Andy Haldane, Chief Economist at the Bank of England ©Niccolò Caranti

Groupthink culture in the economics profession led the Bank of England’s Chief Economist, Andy Haldane, to admit last week that economic forecasting is in crisis.

The notorious projections by “Project Fear” of the immediate impact of a Brexit vote have been shown to be completely wrong. But, as the Treasury document which produced the forecasts states, they were based on a “widely accepted modelling approach” [my italics].

GDP growth in the third quarter of 2016—July through September—was projected by the Treasury to be negative with a Brexit vote, between -0.1 and -1 per cent. The Office for National Statistics now estimates growth was +0.6 per cent, and comments: “Since the result, growth in gross domestic product (GDP) has been in line with recent trends. This suggests limited effect so far from the referendum.”

The reasons for the views of mainstream economists rest on two important underpinnings of the discipline. The first is the belief in the benefits to society of free trade. The basic theory was developed by the great English economist David Ricardo, almost exactly 200 years ago.

Economists are aware that free trade can destroy jobs. For example, a paper in the July 2016 issue of the American Economic Review by Justin Pierce and Peter Shott shows that the sharp drop in US manufacturing after 2000 can be attributed to a change in US trade policy that eliminated potential tariff increases on Chinese imports.

But trade, by increasing the efficiency of production, benefits industries by reducing the cost of their inputs, and benefits consumers by reducing the price of goods and services in the shops (and online!).

There is a large amount of empirical evidence which supports economists’ views on free trade. The elision which they make is to go on to believe that the UK leaving the EU will necessarily lead to our trade becoming less free. This is a judgement about political economy, on which standard economic theory is silent. The Brexiteers believe that we can negotiate better trade deals on our own, the Remainers think not.

The Cambridge economist Bob Rowthorn points out “There has already been a sharp fall in the size of the euro area economy as a proportion of the world economy, and it is hard to see how this trend will not continue.” The deals…

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