The political (micro) economy of the Brexit referendum: an application of public choice

There were many reasons why a majority of the British voters opted for ‘Brexit’ and voted to leave the European Union in the referendum on the 23rd of June 2016. Demographic data shows a clear correlation between social class and attitude towards the EU. Moreover, the government and the remain-side fatally failed to run a campaign that addressed the voters’ concerns about immigration and sovereignty. These idiosyncratic factors notwithstanding, the referendum can be understood through the prism of economic theory; using economic theory can give us an insight into psehological behaviour, which we can not get from a pure empirical analysis.

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The night of the 23 of June – the day of the Brexit referendum – started well for the ‘remain’-side. David Cameron and his guests at a champagne party could watch how Nigel Farrage apparently conceded defeat, “I think Remain will edge it, yes. The massive increase in voter registration will be the reason for that.”, said the UKIP leader[i] The excuse that the extension of the voter registration could have swung referendum was met with derision among those in the ‘remain’ camp; as proof, if such was needed, that Farage was a sore loser and as evidence that his commitment to democracy was skin-deep, opportunistic or non-existent. But, all this was soon to change.

After the first result from Gibraltar (a massive win), Sunderland in the less affluent north of England declared for ‘leave’ and shortly thereafter Newcastle (another Northern city long believed to be a bastion of remain supporters) confirmed the trend. A very narrow win for remain in the Tyneside capital showed only 50.7 for ‘remain’. At four pm it was all over; that a majority of the British voters had voted to leave the European Union. Two hours later, the official result was declared.

It had seemed very different just a few months before. To be sure, some academics and pollsters had suggested that “we would expect the current government to lose the referendum by 4 per cent” and this had even been reported in the Daily Express – and subsequently in these pages. In early February 2016, Lord Rose, the chair of Britain Stronger in Europe, boldly declared that those favouring continued membership would win by a ‘substantial margin’.

So what happened? Is there an explanation for what went wrong? And, indeed, can economic theory contribute to an understanding of the outcome? In this article, interviews with actors and events during the British referendum campaign on continued membership of the EU will be analysed through the prism of microeconomic theory, in particular the well-known concept of elastic and inelastic demand curves.

An Economic Theory of Direct Democracy

“We considered what we could do, if we could somehow come up with a pledge but we knew that it was pointless; there was nothing we could do that could even remotely satisfy the voters’ views [regarding immigration and sovereignty]”. Lord Andrew Cooper, the Prime Minister’s pollster, acknowledged – after the referendum – that the emotional arguments like immigration and sovereignty could not be countered by economic arguments. This failure to convince the 52 per cent of the British voters who opted for ‘Brexit’ raises interesting perspectives for political scientists, economists and others who deal with decisions.

Fundamentally, it will be argued in this article, the decision to vote ‘leave’ can be understood in terms of basic economic theory; ‘Brexit’ was a politically inelastic good; a change in the price did not affect the desire to ‘purchase’ this good.

Dennis Mueller once noted that ‘public choice can be defined as the economic study of nonmarket decision making, or simply the application of economics to political science”. This article is an attempt to do exactly this; to analyse the nonmarket referendum through the prism of economic reasoning.

Economic explanations never quite translate into politics. For starters, not everything in the political world can be quantified in the way that money can. Nevertheless, sometimes, the same logic can be applied. This is especially true when dealing with decisions and situations when voters and politicians face a trade-off between two competing products. Referendums and elections in particular are well suited for applying economic reasoning to non-economic or quasi-economic choices.

Viewed in the perspective of economic thinking, the Brexit referendum was a choice between economic security and sovereignty. Each of these options two had – as in economic theory – different demand-curves. The price of each had implications for the voter’s decision.

Before we start the analysis we need to get the definitions right. So, what do we mean by, respectively, elastic and inelastic demand?

Alfred Marshall’s classic definition of elasticity from Principles of Economics (1881) states,

We may say generally: the elasticity (or responsiveness) of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price….the only universal law as to a person’s desire for a commodity is that it diminishes… but this diminution may be slow or rapid. If it is slow… a small fall in price will cause a comparatively large increase in his purchases. But if it is rapid, a small fall in price will cause only a very small increase in his purchases. In the former case… the elasticity of his wants, we may say, is great. In the latter case… the elasticity of his demand is small.

Put more simply, an elastic good, following Marshall’s definition, is one where a slight change in price leads to a slight change in the quantity demanded. Conversely, an inelastic good is one where even a considerable change in price has a negligible effect on the quantity demanded.  The contention (or hypothesis) here, then, is that the two options, respectively, ‘Brexit’ and ‘Bremain’ were, respectively, inelastic and elastic goods.

The Political Economy of Brexit: demand for an inelastic good

The main argument proposed by those who wanted to leave the EU was sovereignty. “It was clear from the start that we wanted a people’s campaign. We wanted to focus on sovereignty. ‘Take back control’, ‘I want my country back’, that sort of slogans. They are priceless. Who does not want to get his [or her] country back?” These were the words of Gerry Gunster, the American political consultant who ran the campaign for Leave.eu

His argument – though he did not put it in the jargon of economic theory – is that some voters are willing to accept virtually any increased cost as long as they can ‘take back control’. In his own words, sovereignty is “priceless”.

In economic terms, sovereignty can – following this logic – be seen as an inelastic good. As in the aforementioned definition, a good is inelastic when a change in the price leads to a negligible change in its demand. For example, a chain smoker, will keep buying cigarettes almost no matter how expensive a pack of Benson & Hedges or Marlboro’s become. And, a committed football fan will, no doubt, continue to buy a season ticket even though the prices rise exorbitantly. It is the same way with sovereignty and similar political emotions. For the committed nationalist, winning (or regaining) sovereignty is – no pun intended – priceless. Like the consumer who purchases inelastic goods no matter the price, the ‘Brexit’-voter was willing to pay a high price for leaving the EU if that was required.   That is, even an increase in the price – as predicted by countless reports by IMF, The HM Treasury (the British ministry of finance) and others – would only lead to a negliable change in the ‘demand’ for ‘taking back control’ – or so it turned out.

farage 2

Of course, we cannot prove this in the strictest sense of the word. But the logic was certainly not lost on Nigel Farage. The stockbroker turned politician, told the Eurosceptic Daily Express, “The wellbeing of those living and working in our country matters to me more than GDP figures.”

Mr Farage may not have considered his prediction in the jargon of economic theory, but the logic was clear. An increase in the cost of living – or, as voters saw it, a change in abstract macro economic figures – would be a small price to pay for ‘freedom’ (Farage’s word for leaving the EU).

The government’s document HM Treasury Analysis: The Immediate economic Impact of Leaving the EU had claimed that each voter – according econometric estimates – would be £4000 pounds worse off in 2030 if Britain voted to leave the EU, and “a vote to leave would cause a profound economic shock creating instability and uncertainty, which would be compounded by the complex and interdependent negotiations that would follow”

However, the Treasury’s prediction was, arguably, too abstract for many voters – and, more to the point – many voters were receptive to and convinced by the £350 million a week claim; the suggestion by the leave campaign that Britain paid this amount to the EU every week. We shall return to this claim below.

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The Political Economy of Bremain

It was clear that campaign to stay in Europe wanted to push the economic argument.  And they had good reasons for doing so opinion polls suggested that many voters – indeed, a majority – believed that Britain would benefit economically from staying as a member of the European Union[i].  The problem for the ‘remain’ side was, economically speaking, that the ‘welfare’ argument was a classic example of an elastic good.  A small change in the price of Bremain and the demand for staying in Europe would go down.

Nevertheless the economic argument – and the perceived benefits of staying in the EU – presented a problem for the leave campaign. Without any economist of note on their side they faced an up-hill struggle. They resolved this by resorting to the aforementioned claim that the UK taxpayers transferred £350 million a week to the European Union.

The government and HM Treasury –it should be noted – dismissed this claim – as one would expect. But the assertion was also dismissed by the UK Statistics Authority, whose Chair Sir Andrew Dilnot, in unequivocal terms denounced the claim, “UK Statistics Authority is disappointed to note that there continue to be suggestions that the UK contributes £350 million to the EU each week, and that this full amount could be spent elsewhere” The Treasury Committee in the House of Commons also denounced the claim that Britain was transferring this amount of money to the EU, noting that the ‘real’ figure was closer to £180 million a week.

The problem for the ‘remain-side’ was that many voters accepted the £350 million a week figure or at least the gest of the argument. “Voters totally internalized the argument when we used it in focus groups. When they were told that the figure was in accurate, they would say, ‘yes, but it is still a substantial amount’, and we would get nowhere”, said Lord Cooper.

brexit

In economic terms, as soon as the cost of ‘Brexit’ was believed to be rather minimal – or perhaps even positive – the demand for leaving the EU went up.

The Remain campaign had done rather well in the first week after David Cameron called the referendum; they had been able to control the agenda and had argued that the price of leaving the EU was high. Once this claim had been effective disputed by leave campaigners like Boris Johnson, Michael Gove and Nigel Farage, the support for ‘leave’ increased, and demand for continued membership dropped significantly.

In economic terms, ‘Bremain’ was an elastic good, the perceived change in price had an immediate impact on the demand. When the price of EU membership was claimed to be £350 million a week, demand for EU membership fell. That this claim was fanciful was acknowledged by Nigel Farage within hours of the referendum makes little difference. Esse est percipi – ‘what is, is what is perceived’, the philosopher George Berkeley (1685-1753) famously noted. Or, in Lord Cooper’s more downbeat assessment: “the other side had the best line and the best lies.”

The Framing of the Brexit Debate

All this brings us to another aspect of the campaign; communication. The competing claims regarding Brexit or Bremain were not taking place in a vacuum. As in retail economics, the market place of politics is driven as much about perceptions as it is by quantity and price.

Referendums are about framing the debate. Commercials and advertising may not be able to tell people what to think. But an effective campaign can be successful in telling people what to think about. At the risk of sounding theoretical, it is instructive to quote Political Scientist Ece Atikcan conclusion from her survey of several EU referendums. “Politicians”, she observed,

Attempt to mobilize voters behind their policies by encouraging them to think along particular lines, emphasizing certain features of these policies. These frames organize everyday reality by providing meaning to events and [by] promoting particular definitions and interpretations of political issues. The influences these frames have on the voter is the framing effect

The Leave Campaigns were a textbook example of this. Gerry Gunster, the American political consultant who was advising Nigel Farage, was in no doubt that the ‘framing’ of the debate effectively won the campaign. “It was to be a people’s campaign”, he says. And unlike the Remain, both the official and the unofficial leave campaigns had a simple message, “We can’t remember the slogan for remain. That says it all. But months after this campaign people will remember ‘I want my country’ back’”

In terms of choice and economic theory, the utility of having control over one’s life is almost unbeatable, or, indeed, priceless. Once again, the ‘Brexit’ argument followed an inelastic demand curve; even the barrage of statistics from HM Treasury and other institutions showing the rising cost of leaving the EU did not convince voters. Taking back control was preferable to a rise in the cost of living. Not least as many voters, perhaps a majority, believed in the £350 million a week claim.Despite the increased price, the voters (or at least the 52 per cent who opted for ‘leave’) were not convinced. The effect of the predicted price rise had a negligible effect on the demand for Brexit. Indeed, following the publication of the HM Treasury document, the polls hardly moved at all.

If an inelastic good is one where the demanded quantity is negligibly affected by changes in price, then the Brexit option – ‘to take back control’ – was an inelastic good.

This was acknowledged by Lord Cooper after the referendum. Indeed, he admitted, “The publication of the treasury document was a mistake”. That he also admitted the decision to publish the report was “not tested in focus groups”, is another story – though, perhaps, a rather telling one[iv].

Lord Cooper and his advisors were aware that it was difficult to get their message across. This was one of the findings they got from the countless surveys conducted before and during the campaign. To fully understand their predicament it is illustrative to look at the other demographic, social and structural factors that militated against a ‘remain-win’.

Other factors: The Sociology of the Campaign

Much as the all-important swing-voters were convinced by the sovereignty argument and the  £350 million a week argument there were other explanations. Demographic factors played a key role in the referendum. Or, put differently, demographic categories correlated with voting intentions in a way that may not immediately be explicable by economic theory.

There was no end of fanciful correlations and calculations undertaken by the pollsters. Populus – who also did the polling for David Cameron – found in an internal memo that support was ‘leave’ was correlated with obesity. In crass terms – and without qualifying caveats – Britain would still have been a member of the European Union if the Britons weren’t so fat! Of course, this conclusion is somewhat frivolous. Obesity is a social phenomenon, which is highly correlated with poverty measures. Statisticians use a measure known as the Pearsons Correlation Coefficient. A perfect mathematical correlation is R= 1.0 and no correlation is R=0. Conventionally any figure above R=0.3) is considered strongThe same pollsters found a correlation between non-professional occupation and leave of R=0.74 and a negative correlation of ‘leave vote share and socio-economic group of R =0.65. In other words, the higher the social group the lower the propensity to vote leave.

When vote-leave share was correlated with years of education, the figures showed a correlation of R: .80. Based on these measures, education was a better predictor of the voters’ attitude  towards the EU than was support for UKIP in the last general election.

Table One: Demographic Drivers of leave/Remain Vote Shares (Pearsons Correlation Coefficients)

 Leave vote share vs. UKIP vote in 2015                                            R=  .81

Leave Vote vs. English only (or Welsh only)                                       R=  .51

Leave Vote vs. ‘not in very good health’                                              R=  .55

Leave vote share vs. non-professional occupation                              R=  .74

Leave vote share vs. socio-economic group                                        R= -.65

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All significant at p >0.01, N:1200, Data courtesy of Populus

What is interesting is that all the groups or demographics that opted for leave were also likely to be the ones who would be hit by the predicted economic malaise in the wake of a ‘leave-vote’. That these groups were willing to pay the price of the impending doom foretold by the Chancellor of the Exchequer (Finance minister) George Osborne in return for ‘taking back control’ is interesting and perhaps show the degree to which the perceived independence from the EU was an ‘inelastic good’.

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But much as this argument is compelling, it is also worth noting that the referendum was the result of a confluence of factors – many of which were of the remain-campaign’s own making. In many ways the referendum was a perfect storm.

In his prescient book The Revolt of the Elites, American historian Christopher Lasch lamented how “the elites who define the issues have lost touch with the people”[i]. The referendum campaign was characterised by this chasm between the experts and the urban cosmopolitan elite and those whom Nigel Farage called “good people, honest people, decent people”[ii].  Several institutions organised round-tables, town-hall meetings and debates. It is a safe bet that the voters were well informed. But they were not convinced by the arguments by experts – and still less were they swayed by the dire economic warnings. At an event in Coventry a self-confessed UKIP supporter asked a question about the EU’s “undemocratic nature”. He received the answer that the European Union was the “most democratic international organisation in the world, and the only one that had successfully unseated its executive when the European Parliament had forced the Jacques Santer Commission to resign in 1999”.

“I am not an expert but I know you are wrong”, responded the self-confessed brexiteer. He got a standing ovation. The ‘expert’ – a former editor of The Economist -was booed.

The official ‘In’ campaign fundamentally failed to understand how the voters’ attitudes were shaped by an active dislike of experts and various elite representatives who told people what to think. Voters were not impressed when – on the 20th of May – singer Paloma Faith, the actor Benedict Cumberbatch and the author John Le Carré urged voters to vote ‘remain. Nor were the voters – or a majority of them convinced by the Stephen Hawkin’s suggestion that a vote for ‘leave’ would hurt British science and research, let alone by former footballer David Beckham’s recommendation to ‘vote remain’[iii].

Seemingly oblivious to the celebrities’ failure to convince the voters in other referendums[iv], the ‘in’ campaign dispatched the comedian Eddie Izzard to tour the country with a ‘positive’ message and to tell voters about the economic benefits of EU membership. This barrage of arguments for remain from celebrities contained warnings about the economy – warnings that were constantly repeated by economists and international institutions – did not help remain. Based on opinion polls the voters were not responding to the predictions of economic gloom presented by David Cameron and his allies.

By the end of May the immigration and sovereignty emerged as the big issues in the campaign. Many in the ’elites’ believed this hurt the leave campaign. It did not; a majority of the voters were unconvinced by the economic warnings and were willing to pay a high price for ‘freedom’ if necessary.

Conclusion

Abstract models and theory are never an exact mirror of the real world.  The theories are the maps, not the landscape, to use Gregory Bateson’s well-known and apt metaphor[i]. But sometimes the theories – the maps if you like – can reveal a pattern that is not visible to the untrained eye. Occasionally an abundance of evidence and empirical detail make it difficult to see the proverbial wood for the equally proverbial trees.

Economic theory provides one particular map for understanding market- and occasionally non-market behaviour. In economics, the demand for an elastic good falls if the price increases. Conversely, the demand for inelastic goods do not change as a result of price changes. One can see leaving the EU as an inelastic good. Although the price for this option was predicted to be high, demand for ‘Brexit’ remained unchanged. Indeed, once it was believed that the cost of leaving the EU was negligible (due to the much debated £350 million a week claim) demand for ‘leave’ even went up. Economic models may be abstract but the logic is hard to deny; the 52 per cent wanted Brexit at any cost.

But back to the world of real economics and politics, what happened after the vote? Two days after the vote, the Pound was in free fall and dropped from 1.48 against the US Dollar to 1.36 – and continued to fall after that. The stock marked nosedived, at least initially. In the first twelve hours after the result the stock market lost more than Britain’s annual contribution to the EU-budget. Even the Daily Express – normally a bastion of self-confident national pride – conceded that “ France ‘overtakes UK as world’s fifth largest economy’ after pound plunges”[ii]. Following a weekend of turmoil, Standard and Poor downgraded Britain’s credit rating from ‘Triple A to AA – and was followed by Moody. Investment was down by seven per cent. Many economists felt vindicated. Mervyn King, the former governor of the Bank of England, however, was relaxed, ‘Markets go up, markets go down.”

Matt Qvortrup is a professor of Political Science at Coventry University

Disclaimer:
The views expressed in this explainer are those of the authors and not necessarily those of the UK in a Changing Europe initiative.

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