic actors, legal systems, education systems, tax codes, fashion. In classical Europe emulation and competition between nations, communities and individuals spurred creativity and innovation.’

Britain always has been global, we are fully with the modern world. We invented modernity and took it around the globe. The British, instinctive believers in free trade, understand this and behind Brexit was a desire to reenter the rest of the world free from the Byzantine grip of a sclerotic EU. Britain tried european union, found it not to our tastes and are now seeking new opportunities over-seas.

The EU, just like the trans-national empires of the past, is not permanent. If any time line is extended long enough the chances of survival become zero. An organism, or organisation for that matter, must adopt or die. In the referendum, the British people rejected the EU’s inflexibility and its failure to adapt.

Top down, rent seeking, institutions are the past. Those holding onto the supranational institutions are desperately trying to support a system that kept the old cartels in power. Technology and the people’s legitimate rights to have a government of their own people will sweep away suprantionalism.

The greatest trend in world politics is the near universal demand for diversity and decentralization of decision making and power. Ever more countries are being born and taking their seat at the United Nations, an international body that has at its very core a respect for the nation state.

Whilst transnational empires will fail and new states will be born, there is also the beginnings of a trend towards not just smaller political units but economic empowerment of individuals. Using technology people are becoming free from the tired cartels that cling to supranational governance. Whilst global value chains are growing, people will no longer have to be passive receivers of the proceeds of growth as if they were in some feudal system. 3D printing is just the start. Indeed, even financial institutions may themselves have to adapt to deal with the challenge from crypto currencies and peer-to-peer investment models.

Top down information flows are the past, by rejecting the hierarchical organisation of the EU, Brexit has shown how we can live the information revolution. In the UK, centralisation is out, we have embraced the new world of horizontal information channels. In this exciting age of technology and easy communications across the globe, it is absurd that our lives were being managed by grey men in their ivory towers in Brussels.

Technology is driving changes that remote bureaucrats have yet to imagine. People are deciding how to live their own lives for themselves. Brexit is about openness. It’s about people realising their global role and forging new links with counties and other people. The UK has re-joined a world we helped to shape. The British people, through Brexit have embraced what made this country so dynamic; freedom of information and limited top down control.

If TED wants to remain relevant then it needs to be open to the new ideas at the heart of Brexit. This may require Chris Anderson to take a leap of faith and be open to the ideas that are driving the most exiting political movement in a generation – Brexit. Chris Anderson needs to look beyond the pseudo-globalisation of political, corporate and market hierarchies attempting to ensnare us in their web, whilst masquerading as enlightened progressives. The TED talks need to embrace the coming Cambrian explosion of devolution, fewer hierarchies, more markets and more information channels.

How we choose to live our lives and interact can no longer be controlled by old structures like the EU. It is not the big that beat the small, it is the fast who beat the slow.

If we can question the old tired structures of supranational governance, which come from the early 20th Century, and break free from it, then Chris Anderson can step up to the plate and listen to what Brexiteers have to say. It may take him out of his comfort zone, but I suspect that he will realise that despite the inevitable bumps on the road we point the way forward.

The French economist, Professor Jean-Jacques Rosa, in the Bruges Group publication, Saying No to the Single Market, summed up what is so wrong with the supranational version of globalization which the EU personifies. His arguments are summarised below. The EU is little more than organisational sclerosis.

The attempt to construct a third superpower by combining the former imperial nations of France, Germany, Italy and possibly even Great Britain was intended to reinforce and consolidate the Western Alliance. But the last quarter of the century saw a sea change in organization, coming from the information and communication technological (ICT) revolution.

The organizational trend underwent a complete reversal from the mid-1970s onward, changing the structure of most hierarchical organisations, and boosting the development of markets everywhere. I claim that the optimal organisation of the public sector and also of private businesses has been revolutionized by an informational tsunami during the past three decades in favour of smaller hierarchies and larger markets. And that is the reason why the old project of centralizing Europe by building an additional level of political organization above that of the nation states is now not only obsolete (the remnant of a former era) but also moving more and more afar from the modern (information era) optimal political organization. For that reason, it is deeply detrimental to growth and economic dynamism.

A problem of Centralisation
The single market itself is another step in that wrong direction, alongside with other centralising policies, whether effective, such as monetary policy (the creation of the euro) or projected, such as a single tax policy intended to suppress tax competition among governments. They all belong to the general category of anti-competition policies.

The single market really means European-wide centralisation of national regulations, a regulatory centralisation that decreases competition and consumer welfare.

It creates huge new rents for centralized European regulators and for business interest groups and oligopolies.

The centralisation of regulation ignores the difference of tastes in various countries. It also ignores the difference in economy conditions, such as the local (national) elasticity of demand, the elasticity of supply, the density of population in various countries, and so on. These factors explain the differences in the demand for environmental regulations from one country to another. Fixing the same standards for the whole of Europe ignores these differences in demands: one size does not fit all and the consumers are less well served. Thus, centralising regulation distorts competition instead of increasing competition.

Interest groups versus consumers
A regulation in fact is a tax plus a subsidy. The question is: is the centralisation of regulation increasing the overall volume of regulation? I say yes of course.

Why? Well take the European Union. The total population of the 28, soon to be 27, countries is about 500 million people. A large enough firm will now have its former lobbying budget available to lobby not 28 regulatory bodies but just one central authority and with greater outcome. It becomes more worthwhile to lobby. So there is an overall increase of the money spent lobbying and of course the regulatory authorities are influenced by the spending of lobbies and that’s what the late Professor and Nobel Prize winner George Stigler showed and called the “capture” of regulators by the regulated firms and their lobbies. The regulatory authorities are not completely independent of the actions and spending of the lobbies. Bureaucrats controlling access to a 500 million people are obviously more actively lobbied than bureaucrats controlling a market of 18.5 million people.

Rent seeking will increase and that’s bad news for consumers. That’s good for some businesses, that is good for the bureaucrats, but it is bad news for consumers. And so, the incentives for forming cartels, the collusion between firms, are much increased. As we know, cartels are good for business and bad for consumers: they result in higher prices and lower quantities.

There is a second important real effect of the centralisation of regulation, it comes from the dilution of democratic control. The formerly hard won national democratic control is reduced through the extension of the voting area and voting population, and that’s exactly what happens in business firms when you dilute the capital by the creation of new shares. You increase the capital and you dilute the power of the former owners (voters or shareholders). The control that these “owners” can exert on managers, that is, in this example, the politicians and bureaucrats, is lowered in the same proportion. Accordingly, the politicians all over the EU are not going to resist the trend towards more centralisation. On the contrary, they receive some personal benefits and increased independence vis-à-vis the electorate by that very diluting process.

My conclusion is that the centralisation of regulation brings about an extension of the size of central bureaucracies and this is the case even more when you consider that existing bureaucracies usually do not disappear when new ones are created.

Look at the European Central Bank. The ECB has been created and is now working in a huge expensive building in Frankfurt. But the French Central Bank still exists, it didn’t decrease its employment or budget and I suppose it’s the same for other national central banks in the Eurozone. So there is a net addition of monetary bureaucracies with the centralisation of monetary regulation and the creation of one more level in the political hierarchy, which results in an increase of the overall size of bureaucratic Europe.

On the business side of that process, the development of lobbies mainly benefits existing established firms because they are the only firms that can create a lobby. “Potential” firms obviously cannot, nor do the new entrants. The extension of lobbying thus favours existing firms. Existing firms are large firms, and the older they are the larger they are. It follows that centralisation of regulation and increased lobbying promote the concentration of business firms and business interests and that’s not really an advantage for consumers either.

This is not good for the creation of new firms and for the general dynamism of the economy. Indeed, it is the source of sclerotic organisation in the EU. It enforces and enhances the rents of large, older business firms and bureaucracies and freezes the hierarchical structure of both industry and political production at a moment when innovation, new small firms, and lighter government are required. It is a recipe for accelerated decline.

Organisational sclerosis
During the first three quarters of the 20th century there was a trend towards centralisation, concentration, increase of the size of hierarchies both public and private (big firms, big states). Industrial organisation economists call it the “fordist” era after the name of the American carmaker that invented the continuous production line, but it was also the era of socialism and centralisation of the state and of the increase of the size of state bureaucracies everywhere, including in the democratic “market economies”.

But from the mid-70s on, a reverse track upset organisational structures everywhere. Big conglomerates disappeared in the following decade, very large and inhomogeneous countries dissolved: the USSR first and then Yugoslavia, Czechoslovakia, while regionalist and secessionist movements multiplied in Spain, Italy, and elsewhere in the world.

Something big happened in the 1970s: that was the dawn of the information era. Suddenly information costs fell vertically because the drastic fall in the cost of storing, processing and communicating information due to the microchip, the computer, and radio transmission of the internet. An economist would say that when the cost of information is going down more information should be used. But a more intensive use of information is going to impact profoundly the structure of organisation of all productions.

When the cost of information goes down dramatically as it did in the 1970s, then the market becomes more efficient than the hierarchies. So hierarchical Europe is to shrink its hierarchies: they should be divided and reduced, and at the same time markets should expand, and that’s what happened in the 1980s, worldwide. It was even more the case in highly centralised economies such as the USSR. They simply went broke because their organisational structure had become uncompetitive and obsolete. They did not take advantage of the sudden fall in the cost of information. They did not realize that a new and abundant resource (information) was available for maximizing growth. Or if they did they weren’t able to change their outdated organisational structure to benefit from the new cheap resource and they lost to information intensive competition from the U.S.

Adam Smith called attention to the invisible hand of the market and the American economist Alfred Chandler explained in a symmetric fashion that the “visible hand” of the big corporation, the existence of large hierarchies, was characteristic of the 20th century businesses. What one could observe today is that since the last quarter of the past century large hierarchies are shrinking: the information era is the era of the “shrinking hand”.

Against this general background what are we doing in Europe? The EU is still extending the public (or political) hierarchies and contracting markets, a directly dysfunctional and unproductive strategy. The relative prices of factors and information tell us that they should be doing the opposite. We live in an extraordinary abundance of information, and the deluge is increasing.

The current European orientation towards increased centralisation is itself increasingly questioned and will be reversed just as in the last part of the 19th century, the previous British trend towards free trade and small hierarchies was replaced by a new trend towards centralisation, including both big firms and big state. I think that current European policies are a legacy of this period (the 20th century) but that they are counterproductive in the new era of the information age. What we need to avoid a growing organisational sclerosis is a radical about face of policy, a great reversal if you like.

A uniform union-wide regulation (and the underlying model of centralisation of everything) is just like the Ford Model T: the choice of the car paint is up to every buyer, provided it’s black. This could be a productive, wealth enhancing, policy in the price context of the past century. But it won’t do today.

With the falling costs of information, centralisation is out, variety is in and centralisation becomes directly unproductive and will lead to failure in a very short term as the information revolution proceeds at an accelerating pace.

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