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Network Externalities and the Disaster of Brexit

By Andrew Brower Latz.


Nothing I’ve read on Brexit has addressed the concept of network externalities, but that concept reveals a particular facet of the tragedy of Brexit. A network externality is ‘a situation in which a firm gains advantages in the market for a particular range of products because of its privileged or costless access to a network important to the distribution of those products’ (Colin Crouch, The Strange Non-Death of Neoliberalism (London: polity, 2011), 35). Even if one firm has a better product, the increased costs and difficulty of accessing distribution networks will make it hard if not impossible for it to compete with a firm that has such a network. Network externalities exist in politics too.

The USA has influence beyond the size of its economy, population and military because it has huge network externality advantages. Its currency is the global currency, which means it can deal with debt by printing more dollars, a feat no other country can pull off to the same degree. English is the global language, which gives it an edge not only in business, but in the culture industry, and in science and education (the top-rated academic journals, in which researchers must publish, are all in English and most are based in the US). Its military can act anywhere and is so big that state protectionism of and subsidies to the armaments industry seem not to disturb America’s preaching of free trade. Its financial sector sets the world accounting standards: the three New York ratings agencies (Standard & Poor, Moody’s, and Fitch) in some sense regulate governments the world over, but do so from an American perspective. (This list and the inspiration for this article come from Colin Crouch, Making Capitalism Fit for Society (Cambridge: Polity, 2013)).

These advantages explain why the US is able to have a form of economic success despite its neoliberalism, which is almost always thought to be success because of its neoliberalism. The US has some of the most extreme inequality, lowest employment protection laws and unemployment pay, and some of the weakest trade unions in the world. Neoliberals regard these as the foundation of its economic success, when in fact every other country with those characteristics is an economic failure and/or has very weak democratic institutions. Without the USA’s network externalities, neoliberalism doesn’t work.
What does work? The Nordic and Northern European countries: Denmark, Sweden, Finland, Norway, Austria, Slovenia, and the Netherlands. They have a version of social democracy in which there is low inequality, high union strength, and a forward-thinking form of unemployment provision in which people can re-train whilst receiving decently high unemployment pay. The latter not only gives security to the majority of workers, it enables the economy to be innovative and dynamic because it can depend on a well-trained pool of labour. Unions in these countries have cooperative relations with employers. Since they have a broad membership, they do not push for unreasonably high increases in wages because they know such increases will be passed on to their members as higher prices. The key to avoiding damaging inflation is not to weaken or destroy unions but to foster more harmonious relationships between them and employers, and to give them wide enough coverage that they are obliged to think of the effects of their negotiations on the whole society and not merely the workers in one sector. (Germany’s neo-corporatist heritage teaches the same lesson).

Low inequality and strong labour coexist alongside high employment performance and high innovation in these countries. Sweden, Germany and the Netherlands all record a higher number of patents in ratio to the population than the USA. Crouch’s figures do not prove low inequality and strong labour cause high employment, strong economic performance and innovation, but they do refute the neoliberal assertion that strong unions reduce innovation and employment.

They also show that a welfare state can be used as a form of social investment that boosts employment and the economy, whilst funding good education, family and labour market policies. Providing accessible childcare enables more women to enter employment. Employment creates more employment, a virtuous circle increasing the tax base.

All these achievements are real. They are not wishful thinking. Yet the neoliberal orthodoxy hides their accomplishments, and the entrenched interests of corporate elites have such influence on politicians that instead of moving towards such models, governments have been moving towards neoliberalism – even in the more socially democratic countries themselves. Some would paint such moves as bowing to the inevitable wisdom of neoliberal versions of free markets. It is much more likely the effect of ideology and the political power exercised by giant financial and corporate firms.

In 2013 Colin Crouch offered a suggestion to aid the spread of the Nordic model of capitalism: create alternative networks from which countries can choose, so that no single network dominates. There can be no recourse to protectionism. The UK usually presents its Euroscepticism as a version of nationalism but it is actually an attempt to share in America’s network dominance. Crouch believed the EU was the best candidate to develop an alternative to the US. It probably still is but Brexit has weakened the possibility of developing a social democratic network to offer a choice of markets (actually existing neoliberalism paradoxically reduces choice when it comes to markets). This strengthens US network dominance, which is bad, because US politics is so dominated by corporate lobbies it is ‘at the forefront of moves to prevent action to regulate irresponsible banking or to save the planet from environmental disasters caused by profitable economic activities. It will continue to be a pioneer and world leader in the abolition of the welfare state, the erosion of labour standards and attacks on the rights of trade unions to represent workers’ interests’ (Crouch, Making Capitalism Fit for Society, 131). The UK could have joined in the project of creating a network of social investment welfare states across Europe, creating a positive-sum game between workers and corporate elites. Instead, Brexit will probably further the simple-minded version of neoliberalism the EU displayed in its treatment of Greece.

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Andrew Brower Latz‘s articles have appeared in various journals such as Telos, Thesis Eleven, and Political Theology, and magazines such as Open Letters Monthly and Philosophy Now. His book, The Social Philosophy of Gillian Rose, is forthcoming.

First published in 3:AM Magazine: Monday, August 29th, 2016.