Krugman, Hayek, and Scottish Independence

8 09 2014

 

Paul Krugman has published an interesting article on the economics of Scottish independence, an issue that is front and centre in the wake of a poll saying that the Yes side may win this month’s referendum on independence.

One of the reasons Krugman’s article is interesting to me is that he discusses Canada. Canada is one the countries that has inspired modern Scottish nationalism: many Scottish nationalists want Scotland to have the same degree of autonomy from the England that Canada enjoys from the United States. (Norway is, however, clearly the most important role model of Scottish nationalists—thanks to the peaceful 1905 separation of Norway from Sweden, Norway controls all of its oil revenue, unlike Scotland. Other nationalist movements referenced by Scottish nationalists include Catalonian nationalism and Quebec nationalism).

 

Krugman coherently argues that the analogy between Canada’s current relationship with the United States and an independent Scotland’s future relationship with England is misleading because the Scottish nationalists envision a currency union between Scotland and the rest of the United Kingdom, whereas Canada has control over its own monetary policy.

Comparing Scotland with Canada seems, at first, pretty reasonable. After all, Canada, like Scotland, is a relatively small economy that does most of its trade with a much larger neighbor. Also like Scotland, it is politically to the left of that giant neighbor. And what the Canadian example shows is that this can work. Canada is prosperous, economically stable (although I worry about high household debt and what looks like a major housing bubble) and has successfully pursued policies well to the left of those south of the border: single-payer health insurance, more generous aid to the poor, higher overall taxation.

But Canada has its own currency, which means that its government can’t run out of money, that it can bail out its own banks if necessary, and more. An independent Scotland wouldn’t. And that makes a huge difference.

 

Krugman’s point is a very valid one. It also reminds me of a book that Jane Jacobs published in 1980, on the eve of the first referendum on Quebec independence. Jacobs argued that Quebec independence would only be beneficial if an independence Quebec has its own currency.

I think we need to be very careful in how we use the Canadian analogy to understand alternatives to current Anglo-Scottish Union.  As John Kendle demonstrated in his book on the federal tradition in British politics, British politicians have a long track-record misusing the Canadian experience as a data point.   

The use of the Canadian example in British constitutional politics is certainly not new. In Canada has loomed large in Scottish debates over nationhood since the early twentieth century.  Canada first started being used in British debates on constitutional reform in the 1880s, when Irish Home Rule was on the agenda in British politics. Gladstone and other supporters of Home Rule frequently used Canada as an example of the benefits of devolving a degree of autonomy to a restive outlying region. Their reasoning was straightforward: prior to the grant of Responsible Government (i.e., internal autonomy), Canada was convulsed by political disturbances. Responsible Government had, according to Gladstone cured the problem and turned the Canadians, even the Roman Catholics, into loyal British subjects. Ergo, Home Rule would pacify Ireland. This line of reasoning overlooked two crucial facts: most Irish Protestants hated the idea of Home Rule, and the Atlantic Ocean is a helluva lot wider than the strait between Ireland and the British mainland.

 In the early 20th century, when Irish Home Rule was again on the agenda in Britain, the Canadian example was again used. By this point, a small Scottish nationalist movement had emerged. In an attempt to form a tactical alliance with Irish Home Rulers, the Scottish nationalists advocated Home Rule All Round, the conversion of the United Kingdom into a federal state modelled on the Canadian Confederation. Under this arrangement, England, Scotland, Wales, and Ireland would each have their own legislature for local matters such as education and property and civil rights. The problem with this analogy was that creating a federation of autonomous colonies is very different from breaking-up a unitary state.

 

When the Scottish nationalist movement re-emerged in the 1960s and 1970s, Canada’s experience was again referenced. (Scottish independence emerged as a real political force in the 1960s thanks in part to the end of the British Empire. The discovery of oil in the North Sea and its subsequent jump in value in 1973 also helped to make Scottish nationalism more mainstream).

 

  I suspect that Canada looms large in the present-day debate on Scottish independence in part because of the Iraq War: even though the vast majority of Scots were opposed to the 2003 invasion of Iraq, the rest of the UK dragged Scotland into the conflict. Canada, in contrast, was able to opt out of the Iraq War because of the degree of autonomy it enjoys from the United States includes control over its foreign policy.  Scottish nationalists who admire Canada’s stand on the Bush-Blair invasion of Iraq would do well to take a close look at Canadian foreign policy in that period: while Canada’s government deferred to domestic public opinion and ultimately decided not to participate in the Iraq War, it actually helped the US invasion behind the scenes.  The action of Canada’s government at this juncture suggests that the degree of actual autonomy enjoyed by normally independent countries is perhaps more circumscribed than the idea of sovereignty might suggest.

There is a more serious problem with the attempts to the Scottish nationalist to use Canada, Norway, or indeed any other country, as a “model” of what an independence Scotland would be like. That’s because nation-states are such complex entities that any attempt to design what they will be like in advance according to some sort of master plan is likely to fail in the much the same way that central planning of economies always fails to deliver the promised results. I think that Scottish, nationalists and indeed anyone else who supports rapid change in the constitutional status quo would do well to consider Hayek’s writings on emerged orders and the limits of human reason. Hayek developed these ideas during the debate in the interwar period on the desirability of Soviet-style central planning, but the underlying principles are of more general applicability.

I think that Scottish nationalists may be rushing things. Nations such as Canada and Norway achieved their independence very gradually. (Canadians still quibble about the precise date on which Canada became fully independent).  By most metrics, they have outperformed the nations that went from zero self-government to full sovereignty very rapidly. The Canadian province of Quebec has been gaining powers and building capacity for self-government very gradually over several generations. If Quebec ever becomes independent, that outcome could be depicted as the natural culmination of a graduate process that began with the creation of the Quebec legislature back in 1867. In contrast, Scotland’s has only had its own parliament since 1999, when the devolved Scottish government was created. Of course, some of Scotland’s institutions, such as its distinctive court system and municipal governments are far older.  But the institutions of the Scottish state are quite new.

Don’t get me wrong: I’m very sympathetic to all forms of decentralization and am this inclined to feel that smaller nations are, ceteris paribus, better than large ones. I believe in cascading powers down to the smallest possible unit of government (subsidiarity).  So all of my instincts are to support Scottish nationalism. However, I fear the consequences of compressing a community’s progress to full statehood into a very short period.  The currency issue also needs to be resolved.  

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2 responses

8 09 2014
Jonathan Weisman (@JJWeisman)

One of Krugman’s points should give you pause in shrinking the ideal polity. The ability of a larger entity to absorb the cost of regional bailouts could be an important attribute of bigger states. Of course, it may be that you’re thinking upheavals would be smaller and more effectively dealt with if there was less insurance against downturns or funding propping up declining industries/lifestyles.

10 09 2014
andrewdsmith

It’s certainly true that the government of a large country is in a better position to bailout failed banks. When Scotland’s Royal Bank of Scotland collapsed, the UK government stepped in. It probably wouldn’t act as a lender of last resort to a bank in an independent Scotland. Of course, that raises the question of whether government bailouts of Too Big To Fail banks are desirable.

Big states facilitate the pooling of risks between regions and fitms. Such pooling has advantages, but it also creates moral hazard. Iceland, a country that was too small to bail out its banks, arguably had the best response to the 2008 financial crisis.

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