Brexit & the two Canutes

Brexit & the two Canutes

Amazingly, this week marks the first time a client has asked me, formally, to look at Brexit. It has inevitably been part of my thinking since the referendum was first announced, included in talks and discussed in Q+A sessions. But this is the first time I have had to prepare a full talk on the subject.

My thinking remains the same as it was before the vote: we have taken the more difficult path to what is likely the same future. Leaving the European Union — should we ultimately leave — presents barriers to commerce and communication. The historical trend, which I fully expect to continue, is to bring these barriers down, not raise them. Yes, there are issues between the US and China, but those are largely down to the economic illiteracy of the current chump-in-chief. Whatever our actions here, we won’t reverse this global, long-term trend for low-friction communication and trade, and nor will he.

Stopping the tides

The likely outcome is rather well illustrated by the two stories of King Canute. I say two stories, because the version most of us know is not the version originally told.

Canute, (or Cnut) was the king of Denmark, Norway, and England. In the story we all know, he is presented as being so arrogant that he believes he can command the tides to stop. He is surprised and distraught at their unwillingness to respond to his commands.

I fear some of our political leaders are like this version of Canute, believing that the power of our state is still such that we can wield power without the support of our European neighbours. Like Canute in this case, I think they will be sorely disappointed.

Networks, not monoliths

The reality of today’s world is one of networks, not monoliths. Very little success is commanded by organisations that attempt to do everything themselves. And when you look inside those that do, you find that they have constructed themselves as networks, not old-school monoliths.

Critics of the European project see it as a new, larger, monolith, with power centralised to Brussels. There’s a little truth in this, but its much more important role is as a network, a set of shared protocols within which multiple nodes can co-operate with low friction.

We may still be a reasonably large economy, but outside of such a network, states are poorly-sized for many of today’s challenges. Too small for issues of trade, crime, research, and media, all of which are increasingly international. Too large and centralised (in our case) for the smaller issues of day to day life: healthcare, transport, waste.

The EU network offers us a much more appropriate scale of operation for many issues and sectors. Inside it both government and commercial entities can operate much more effectively. Outside of it, we are subject to the same change tides but with much reduced ability to shape their flow. A node isolated from its network fast loses relevance.

We can and will rebuild our network, but it will take time, and the network outside of the European project will inevitably operating with a less favourable set of rules to the ones we had before.

Humility and piety

The real story of King Canute, as first told by Henry of Huntingdon, is one of humility. Canute knows full well that he cannot command the tides. He is a pious man, and for him, the sea is the domain of a higher power. Canute wants to demonstrate this to fawning courtiers, who he feels think rather too much of him. So he plants himself in opposition to the sea, demands it halt and shows them how little notice it pays.

I fear some of our political leaders are more like this Canute, at least in their understanding that their will is insufficient to change the tides. They are going through the motions, not to demonstrate their lack of power but in a bid to cling to what little they have: the courtiers here are as likely to plant a knife in the back of the king as to praise him. As the tide rolls in around them, they will just repeat the mantra “It was the will of the people.”

This group may also claim piety, but I do not recognise their interpretation of Christian teachings, since they must also recognise the damage their actions will have on the lives of many.

Low friction future

Ultimately, the world will be one of low borders and frictionless trade. Not because of some grand free-market conspiracy* but because we are a planet that has been shrunk by technology — first transport and then communications. A huge proportion of our modern products and services can be conducted and delivered digitally. Rapidly advancing technology will mean that the transportation of others falls further in cost through automation, green energy and new materials.

In the meantime, the UK will be one of the highest-friction places to trade, with new financial, legal and logistical barriers. This will inevitably have an impact on jobs, compounded by the growing prospect of automation, from which we will not be insulated. We will be isolated from international research programmes — something that is already happening. And we know that we will struggle to meet the resource requirements for our health service.

Good reasons to leave

In theory at least, there might be good reasons to leave the EU, whether you come from the left or the right. On the left, you might believe that an independent UK can more easily nationalise some industries, increase worker protections, and pursue more aggressive tax strategies against international companies. On the right you might think we can lower trade borders even further, reduce labour costs, and make the UK a more attractive target for investment. Unfortunately, none of these theories survive very long when tested against reality.

For the left, EU law doesn’t prevent us nationalising some industries, when there is good reason to do so. Rather the EU is the conduit for World Trade Organisation rules: a larger, less favourably-weighted network. We would likely have much greater trouble nationalising industries without the insulation of the EU. Inside the EU many countries manage to pursue significantly greater state intervention than the UK, where three quarters of applications to apply state aid are waived through.

Worker protections have historically been advanced by the EU rather than limited by it: our own track record is arguably bettered by our neighbours. And on the tax front, we would probably have better luck with a co-ordinated international strategy rather than going it alone. It might be slower but it would have a better chance of success.

For the right, well yes, we could remove some worker protections and reduce labour costs. But that would have to be about ideology rather than a pragmatic strategy for economic growth. Who is going to labour without the migrants we have been so reliant upon in recent years, and in what industries if tariffs are adding so much friction to trade? Automation is already going to reduce labour costs anyway, and robots have no such protections.

All of this means for me, as backed by pretty much every reasonable analysis to date, leaving the EU means difficult times ahead for the UK, especially if we leave without a deal. Some of this risk could be mitigated with the right deal, though in many ways this would satisfy no-one: we would at least be inside the network but with no control over the rules by which it is governed.

Facing Brexit

So what should people and organisations do facing this rather gloomy analysis? The first thing to understand is that technology still presents a greater change-driver over the medium term than this political shift. Brexit will be a terrible shock but the pace of technological change continues at an astronomical rate and presents as great a threat to work and industries. Technology will continue to change our lives whether we are inside or outside the EU.

Just as technology has been used to circumvent barriers in the past, if we leave, so it will be used in the future. Expect to see large corporations finding workarounds for increased tariffs, and expect to see growing digital grey and black markets. Expect to see freelance workers here finding ways to continue to sell their services internationally.

Our businesses need to strive to be the best and the fastest at responding to change. This means maintaining a watchful eye on the near horizon and breaking the boundaries of their own thinking about what is possible: most of us are constrained in our imaginations by today’s reality in our company, sector and country. It means making good decisions more quickly, pushing power to the edge of the organisation or accelerating the flow of information through to decision-makers at the core. And it means reshaping the organisation as a network itself, able to be constantly rearranged to meet changing conditions.

As individuals we need to recognise the challenge that Brexit presents alongside the work environment that will continue to transform under any circumstances. We need to be focused on those high-value skills that insulate us from the threat of automation, but also to push for a welfare and education environment that gives the best chance of adapting to high frequency change.

The great and the unready

Canute conquered England and ruled it for nearly two decades. He came to be known as ‘Canute the Great’. He replaced ‘Aelthred the Unready’, via a short reign for Aethelred’s son. However the Brexit story plays out over the next twelve months, our current crop of leader’s seem more likely to be remembered as unready than great. For us as individuals and for our organisations, the challenge is to be ready for the coming uncertainty.

*By the way, it’s not exactly a conspiracy but there has been a general re-writing of the economic orthodoxy over the past fifty years or so leaving us with a general impression that markets are good and government spending is bad, when the evidence doesn’t really support this. See Ha-Joon Chang’s “Economics, The User’s Guide”, for a great analysis.

 

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Tom Cheesewright