The stupidity trap

On 23 June 2016, a referendum was held by the government of the United Kingdom, which look forward separating from the European Union. The results surprised many pollsters; the Brexit resulted victorious with a small margin 51.89% against 48.11%. David Cameron immediately resigned as prime minister leaving Theresa May as the person in charge of executing the Brexit.

The British Pound depreciated by 11%. Furthermore British, European and American financial market opened down, it was clear that the Brexit was and still being synonymous of uncertainty, which is the magic word that scares the market. Consequently, it was pointed out by many economists as Christine Lagarde, Director of the IMF and organizations such as Morgan Stanley, that such uncertainty would have a negative effect on investment in the medium and long term.

One year after Brexit, believers have lost their faith. Theresa May announced general elections in order to create an atmosphere of stability and strength leaving for granted that Brexit would be the only way that the United Kingdom will follow. May won comfortably against Jeremy Corbyn but she lost the majority in the Parliament creating a difficult political atmosphere around the Prime Minister and the Conservatives.

On the contrary, the economy does not seem to have suffered, the annual GDP growth is estimated about 2% and the unemployment rate around 4.6%, the major concern is that the Bank of England has maintained an expansive monetary policy holding interest rates really low around 0.25% and the annual inflation rate close to 2.9%.

Due to the fact that these numbers would not seem worrying in the short term, low interest rates cannot be considered a stable equilibrium. So, it is no surprise if the Bank of England decides to increase them, which will cause an increase in the cost of debt, although in the very short term aggregate demand has been driven by consumption, the economic theory forecast a contraction in demand. On the other hand, inflation begins to diminish Britons life quality due to the fact that the wages have not grown at the same rate, which in turn causes the future consumption impaired.

It’s also important to remember the fact that 45% of the total exports from the United Kingdom go directly to the European Union and approximately 50% of the imports come from it, that is to say, it is the biggest commercial partner of the British. In addition, the United Kingdom represent less than 7% of total EU exports. To summarize, the main commercial partner of the United Kingdom is the European Union that implies the need to reach a good deal for both parties but especially for the UK, and the future consumption of goods traded in the sin will depend on it.

Theresa May has remarked every time that will do everything she can to get the best deal possible, which in fact makes it clear that the Brexit was complete stupidity. The negotiation power has fallen into the hands of the European Union; following the game theory perhaps both will have to choose the scenario where they minimize their losses. In the words of the investor who "broke" the Bank of England, George Soros: "May could reach an understanding with the EU on the agenda and agree to continue as a member of the single market for a period long enough to carry out all the legal work that will be needed. This would be a great relief to the EU because it would postpone the evil day when Britain’s absence would create an enormous hole in the EU’s budget. That would be a win-win arrangement. "

What is the trap of stupidity?

In 1988 the economic historian Carlo Cipolla presented the controverted theory of stupidity, which points out that individuals can be stupid regardless of our characteristics. In fact, according to Cipolla (1988), the stupid ones are a great group extremely dangerous and powerful. Certainly, it is difficult that at some point in our lives we are not part of such a popular group. In fact, we can question what happens when stupidity is expressed openly through the best-known tool of democracy: the vote.

Cipolla (1988) classified individuals into four categories: First, the intelligent ones, who benefit others and themselves. Secondly, the unfortunate or naive, who benefit others and harm itself. In the third place the already known evildoers, which harm others and benefit themselves. And finally, the aforementioned, the stupid ones who harm others and themselves.

The vote has been the instrument chosen by the British to show the world that Cipolla’s words are true, stupid ones are highly dangerous. The UK is facing the most lethal enemy: uncertainty. Although negotiations began, the only options on the table are the "light" or "hard" Brexit even though many Britons feel it was a mistake and would like to return in time and change their vote to stay in the European Union, the Tories remain firm in their decision to say goodbye. The UK will be obliged to find the best deal possible and assume the costs that it could bring in terms of investment, prices and aggregate demand.

References:

Cipolla, C. (1988). Allegro ma non troppo. Il Mulino