Friday Flyer: Annus Mirabilis: 2016

This has been a year of miracles. But unlike Larkin’s year of 1963 in which the baby boomers broke free jointly into prosperity and security, we may look back on this year as the end of the long process of liberalisation and globalisation that had been set in train by the postwar consensus. Perhaps this process had gone too far, too quickly and needed to be better managed but an abrupt move away from liberal ideas may spell troubled times ahead. Most of us have some half-remembered stories in our minds about the collective failure of European states in the inter-war period, the rise of nationalist parties of either extremes and cannot help but be concerned about what the long period of dissatisfaction with economic performance may bring. Brexit has been Trumped and we wonder what might be Penned next.

The UK gave us a big clue. Rather like Credit-Anstalt or Lehmans. Of course, the UK has had a difficult relationship with the European Union and its predecessors, the European Economic Community and the European Community, along many dimensions, as long-run polling data and both the announcement and result of this year’s advisory Referendum confirm. But, despite looming exit from Union, the UK remains a European nation. So whether the country is a full member of the supranational organisation or ultimately becomes simply an observer, our relationship with Europe will continue to be a hugely significant point of departure for our external trading and political relationships. So precisely because the referendum result will allow the UK to redefine this key relationship and ask to consider many of the questions to be faced in forging a new European partnership, the core question is with what institutions we replace the EU superstructures.

It might be thought that many of the political issues are primarily outside the realm of economic analysis. And if nothing else, the elections of 2016 tell us about some heightened level of dissatisfaction with the current political and economic settlement within the UK and elsewhere. But new economic approaches to understanding long-run prosperity increasingly place an emphasis on the role of institutions and organisations in shaping how resources are allocated. Whilst it is true that the UK, USA and Europe have made long-standing commitments to free and open elections, with consequently a considerable constraint on executive authority, it also the case that this arrangement has not delivered a sense of contentment in the face of pressures of globalisation, particularly in the aftermath of the financial crisis. There is powerful pent up demand for a change.

The socio-cultural factors that explain the referendum and presidential results will help shape future democratic values and these are likely to play a dominant role in the strategic choices of democratic institutions. These institutions may then also play a role in affecting choices. The tension between elites and the populace seems palpable and decisions will have to be taken about whether elites give up some power to defend the economic structures or whether power will revolve away from those cosy elites with a process that might be more difficult to manage. We need to offer a fresh perspective on the political economy of democratic institutions, as well as the interplay between policies and cultural change. Does this reasoning simply imply more regional-level decision making, more protection for domestic industries or expenditure on infrastructure? Perhaps. But I think it will imply some recognition by elites that they have to develop the ability of incoming, younger generations to live productive lives. The question facing us all is whether the post-referendum climate will prove to be sufficiently fertile to grow such institutions or whether we will fall into base nationalism.