A Level Economics 6: Production Possibility Frontier

Explain with examples the factors which may shift the PPF inwards or outwards.

The PPF (production possibility frontier) can shift inwards or outwards due to various factors that affect an economy's production possibilities. Let's explore examples of factors that can cause shifts in the PPF:

Technological Advancements: Technological progress can lead to an outward shift of the PPF. When new inventions, innovations, or improvements in production techniques occur, the economy becomes more efficient and can produce more goods or services with the same amount of resources. For instance, the development of advanced machinery and automation in manufacturing can increase productivity, resulting in an expansion of the production possibilities.

Changes in Resources: Any changes in the quantity or quality of available resources can impact the PPF. If there is an increase in resources, such as the discovery of new oil reserves or an expansion of a country's workforce through immigration, it can lead to an outward shift in the PPF, allowing for higher levels of production. Conversely, a decrease in resources, like a natural disaster damaging agricultural land or a decline in skilled labor, can cause an inward shift of the PPF, reducing production possibilities.

Changes in Trade: International trade can influence the PPF. Opening up to trade and engaging in imports and exports can expand the variety of goods available to the economy, increasing its production possibilities. Trade allows countries to specialize in producing goods they have a comparative advantage in, resulting in greater efficiency and an outward shift in the PPF. Conversely, trade restrictions or barriers can limit access to foreign markets, reducing the range of goods available and potentially causing an inward shift of the PPF.

Changes in Education and Human Capital: Investments in education and human capital development can impact the PPF. An educated and skilled workforce can enhance productivity and lead to an outward shift in the PPF. For example, if a country invests in improving its education system and provides training programs for workers, it can increase their knowledge and skills, thereby expanding the economy's production capabilities.

Changes in Institutions and Policies: Government policies, regulations, and institutions can influence the PPF. Policies that promote entrepreneurship, innovation, and competition can stimulate economic growth, leading to an outward shift in the PPF. Conversely, if policies hinder business activity, impose excessive regulations, or limit investment, it can result in an inward shift of the PPF, constraining production possibilities.

These examples highlight how factors such as technological advancements, changes in resources, trade, education, and institutional policies can cause shifts in the PPF, either expanding or reducing an economy's production possibilities.

Economics Essay 72: Trade versus Aid

 “Trade is better than aid.” Discuss the extent to which this is true for less economically developed countries in terms of raising their level of economic development.

Trade refers to the exchange of goods and services between countries, typically driven by market forces and the pursuit of comparative advantage. Aid, on the other hand, refers to the provision of financial, technical, or other forms of assistance from one country to another, often with the aim of promoting economic development and addressing poverty.

Now, let's evaluate the statement "Trade is better than aid" in the context of less economically developed countries (LEDCs) and their level of economic development:

1. Trade as an Engine of Economic Growth: Trade has the potential to stimulate economic growth in LEDCs by opening up opportunities for market access, promoting investment, and transferring technology and knowledge. By participating in global trade, LEDCs can leverage their comparative advantages, such as low-cost labor or abundant natural resources, to generate income, create employment, and attract foreign direct investment. Trade allows LEDCs to integrate into the global economy and tap into larger markets, which can contribute to long-term economic development.

For example, countries like China, Vietnam, and Bangladesh have experienced significant economic growth by becoming major players in global manufacturing and exporting industries. Their engagement in international trade has led to the expansion of industries, increased job opportunities, and higher standards of living for their populations.

2. Challenges and Vulnerabilities in Trade: While trade can bring significant benefits, LEDCs may face challenges and vulnerabilities in participating in global markets. Limited diversification of exports, dependence on a few key commodities, and unequal terms of trade can expose LEDCs to economic shocks and fluctuations in global demand. Additionally, trade barriers, such as tariffs and non-tariff barriers imposed by developed countries, can hinder the growth potential of LEDCs' exports.

For instance, many African countries heavily rely on the export of commodities like oil, minerals, or agricultural products. The volatility in global commodity prices can significantly impact their economies, leading to economic instability and limited progress in overall development.

3. Aid as a Development Tool: Aid plays a crucial role in supporting LEDCs by providing financial resources, technical expertise, and capacity building. It can be targeted towards areas such as healthcare, education, infrastructure development, and poverty reduction. Aid can address immediate needs, alleviate humanitarian crises, and support long-term development projects that may not be immediately profitable but have significant social benefits.

For example, foreign aid has contributed to improvements in healthcare systems, access to education, and infrastructure development in many LEDCs. Aid can be instrumental in addressing basic needs, reducing poverty, and improving social indicators.

4. Challenges and Limitations of Aid: However, aid effectiveness can vary, and there are concerns about its dependency-creating effects and potential for mismanagement and corruption. In some cases, aid inflows have not translated into sustainable economic development or poverty reduction. Aid dependency can create disincentives for domestic resource mobilization, hinder local entrepreneurship, and perpetuate a cycle of reliance on external assistance.

Moreover, aid can be subject to political considerations and conditionality, which may not always align with the priorities and long-term development strategies of the recipient countries.

In conclusion, while both trade and aid have their merits, trade generally holds greater potential for sustainable economic development in LEDCs. Trade can provide opportunities for economic growth, technological transfer, and diversification of production. However, trade should be complemented by well-designed aid programs that focus on capacity building, human development, and addressing structural constraints. The effectiveness of trade and aid in raising the level of economic development in LEDCs depends on various factors, including domestic policies, global economic conditions, and the strategic alignment of trade and aid initiatives with national development priorities.

Economics Essay 71: Theories of Trade

Explain, using numerical examples, the difference between comparative and absolute advantage in trade. 

Let's use numerical examples to illustrate the difference between comparative and absolute advantage in trade:

Comparative Advantage: Comparative advantage refers to the ability of a country, individual, or firm to produce a good or service at a lower opportunity cost compared to others. It is about relative efficiency rather than absolute efficiency. To understand this concept, let's consider the example of two countries: Country A and Country B.

Assume that Country A can produce either 100 units of wheat or 50 units of cloth, while Country B can produce either 80 units of wheat or 40 units of cloth. The opportunity cost is calculated by dividing the quantity of one good given up to produce another. The opportunity cost of producing 1 unit of wheat in Country A is 0.5 units of cloth (100/50), while in Country B, it is 0.5 units of cloth as well (80/40).

In this case, Country A has a lower opportunity cost of producing wheat compared to Country B (0.5 units of cloth vs. 1 unit of cloth). Therefore, Country A has a comparative advantage in producing wheat, while Country B has a comparative advantage in producing cloth. According to the principle of comparative advantage, both countries can benefit from specialization and trade. Country A can specialize in producing wheat and export it to Country B, while Country B can specialize in producing cloth and export it to Country A.

Absolute Advantage: Absolute advantage, on the other hand, refers to the ability of a country, individual, or firm to produce more output with the same resources compared to others. It is about being more efficient in terms of productivity. To illustrate this concept, let's consider an example between Country X and Country Y.

Assume that Country X can produce 100 units of cars or 200 units of bicycles, while Country Y can produce 80 units of cars or 120 units of bicycles. In this case, Country X has an absolute advantage in both car production (producing more cars) and bicycle production (producing more bicycles) compared to Country Y.

While Country X has an absolute advantage in both goods, it doesn't necessarily mean that there is no room for trade based on comparative advantage. Even though Country X can produce more cars and bicycles, if the opportunity cost of producing one good is lower for Country Y (i.e., it gives up fewer units of the other good), it would still make sense for both countries to specialize and trade.

In summary, comparative advantage is based on the concept of lower opportunity cost, where a country focuses on producing the goods with a lower opportunity cost compared to other countries. Absolute advantage, on the other hand, is based on producing more output with the same resources. Both concepts play a role in determining trade patterns and the benefits of specialization and trade between countries.

Economics Essay 58: Terms of Trade

 To what extent would an improvement in the terms of trade improve the balance of trade?

Before addressing the question, let's define the key terms:

1. Terms of Trade: The terms of trade refer to the ratio at which a country's exports are exchanged for its imports. It represents the purchasing power of a country's exports in relation to its imports. The terms of trade are calculated by dividing the price index of a country's exports by the price index of its imports.

2. Balance of Trade: The balance of trade, also known as the trade balance, is the difference between the value of a country's exports and the value of its imports over a specific period, usually a year. A positive balance of trade, or trade surplus, occurs when the value of exports exceeds the value of imports. A negative balance of trade, or trade deficit, occurs when the value of imports exceeds the value of exports.

Now, let's evaluate the extent to which an improvement in the terms of trade can affect the balance of trade:

An improvement in the terms of trade means that a country can obtain a higher quantity of imports for a given quantity of exports. This occurs when the prices of a country's exports increase relative to the prices of its imports. Here's how an improvement in the terms of trade can influence the balance of trade:

1. Increase in Export Revenue: If the terms of trade improve, a country receives a higher price for its exports. This leads to an increase in export revenue, as the country can sell its goods and services at higher prices. The increased export revenue can contribute to a positive impact on the balance of trade, as it enhances the country's ability to pay for imports.

2. Cost of Imports: When the terms of trade improve, the prices of imports may also decrease or increase at a slower rate compared to exports. This means that a country can import goods and services at lower prices or experience slower price growth for imports. It can result in cost savings for businesses and consumers, potentially leading to increased imports. The affordability of imports can help address domestic demand and improve the availability of goods and services within the country.

However, it is essential to consider other factors that can influence the balance of trade apart from the terms of trade. Factors such as exchange rates, domestic demand, competitiveness, productivity, trade policies, and global economic conditions can also significantly impact the balance of trade.

In conclusion, while an improvement in the terms of trade can contribute to a more favorable balance of trade by increasing export revenue and potentially reducing import costs, it is not the sole determinant. Various other factors interact to shape a country's trade balance, and their combined effects must be considered to assess the overall impact on the balance of trade.

A Level Economics Essay 23: Comparative Advantage and Trade

Using the concept of comparative advantage, explain how international trade should allow a country to consume outside its production possibility frontier. 

The theory of comparative advantage explains how trade enables an economy to consume more goods than it would in an autarky, where it produces everything domestically without engaging in international trade.

Comparative advantage refers to the ability of a country to produce a particular good or service at a lower opportunity cost compared to other countries. The opportunity cost is the value of the next best alternative that must be given up to produce or consume a specific good or service.

Let's consider Country A and Country B, which both produce two goods: cars and computers. In an autarky scenario, Country A can produce either 100 cars or 200 computers, while Country B can produce either 50 cars or 100 computers.

To determine comparative advantage, we compare the opportunity costs between the two countries. The opportunity cost of producing one car for Country A is 2 computers (200 computers / 100 cars), while for Country B, it is 0.5 computers (100 computers / 50 cars). On the other hand, the opportunity cost of producing one computer for Country A is 0.5 cars (100 cars / 200 computers), and for Country B, it is 1 car (50 cars / 100 computers).

Based on these opportunity costs, we can see that Country A has a comparative advantage in producing computers, as it has a lower opportunity cost (0.5 cars) compared to Country B's opportunity cost of producing computers (1 car). Conversely, Country B has a comparative advantage in producing cars, as it has a lower opportunity cost (0.5 computers) compared to Country A's opportunity cost of producing cars (2 computers).

Now, let's explore the advantages of trade based on these comparative advantages. Suppose Country A specializes in producing computers and allocates all its resources to computer production. Meanwhile, Country B focuses on producing cars and utilizes all its resources for car production.

In this scenario, Country A can produce 400 computers (double its initial production capacity), and Country B can produce 100 cars (double its initial production capacity). If they engage in trade and exchange their surplus goods, both countries can benefit.

Let's assume that through trade, Country A exports 200 computers to Country B and imports 50 cars in exchange. Country B exports 50 cars to Country A and imports 200 computers.

As a result, Country A now has 200 computers for domestic consumption (initial production) plus 200 imported cars, which it did not produce domestically. Similarly, Country B has 50 cars for domestic consumption (initial production) plus 200 imported computers.

Through trade, both countries can consume beyond their initial production possibilities. Country A gains access to cars that it would have struggled to produce domestically, while Country B gains access to computers that would have been costlier to produce locally.

This example demonstrates how trade based on comparative advantage allows countries to allocate resources more efficiently and expand their consumption possibilities. By specializing in the production of goods with lower opportunity costs and engaging in mutually beneficial trade, countries can access a wider variety of goods and achieve a higher level of overall welfare.

It's important to note that the numerical examples used here are for illustrative purposes and simplified for clarity. In real-world scenarios, trade patterns and quantities will vary based on a range of factors, including market conditions, production capacities, and trade policies. Nonetheless, the underlying principle of comparative advantage remains valid in explaining the advantages of trade in expanding consumption possibilities and improving economic welfare.

A history of global reserve currencies

Michael Pettis in The FT

The US dollar, analysts often propose, is the latest in a 600-year history of global reserve currencies. Each of its predecessor currencies was eventually replaced by another, and in the same way the dollar will eventually be replaced by one or more currencies.  

The problem with this argument, however, is that there is no such history. The role of the US dollar in the global system of trade and capital flows is unprecedented, mainly because of the unprecedented role the US economy plays in global trade and capital imbalances. The fact that so many analysts base their claims on this putative history only shows just how confused the discussion has been.  

It’s not that there haven’t been other important currencies before the dollar. The history of the world is replete with famous currencies, but these played a very different role in the flow of capital and goods across international borders. Trade before the days of dollar dominance was ultimately settled in gold or silver. A country’s currency could only be a “major” trade currency to the extent that its gold and silver coins were widely accepted as unadulterated or, by the 19th century, if the convertibility of its paper claims into gold or silver was highly credible.  

This is not just a technical difference. A world in which trade is denominated in gold or silver, or in claims that are easily and quickly convertible into gold and silver, creates very different conditions from those today. Consider the widely-held belief that sterling once ruled the world in much the same way the dollar does today.  

It simply isn’t true. While sterling was indeed used more than other currencies in Europe to settle trade, and the credibility of its conversion into gold was hard-earned by the Bank of England after the Napoleonic wars, whenever sterling claims rose relative to the amount of gold held by the Bank of England, its credibility was undermined. In that case foreigners tended to reverse their use of sterling, forcing the Bank of England to raise interest rates and adjust demand to regain gold reserves.¹ 

This does not happen to the US dollar. Trade conditions under gold- or silver-standards are dramatically different from those in a dollar world in at least three important ways. First, trade imbalances in the former must be consistent with the ability of economies to absorb gold and silver inflows and outflows. This means that while small imbalances were possible to the extent that they allowed wealthier economies to fund productive investment in developing economies, this was not the case for large, persistent trade imbalances — except under extraordinary circumstances.²  

Second, and much more importantly, as trade imbalances reverse, the contraction in demand required in deficit countries is matched by an expansion in demand in surplus countries. That is because while monetary outflows in deficit countries force them to curtail domestic demand to stem the outflows, the corresponding inflows into the surplus countries cause an automatic expansion of domestic money and credit that, in turn, boosts domestic demand. Under the gold- and silver-standards, in other words, trade imbalances did not put downward pressure on global demand, and so global trade expansion typically led to global demand expansion. 

And third, under gold and silver standards it was trade that drove the capital account, not vice versa as it is today. While traders chose which currency it was most convenient in which to trade, shifting from the use of one currency to another had barely any impact on the underlying structure of trade. 

None of these conditions hold in our dollar-based global trading system because of the transformational role played by the US economy. Because of its deep and flexible financial system, and its well-governed asset markets, the US — and other anglophone economies with similar conditions, eg the UK, Canada, and Australia — are the preferred location into which surplus countries dump their excess savings. 

Contrary to traditional trade theory, in which a well-functioning trading system might involve small, manageable capital flows from advanced, capital-intensive economies to capital-poor developing economies with high investment needs, nearly 70-80 per cent of all the excess savings — from both advanced and developing economies — is directed into the wealthy anglophone economies. These in turn have to run the corresponding deficits of which the US alone typically absorbs more than half. As I have discussed elsewhere, this creates major economic distortions for the US and the other anglophone economies, whose financial sectors benefit especially at the expense of their manufacturing sectors. 

It is only because the US and, to a lesser extent, the anglophone economies, are willing to export unlimited claims on their domestic assets — in the form of stocks, bonds, factories, urban real estate, agricultural property, etc — that the surplus economies of the world are able to implement the mercantilist policies that systematically suppress domestic demand to subsidise their manufacturing competitiveness. This is precisely what John Maynard Keynes warned about, unsuccessfully, in 1944. He argued that a dollar standard would lead to a world in which surplus and deficit countries would adjust asymmetrically, as the former suppressed domestic demand and exported the resulting demand deficiency. 

The point is that dollar dominance isn’t simply about choosing to denominate trading activities in dollars the way one might have chosen, in the 19th century, between gold-backed franc, gold-backed sterling, or Mexican silver pesos. It is about the role the US economy plays in absorbing global savings imbalances. This doesn’t mean, by the way, that the US must run permanent deficits, as many seem to believe. It just means that it must accommodate whatever imbalances the rest of the world creates. 

In the fifty years characterised by the two world wars, for example, the US ran persistent surpluses as it exported savings. Because Europe and Asia at the time urgently needed foreign savings to help rebuild their war-torn economies, it was the huge US surpluses that put the dollar at the centre of the global trading system during that period. 

By the 1960s and 1970s, however, Europe and Asia had largely rebuilt their economies and, rather than continue to absorb foreign savings, they wanted to absorb foreign demand to propel domestic growth further. Absorbing foreign demand means exporting domestic savings, and because of its huge domestic consumer markets and safe, profitable and liquid asset markets, the obvious choice was the US. Probably because of the exigencies of the cold war, Washington encouraged them to do so. Only later did this choice congeal into an economic ideology that saw unfettered capital flows as a way to strengthen the power of American finance. 

This is why the end of dollar dominance doesn’t mean a global trading system that simply and non-disruptively shifts from denominating trade in dollars to denominating it in some other currency. It means instead the end of the current global trading system — Ie the end of the willingness and ability of the anglophone economies to absorb up to 70-80 per cent of global trade surpluses, the end of large, persistent trade and capital flow imbalances, and, above all, the end of mercantilist policies that allow surplus countries to become competitive at the expense of foreign manufacturers and domestic demand. 

The end of dollar dominance would be a good thing for the global economy, and especially for the US economy (albeit not, perhaps, for US geopolitical power), but it can’t happen without a transformation of the structure of global trade, and it probably won’t happen until the US refuses to continue absorbing global imbalances as it has for the past several decades. However it happens, a world in which trade isn’t structured around the dollar will require a massive transformation of the structure of global trade — and for surplus countries like Brazil, Germany, Saudi Arabi, and China, this is likely to be a very disruptive transformation. 

1. Nor was sterling even the leading trade currency in the 18th and 19th centuries. More widely used in much of Asia and the Americas were Mexican silver pesos, whose purity and standardisation were much valued by traders and so formed the bulk of trade settlements. 

2. One can argue that the closest comparison to today was 17th century Spain, when Spain ran large, persistent trade deficits, but of course these were the automatic consequences of huge inflows of American silver, and Spain didn’t accommodate foreign imbalances so much as create them, to the benefit especially of England and the Netherlands. In a recent conversation George Magnus also noted how the famous sterling balances of the 1940s illustrated another — very different — example in which the structure of trade could not be separated from the use of its underlying currency.  

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A Strong Labour movement Raises everyone’s Living Standards

Owen Jones in The Guardian

Respect for tradition, we are told, underpins the Conservative party. But there’s one tradition for which it has unwavering contempt – strike action: a part of our culture and heritage it has ferociously and instinctively demonised as an antisocial attack on the general public. Tories are known to extol the virtues of rugged individualism, but it seems the collective suddenly matters when industrial action is declared. Then, it seems, society – which in previous Tory eras was doubted to even exist – becomes a totem to be protected from sinister forces, from a malign and externalised striking rabble.

Strikes bring inconvenience. Of course they do. They disrupt our normal life, our plans, our expectations. But the concentrated attempt to stigmatise the very notion of the strike is something that must be resisted. The strike – and the threat of striking – should be celebrated precisely because it underpins many rights and freedoms we now take for granted. Union struggles in the 19th century played a pivotal role in shortening the working day, and in the 20th century, in creating the weekend. In the postwar heyday of union power, they drove up incomes. Strikes are a profound social good.

Yet how little this argument is heard. Anti-union sentiment is profoundly embedded in our political culture. When the Tory chairman, Nadhim Zahawi, suggested on national television that the upcoming nurses’ strike would aid Vladimir Putin by worsening inflation in the west, it was yet another crude illustration of this very British phenomenon, echoing Margaret Thatcher’s denunciation of striking miners as the “enemy within” in the 1980s. This hostility has a long pedigree and, historically at least, the Tories have been known to be candid about their real intentions.

RMT picket at Slough railway station, 8 October 2022. Photograph: Maureen McLean/Rex/Shutterstock

As the 20th century dawned, the Tories defended a legal ruling making unions financially liable for profits lost to strikes, leading the Conservative prime minister Stanley Baldwin to later confess: “The Conservatives can’t talk of class war. They started it.” In 1926, they introduced a raft of anti-union laws in the aftermath of the general strike, including the banning of solidarity industrial action.

But while unions were hobbled in the 1930s, a spirit of collectivism nurtured by wartime sacrifice helped their rebirth. The three-decade social democratic consensus established by Clement Attlee’s Labour government led the Trades Union Congress in 1968 to boast that it had grown from a “small debating assembly” into a body that shared “in the making of government policies, taking part in administering major social services and meeting on equal terms with the spokesmen of the nation’s employers”. This was the era in which Britain enjoyed its highest ever sustained period of economic growth, which – thanks in part to strong unions – was more equitably distributed, boosting the pay of ordinary workers.

When the oil shock of the 1970s sent prices surging, unions mobilised in an effort to match wages with the cost of living. The grand climax – the winter of discontent – was successfully spun by Thatcher to label unions as national bogeyman for a generation. Her successors took up that framing as well. When Tony Blair became prime minister in 1997, he promised that his government would “leave British law the most restrictive on trade unions in the western world”. And David Cameron assailed Ed Miliband as “taking his script from the trade unions”, and turned the screw further, with even more restrictive laws.

But today this anti-union approach jars with political reality. One poll has suggested that nearly six in 10 voters back the nurses’ strike, and another found that more people backed the rail strike than opposed it. After an unprecedented fall in living standards, the default position of millions whose pay packets are shrivelling in real terms has become “well, fair play to them, at least someone is taking a stand”.

While earlier generations of Tories may have used the language of class warfare openly, their modern cohort is savvier. They seek to isolate striking workers from the wider public, portraying them as somehow separate from society at large. Rishi Sunak denounces strikers as a threat to “hardworking families”, as if nurses, paramedics or transport workers are excluded from that category. But this attempt to separate striking workers from society at large collides with the reality people see every day. The withdrawal of strikers’ labour is so noticeable precisely because of how central they are to our way of life. Rather than a middle-finger salute at the general public, it is one part of society crying for help from another.

 

Despite all the talk of monstrous disruption, for most the real inconvenience is struggling to pay bills and feed their children, rather than the irritation of a postponed train journey. Real wages are projected to be lower in 2026 than they were in 2008.

Indeed, a fundamental reason for wages being so low and conditions so poor in the UK is because of the dilution of union power. According to one study, the “changes in bargaining power” suffered by unions explains half of the decline in the share of the economy going to wages over four decades in several rich countries, including Britain. Rather than union action inconveniencing everybody else, the decline of unions has dragged down the wages of non-unionised workers, too, according to a US study. A strong labour movement, in other words, brings up everyone’s living standards.

A strike, then, isn’t antisocial behaviour, on a collision course with the interests of the wider public. By neutering the threat of strike action with authoritarian laws, the Tories have succeeded only in weakening a mechanism with a proven record in raising the living standards of all workers. Despite the mythology, no one goes on strike on a whim. A worker forfeiting a day’s pay isn’t just a sacrifice for the sake of their own interests, it’s a gamble and a sacrifice. Indeed, one of the government’s fears is that a victory for nurses or railway workerswould embolden the pay claims of other workers – an anxiety that is well founded.

Union membership should be honoured not just as a democratic right, but as a cornerstone of collective prosperity. Even many union sympathisers have retreated from such an argument, instead blaming bosses and government for any regretful breakdown in industrial relations. But to strike isn’t a sin, or antisocial or an act of mendacity: it’s a key to a society less beset by injustice than our own.

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Striking workers are providing the opposition that Britain desperately needs

Andy Beckett in The Guardian

In Britain, more than in most democratic countries, going on strike is a risk. Your employer, the government, most of the media, much of the public and often the opposition parties are likely to be against you – or, at best, unsupportive. Your loss of income is unlikely to be made up by strike pay. Your behaviour on the picket line will be subject to what Tony Blair described approvingly in 1997 as “the most restrictive” trade union laws “in the western world”.

In very public ways, you will be breaking the rules of the modern economy: refusing to work, inconveniencing consumers, acting collectively rather than individually, and making demands for more money openly – rather than in private, as more powerful people do. If you are on the left, you are likely to be told again and again that your strike is politically counterproductive.

Such are the written and unwritten laws that have constricted British strikes for approaching half a century, ever since the walkouts of the 1978-79 winter of discontent inadvertently did so much to bring Margaret Thatcher to power and to provoke the counter-revolution against workers that still continues today. Many voters have long got used to the idea that strikes are a minority pursuit associated with a bygone age to which the country must not return. Boris Johnson’s government, with its especially strong intolerance of dissent, aims to demonise and marginalise strikes even further.

Yet this summer, more and more Britons are striking or considering striking regardless. From railway workers to barristers, firefighters to doctors, Post Office workers to teachers, nurses to civil servants, council workers to British Telecom engineers, an unusually large potential strike wave is building. Its social breadth, the range of occupations affected and the atmosphere on some picket lines all suggest that something politically significant may be happening.

At the first barristers’ protest, outside the Old Bailey in London this week, an already excited crowd of advocates in courtroom wigs and gowns burst into prolonged applause when they were joined by a few activists in shorts and jeans from the RMT. It’s not every day that you see such camaraderie between self-employed professionals who rely heavily on trains and striking transport workers carrying a banner that calls for “the supersession of the capitalist system by a socialistic order of society”.

The cost of living crisis, and the refusal of the government and other employers to raise wages accordingly, is the immediate reason for this summer’s “wave of resistance”, as Mick Lynch of the RMT union calls it. Yet the causes go deeper: more than a decade of stagnant or falling wages; the long Conservative squeeze on the public sector; and the whole transformation of the British economy since the 1970s, which has effectively taken money from workers and given it to employers, shareholders and the wealthy.


Public dissatisfaction with this model has been growing for years. In the latest British Social Attitudes survey, 64% agree that “‘ordinary people do not get their fair share of the nation’s wealth” – up from 57% in 2019, and far greater than the support for any party. As Labour leader, Jeremy Corbyn tapped into this discontent. But the end of his tenure, and Keir Starmer’s apparent lack of interest in its redistributive ideas, has created a vacuum where a movement with a radical economic agenda ought to be.

It’s possible that the strike wave could become one such movement. While support for the strikes has been stronger than expected - the pollster Savanta ComRes found that even 38% of Tory voters considered the highly disruptive rail strikes “justified”; among younger people this attitude was particularly prevalent. In the same survey, 72% of under-35s backed the strikers. Since few of them have ever been on strike themselves – less than a quarter of trade unionists are under 35 – then the likely explanation is not shared experience but shared disenchantment. Young people, like many of the strikers, have been particularly badly served by the status quo.

Many young people supported Corbyn for the same reason. And there are other similarities between the two movements. Former Corbyn advisers such as James Schneider, Corbyn himself, and the parliamentary Labour left all support the strikers. Green activists, once an important part of Corbyn’s coalition, have joined RMT picket lines. Like Labour’s 2017 election manifesto, Lynch uses clear, populist language – “every worker in Britain” should get a much better pay deal, he told Question Time – and its effectiveness has taken the media by surprise. Support for the RMT strike rose after his TV appearances.

Could the strikers succeed, not just in getting fairer pay deals but in beginning to change how the economy works? It’s an immense task, which Labour under Corbyn sometimes talked about compellingly but never came close to carrying out. And as the strikes widen and lengthen, public opinion may turn against them. Walking to work because of a train strike will seem less of a novelty and more of an imposition if that dispute drags on into the autumn. One of the obvious but often forgotten lessons of the winter of discontent is that voters often hate strikes in cold weather.

Excited union talk about building new mass movements has proved over-optimistic in the past, for example during David Cameron’s government. The proportion of British employees who are union members has stabilised in recent years, after decades of decline, but by historic standards it is still low: less than one in four. And the fact that Starmer is not prepared to support the strikers removes one of the main means by which their campaigns could be amplified.

Yet for almost a decade now, British politics has not followed the expected paths. It may be that an economy built on poor wages was politically and socially sustainable only while inflation stayed low. That relatively stable and docile era may be over. Recently, the leftwing website Left Foot Forward listed some of the pay rises already won this summer by the increasingly assertive trade union Unite: “300 workers at Gatwick get 21 per cent”, “300 HGV drivers win 20 per cent”. In post-Thatcher Britain, such transfers of wealth to the workers – not just matching but far exceeding the rate of inflation – aren’t supposed to happen. But they are.

Unlike in the 1980s, when the iron lady beat Britain’s last big wave of strikes, unemployment is low and the supply of labour is short. If strikers don’t like a pay offer, sometimes they can threaten to go and work for someone who pays more. You could call it an example of something the Tories talk less about these days: market forces.

BREXIT - The Great Taboo in British Politics

George Parker and Chris Giles in The FT

As he battled to save his job this month, Boris Johnson warned his MPs not get into “some hellish, Groundhog Day debate about the merits of belonging to the single market”. Brexit, he warned his mutinous party in a sweaty House of Commons meeting room, was settled. 

Later that day, Johnson limped to victory in a confidence vote, but only after 41 per cent of his MPs had voted to oust him from Downing Street. He is safe for now but the defining project of his premiership — Brexit — still hangs like a cloud over Britain’s fragile economy. 

Johnson may not want his party “relitigating” Brexit but neither does Sir Keir Starmer, leader of the opposition Labour party, around a third of whose supporters voted Leave in the 2016 referendum. Nor does Andrew Bailey, governor of the Bank of England. Rishi Sunak, the chancellor, would rather talk about something else. Brexit has become the great British taboo. 

But as the sixth anniversary of the UK’s vote to leave the EU approaches, economists are starting to quantify the damage caused by the erection of trade barriers with its biggest market, separating the “Brexit effect” from the damage caused by the Covid-19 pandemic. They conclude that the damage is real and it is not over yet. 

The UK is lagging behind the rest of the G7 in terms of trade recovery after the pandemic; business investment, seen by Johnson and Sunak as the panacea to a poor growth rate, trails other industrialised countries, in spite of lavish Treasury tax breaks to try to drive it up. Next year, according to the OECD think-tank, the UK will have the lowest growth in the G20, apart from sanctioned Russia. 

The Office for Budget Responsibility, the official British forecaster, has seen no reason to change its prediction, first made in March 2020, that Brexit would ultimately reduce productivity and UK gross domestic product by 4 per cent compared with a world where the country remained inside the EU. It says that a little over half of that damage has yet to occur. 

That level of decline, worth about £100bn a year in lost output, would result in lost revenues for the Treasury of roughly £40bn a year. That is £40bn that might have been available to the beleaguered Johnson for the radical tax cuts demanded by the Tory right — the equivalent of 6p off the 20p in the pound basic rate of income tax. 

Despite these sobering figures, Johnson’s complaints about the prospect of “relitigating” Brexit was exaggerated, intended to portray himself as the victim of a putative plot by pro-Remain MPs. In fact, British politicians — and the wider country — are still traumatised by the bitter Brexit saga, and deeply unwilling to revisit it. 

Still, this month has seen the first stirrings of a debate that until now has been buried as the evidence of Brexit-induced economic self-harm starts to pile up. Few are talking about reversing Brexit altogether, but another question is being asked: should the UK start to explore with Brussels ways of softening its edges? 

Show, don’t tell 

Downing Street insisted this week it was “too early to pass judgment” on whether Brexit was having a negative impact on the economy, which could be heading into a recession. “The opportunities Brexit provides will be a boon to the UK economy in the long run,” Johnson’s spokesman said. 

Both Johnson and Sunak insist that it is hard at this stage to separate Brexit’s economic impact from the shock of Covid. In the meantime, the prime minister promotes the “benefits of Brexit”, such as new trade agreements with Australia and New Zealand and the freedom for the UK to set its own rules. 

Sunak has promised a reform of rules in the City of London, including reforming the EU’s Solvency II rules to allow insurers to spend more money on infrastructure projects. He has announced eight new freeports with special tax privileges. 

But economists have not yet been able to find any significant positive impacts of these policies. Some, including Johnson’s patriotic promise to put a “crown stamp” on pint glasses in pubs and to allow traders to sell their wares in pounds and ounces, are primarily symbolic. 

Critics of government Brexit policy are routinely derided. Suella Braverman, attorney-general, last week accused the ITV presenter Robert Peston of “Remainiac make-believe” after he challenged her over the government’s unilateral plan to rip up the Brexit treaty relating to Northern Ireland. Braverman claimed the so-called Northern Ireland protocol had left the region “lagging behind the rest of the UK”. In fact, Northern Ireland (the only area of the UK to remain in the EU’s single market for goods) is the best performing part of the country, apart from London. 

When Bailey appeared before the House of Commons treasury committee in mid May, the BoE governor acknowledged that his predecessor Mark Carney had made himself “unpopular” for saying Brexit would have a negative effect on trade, but that the bank held to that view. 

Kevin Hollinrake, a Tory member of the committee, says Bailey was trying to avoid becoming a political target and was “deliberately avoiding” talking about Brexit. “It’s a singular issue for the UK,” the MP says. “We have changed our immigration rules. It’s about non-tariff barriers. You’ve got to be willing to look at what’s happening on the ground.” 

While some gloomy predictions have failed to materialise, such as former chancellor George Osborne’s 2016 warning of a recession immediately after a Leave vote, there is growing evidence that Brexit is causing more lasting damage to UK economic prospects. 

Ministers are becoming more reluctant to proclaim the economic upsides of Brexit. Kwasi Kwarteng, business secretary, was asked last week at the FT Global Boardroom to list some Brexit benefits. He focused on the UK’s ability to respond swiftly to Russian aggression in Ukraine — “it has substantial benefits particularly in international policy” — rather than on business. Sunak’s allies say the chancellor’s approach is to “show, not tell” on Brexit, pushing through City regulatory reforms rather than giving boosterish speeches on its economic merits. 

The fallout in data 

The first and most obvious economic blow delivered by Brexit came when sterling fell almost 10 per cent after the referendum in June 2016, against currencies that match the UK’s pattern of imports. It did not recover. This sharp depreciation was not followed by a boom in exports as UK goods and services became cheaper on global markets, but it did raise the price of imports and pushed up inflation. 

By June 2018, a team of academic economists at the Centre for Economic Policy Research calculated that there had been a Brexit inflation effect, raising consumer prices by 2.9 per cent, with no corresponding increase in wages. 

Some households, such as those relying on state pensions, were compensated in higher benefits, but the CEPR team found no overall offset with higher incomes. “The Brexit vote delivered a swift negative shock to UK living standards,” they wrote. 

While the UK was still in the EU and during the Brexit “transition phase”, there were no significant effects on trade flows. But this has changed since stricter border controls were introduced at the start of 2021, imposing no tariffs, but significant checks and controls at the formerly frictionless border. 

Economists have used this point in time to contrast how the UK’s trade performance compares with those of other countries before and after the TCA’s imposition. The results have been increasingly ugly, especially for small companies trading with Europe. 

Red tape caused a “steep decline” in the number of trading relationships after January 2021, according to a study by the Centre for Economic Performance at the London School of Economics. The number of buyer-seller relationships fell by almost one-third, it found. 

The same group found food prices had risen as a result of Brexit. Comparing the prices of imported food such as pork, tomatoes and jam, which predominantly came from the EU, with those that came from further afield such as tuna and pineapples, it found a substantial Brexit effect. “Brexit increased average food prices by about 6 per cent over 2020 and 2021,” according to the research. 

Summing up the effects on trade in which imports from the EU have fallen while exports have not risen, Adam Posen, head of the Peterson Institute of International Economics, says “everybody else sees a recovery in trade following Covid and the UK sits flat”. 

The third visible effect of Brexit on the UK economy has been in discouraging business investment. In the first quarter of 2022, real business investment was 9.4 per cent lower than in the second quarter of 2016. That fall was mostly due to Covid, but it had flatlined since the referendum, ending a period of growth since 2010 and falling well short of the performance of other G7 countries. 

Weak investment is a particular worry for Sunak, who sees business investment as the route to greater prosperity. Before departing the BoE in 2020, Carney told a House of Lords Committee that Brexit uncertainty was holding back business investment. Worse, he said, business planning for various Brexit scenarios was taking up a lot of management effort. “Time spent on contingency planning is time not spent on strategic initiatives,” he said. 

Since then, negative perceptions of the UK have continued among business with the chancellor finding he had little bang for his £25bn buck of super deductions in corporation tax to encourage capital spending. As Bailey told MPs last month, the super-deductor was “not at the moment having the impact that was expected”. 

Complaints about high immigration was one of the most contentious issues of the referendum, with a central promise of the Brexit campaign being tougher controls over the number of people entering the country. While net immigration from EU countries has stopped, with effectively no change apparent in the two years to the end of June 2021, net immigration from non EU countries has remained high, with 250,000 in the latest year. 

Collateral damage 

There is, as yet, little appetite among Britain’s political leaders for a return to the EU — even if the other 27 member states were prepared to open the door. Even the pro-EU Liberal Democrats admit reversing course is a long-term aspiration, rather than an immediate goal. 

As part of his attempt to avert a coup, Johnson wrote to MPs this month that he had “created a new and friendly relationship with the EU”. The opposite is true. Brussels restarted legal action against the UK this week over the Northern Ireland protocol: relations are at rock bottom. 

The EU has warned that British scientists will be excluded from the €95bn Horizon research programme as “collateral damage” in the row about Northern Ireland. The prospect of any kind of rapprochement at the moment, at least while Johnson remains prime minister, seems remote. 

But in recent weeks, a tentative debate has started over whether the UK would be better off trying to reach accommodations with the EU to smooth trade in some areas, rather than launching a new front in the Brexit war with unilateral action over Northern Ireland. 

In an article much-discussed at Westminster, the pro-Leave Times columnist Iain Martin wrote this month: “To deny the downsides of Brexit on trade with the EU is to deny reality.” 

Tobias Ellwood, a former Tory defence minister, suggested Britain should rejoin the EU single market to soften the cost of living crisis, and said there was “an appetite” for a rethink and claimed polling indicated “this is not the Brexit most people imagined”. And Daniel Hannan, a leading Tory Brexiter, repeated his longstanding view that Britain should have stayed in the single market under a Norway-style relationship with the EU, while adding that to rejoin it now “would be madness”. 

Anna McMorrin, Labour shadow minister, was recorded telling activists: “I hope eventually that we will get back into the single market and customs union.” She was forced to apologise by Starmer: such talk remains dangerous in political circles. 

Even so, a Starmer-led future Labour government would change UK relations with the EU. The party’s mantra has become “make Brexit work”: rejoining the single market may be off the agenda, but Labour wants to find ways to improve on the bare-bones tariff-free trade agreement Johnson negotiated with the EU. 

Rachel Reeves, the shadow chancellor, told the Financial Times last year that Labour wanted to strike a deal with the EU to reduce the most onerous paperwork and checks on food exports. The party also wants an agreement with Brussels on the mutual recognition of professional qualifications. 

Even among the Eurosceptics in Johnson’s cabinet, there is now an acceptance that the UK should be seeking to rebuild economic relations with the EU, including in areas like the Horizon programme, to avoid exacerbating the looming cost of living crisis. 

“Would I like to be in a better place on Brexit?” asked one pro-Brexit cabinet member. “Yes, absolutely. But we’ve got to find a way of doing it without it looking like we’re running up the white flag and we’re compromising on sovereignty.”