Understanding Brexit

British electorate just stuck it to the man. In voting to leave the E.U. British voters said "no" to both global capitalism as represented by the "City" establishment and the left-liberal cognoscenti who supported remaining in the E.U. The left liberals responded with their typical bed-wetting attributing racism to the anti-immigrant stance of the Leave voters and the markets responded with a global sell-off rightly fearing a contraction in both global trade and capital flows.

Over the intermediate term those fears might prove to be justified. As Adam Smith taught us almost a quarter of a millennium ago, "the division of labor is limited by the extent of the market." Britain leaving the E.U. will likely reduce the size of the market causing economic output to decline. Moreover the British example has lit a fire under the E.U. skeptics in France, Italy and the Netherlands. Trust me, the politics ain't gonna be pretty.

However there is a way out, although its chance is small. To be sure the Leave voters were concerned about unchecked immigration and the impact of globalization on their daily lives, there also was the resentment of being under the control of the 40,000 nameless and faceless Eurocrats in Brussels who seem to be running their lives without any electoral accountability. Simply put national sovereignty was being eroded away to the E.U. Hence it was no accident that the Leave voters proclaimed last Thursday as "Independence Day."

Thus the way forward would be to fundamentally reform the E.U. by reducing its bureaucracy and rule making authority by devolving power back to its constituent nation states. This will require a coordinated revolution in thinking from above; otherwise the E.U. will face a very messy revolution from below. What the British people sensed and the elite did not, was that the E.U. wasn't working for the average European. Thus it has to reform if this noble experiment is to survive.