Where to place Cameron`s and Johnson`s (and Corbyn`s) recent actions in Carlo M. Cipolla`s behavioural chart?

Carlo M. Cipolla was a famous economic historian, mostly teaching in American Universities. Beyond the academic circles, he was famous for a little book, which he had written initially as a divertissement for his friends: Allegro ma non troppo. The book, in the section entitled: The Basic Laws of Human Stupidity, set the laws of human stupidity and categorized behaviour in the following diagram:

Carlo M. Cipolla: the behavioural diagram.

Cipolla

On the horizontal axis of the diagram there are the advantages/disadvantages for the individual deriving from a certain action; on the vertical axis there are the advantages/disadvantages for others, coming from that same action. Clever actions are classified in the upper right quadrant, because they bring benefits to the acting person but also to others. In the bottom left quadrant are categorized stupid actions, which damage the author as well as others. In the upper left quadrant you have naïve actions, causing damage to the author but benefits to others and, finally, in the bottom right quadrant there are the actions of bandits, who bring benefit to themselves but damage to others. The diagram can be further used to define so called “semi stupid” actions. These are placed below the diagonal intersecting the naïve and the bandit quadrant. For instance an action by a person in point B (for Boris, as we will explain) in the bandit quadrant causes disproportionate damage to others for small personal benefit.

This categorization seems to us useful to classify the behaviour of the British Prime minister, Mr. David Cameron, and of the winning leader of Brexit, Boris Johnson, during the referendum saga. In our view the actions of the former can be placed, in Cipolla´s diagram, in the Stupid quadrant, while those of the latter can be placed in the Semi-stupid Bandit quadrant. Of course, we do not at all imply that Cameron is stupid, or either that Johnson is a semi stupid bandit. We just highlight that, in our view, their recent actions fit well in the two mentioned quadrants of Cipolla`s diagram of human behaviour.

Let us briefly summarize the reasons for our classification, for Cameron first and for Johnson second.

David Cameron gambled that, by proposing and winning a referendum on British participation to the EU, he would quell the simmering and poisoning divide in his party between supporters and opponents of the EU. The reason to put his action in the stupid quadrant is that he lost this incredibly risky gamble, ruined his career and created the conditions for the disaster that followed Brexit. This catastrophe was achieved by making a haphazard use of that very powerful but also very dangerous tool that is a referendum, as argued by Kenneth Rogoff[1]. While it is true that referenda can positively complement that complex, secular tested machinery that is representative democracy[2], history also gives examples of referenda with terribly negative consequences[3], proving that they have to be used with utmost care, just because of their extreme potency.

Boris Johnson had no other motivation to go against his many past statements of appreciation for the European Union than the desire to be the next UK prime minister. This he may obtain, and this is the personal advantage he got. However this was obtained at a huge cost to his country and indeed to the whole world. The economic cost can be assessed in two different ways.

On one hand one can look at the existing economic forecasts of the effects of Brexit. Goldman Sachs produced the estimate that the British economy will lose some 2 percent growth in 2017 (2.75% if we include also the loss in the second half of 2016) and enter into a technical recession in the first half of next year. Similar numbers are expected by Oxford Economics (-1.9%) and by the Economist Intelligence Unit, which states that a cumulative 3% loss is expected between the second half of 2016 and 2017 compared to the no-Brexit scenario. Other institutions, like the IMF and the HM Treasury, indicate more pessimistic figures and forecast cumulated losses between 5.5% and 6.5%, Growth in the rest of Europe is forecast to be lower by 0.5% over the next two years. The channels through which Brexit would impact the real economy will be three: first, terms of trade adjustments effects on import and export flows will damage the purchasing power of Britain; second, uncertainty will likely stop investment and affect consumption; third, banks may be forced to reduce their lending. The latter effect is well announced by the sharp depreciation of the equity of the British banks: a bank with lower equity is forced to deleverage.

The other way to assess the economic costs is to look at the impact of the news of Brexit on financial variables, the only ones that react with immediacy to news.

The effective exchange rate depreciated by 9.2% in two days as immediate and direct effect of the result of the referendum. This means that British labour, British capital, British goods have been devalued by more than 9 per cent on international markets. This also means that British people will have to pay much more to purchase goods and services abroad. This effect will go much beyond the increased cost that British holidaymakers will have to sustain for their Costa Brava vacations.

The stock market, a proxy of the British capital stock, has lost 7.1% per cent of its value in Sterling over two days. An international investor can thus now buy British capital goods with a discount of 16.3 per cent (9.2%+7.1%).

Of course there are also multifaceted political costs. The most obvious would be the break of the United Kingdom, with Scotland seceding, and a set-back in the most innovative institutional development of the last two centuries: the construction of the European Union.

But the economic losses are not limited to Britain: €-area, Japanese and American pensioners, for instance, have seen the value of the stocks accumulated to fund their pensions decline by significant amounts on impact last Friday. The Financial Times of Saturday June 25th reported an estimated loss for global equities of 2 trillion dollars. So, just to give an impression, Boris Johnson’s increased his chances to become Prime Minister but imparted a global economic cost of a multiple of 2 trillion, since the value of global equity is just a fraction of the value of the global capital stock. It is difficult to imagine an action that would better deserve the title of semi-stupid bandit in Cipolla´s classification.

Lest the readers think that we are biased against the representatives of the British conservative party, we believe that also the actions of Jeremy Corbyn can find their place in Cipolla´s diagram, at the origin, denoting an ineffective action.

This post was written jointly by Francesco Papadia and Piero Esposito.

[1] https://www.project-syndicate.org/commentary/brexit-democratic-failure-for-uk-by-kenneth-rogoff-2016-06?referrer=/xEK2HJLV3c

[2] Among the positive referenda one can recall the one establishing the republic in Italy in 1946 and the one confirming divorce.

[3] A notorious example is the one called by Hitler in 1933 to withdraw Germany from the League of Nations.

 

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