In a now-famous essay, “What is Seen and What Is Not Seen”, the great economist Frederic Bastiat warned against judging the value of any activity in a vacuum.
Bastiat’s “broken window fallacy” brilliantly exposes a common tendency to focus on the visible, tangible benefits of an action – the “seen” – while neglecting the “unseen” penalties and long-term drawbacks associated with the same activity – the invisible cost of opportunities foregone.
Though writing in 19th century France, Bastiat’s insights have a timeless wisdom. We live with the consequences of reductive “broken window” thinking every day – especially where public money is concerned. Politicians often praise the visible benefits of public spending, e.g. the number of jobs “created”, without considering whether the funds could have been spent more wisely elsewhere – or even how the taxpayer might have spent the cash, had it remained in his or her pocket.
For my money, the fraught Brexit debate badly needs a dose of Bastiat.
So far, discussions of the gains and losses of Brexit have, understandably, tended to focus on the most obvious costs, like the amount Britain may pay in any “Divorce Bill”, the potential “Brexit hit” to companies exporting to the EU, and so on. Of course, these concerns are vitally important, but our focus on the immediate costs of EU departure risks blinding us to the very real costs of maintaining the status quo.
Membership of the European Union carries huge unseen penalties whose implications may not be immediately apparent. The EU’s Common External Tariff, for example, raises prices and so reduces the quantities of goods and services available to ordinary consumers. Since shoppers in the EU lack the counterfactual experience of trading at world prices, this penalty goes unnoticed, but it involves a misallocation of resources on a vast scale.
Negotiating the terms of our departure also comes with huge hidden dangers. In adopting the government’s proposed model for close customs cooperation and a common rulebook, we run the risk of finding ourselves with little scope to diverge from EU regulations on goods, and unable in practice to strike new trade deals with the rest of the world. It is often pointed out that the UK’s interests in trade agreements are primarily in services — but this makes it even more vital to maintain flexibility over what we can concede in goods, to incentivise potential trading partners to strike a deal. The status quo, or anything close to it, carries huge opportunity costs of its own.