Brexit: everyone got it wrong

‘Brexit’ means brexit. Why do I have a feeling some Leavers will end up saying ‘we never left’, and some Remainers will say the same. The opposite is also likely. Some Leavers and Remainers will agree: Brexit did mean ‘brexit’. Both will occur, simultaneously.

If you’re confused, you should be. It is often forgotten that it is not economists who predict the future, but novelists. In this instance, only the great Czech novelist, Franz Kafka, correctly predicted Brexit. In The Castle, the protagonist, named ‘K’, embarks on a never-ending bureaucratic process seeking citizenship from the distant castle. It is ultimately impenetrable. Towards the end, K finally receives second-class status. The letter arrives the day after he dies. Kafka himself died before finishing the novel.

A good imagination has more prescience than an economic model. It is better to imagine something fantastical – it’s bound to happen somewhere at some point in time, if it hasn’t already. Economics tries the opposite – to be specific, assuming everything else remains the same.

In investing you should learn early on that it is treacherous to base a decision on a cyclical forecast. Too many times economies do things that – literally – no one sees coming.

Brexit may be the latest case of ‘everyone got it wrong’. Imagine Kafka is an economist, and this is his tale:

An economy is thriving, or at least on some measures it is close to full employment. There is national angst about many things, some real and some fictitious: the distribution of wealth, the burden of monstrous financial errors being placed on the poor, and the imminent invasion of bellicose foreigners from a distant land.

One group of elitist bureaucrats blames the woes on another faction of the domestic bureaucratic elite, some blame foreign elitist bureaucrats, who tend to patronise them in recognisable but alien accents. In an attempt to settle the dispute once and for all, the elite turns to the population: let them decide. The team with the best jokes wins. The population votes to leave the big, foreign, castle, for its smaller local one.

Well, it’s a Kafka story, so Leave means embarking on an endless process of trying to leave, never knowing whether or not you achieve it. Even when you die.

But it could not be so simple. The population, acting without virtue, has unwittingly acted virtuously. Their wise priests had predicted economic calamity. But something else happens: expecting disaster, the speculative elite cause a huge fall in the exchange rate – never before has the small castle been such a great place to visit, export from, or buy assets in. The central banking elite vindicates this move in foreign exchange markets, by engaging in a baffling series of policies with acronyms and impossible-to-fathom effects. The educated, hard-working, youth from the large, ageing foreign castle continue to arrive, work, and support the small castle – which, of course, is still actually a part of its larger neighbour.

The government which punished the poor for the errors of its banking elite, changes tack. That was an error of the old elite! We will reverse this ‘shrinking of the state’. They embark on a public employment programme, setting up a new ministry for the special metropolitan elite who are experts in trade.

Towards the end of Kafka’s economic tale, the economy is booming, and everyone got it wrong. If they hadn’t got it wrong, there wouldn’t have been a boom. The thinkers among the elite produce new models showing that booms occur if everyone makes errors, about what is happening, should happen, and might happen. They argue about whether or not this is ‘rational’.

All that anyone knows is that they are ‘leaving’. There are some doubters of the sustainability of the boom, but they have taken to writing fiction, in the vain hope of getting it right.

About The Author

Eric Lonergan is a macro fund manager, economist, and writer. His most recent book is Money (2nd ed) published by Routledge. He is also a supporter of Big Issue Invest (BII), the investment arm of The Big Issue, and is one of the initial limited partners in BII’s Social Enterprise Investment Fund LP. In a personal capacity, he makes direct investments in social enterprises. He also supports and advises The Empathy Museum.