Brexit May Save European Growth After All

Europe's project for "ever closer union" may harm competition and growth rather than enhance it.

Competition brings out the best.

Photographer: EAN-SEBASTIEN EVRARD/AFP/Getty Images

For those of us troubled by Brexit, and for Europeans concerned about the survival of the wider European project, a much-awaited book by one of the world's most renowned economic historians and an expert on long-run economic growth might, on the face of it, offer some light at the end of the tunnel.

According to Joel Mokyr, Europe's magisterial rise from economic backwater to superpower between the 16th and 19th centuries had much to do not with integration but with its division into multiple competing states. That is not the conventional view. After the fall of the Roman Empire, Europe disintegrated and political power was increasingly exercised at the local level, leading to the rise of the medieval knight and his castle. By the 15th century, Europe was still divided into some 500 separate political entities. To followers of Adam Smith, such political fragmentation was straightforwardly bad for the economy: It made trade much more cumbersome, leading to multiple tariffs and tolls, numerous currencies and an array of different legal systems.

From this Smithian perspective, the rise of Europe in the last two centuries or more is a story of its reintegration, of getting back to the good old days of Roman times, first through the formation of larger modern states and then through the emergence of the European Union and the euro zone. And it's this view--one which sees political fragmentation as a hindrance rather than a help--to which most modern day economists would, of course, subscribe.

But according to Mokyr's book, Europe's political fragmentation was, in fact, a saviour rather than a curse, one which ultimately led it to overtake parts of the world like China, and to go well beyond the economic achievements of the ancient world. Not only are markets important for growth, so are learned intellectuals, and, it was the latter, Mokyr argues, who benefited from Europe's division into multiple competing states.

Where intellectuals faced intolerance and resistance, as was the case in Spain during the Inquisition, they could flee to a neighboring state. No single leader could "turn off the lights." Ultimately, competition between states meant that they fought to house the brightest and the best, offering prizes and encouraging intellectuals to pursue open science in an effort to feed their reputation abroad. Rather than protecting their ideas, intellectuals had an incentive to disseminate them in an effort to build prestige, which in turn subjected them to the type of scrutiny and selection needed to enable a continued improvement in our scientific understanding of the world. This, in turn, provided the foundations for sustained economic growth.

This may sound like the sort of thing an economic historian would argue, but Mokyr backs up his thesis with concrete examples. He compares the situation in Europe with that in the Middle East and China, the two original centers of human civilization but which were ultimately leapfrogged by Europe. He points to an erosion in the amount of competition in these regions--both politically and between religious groups--which meant that intolerance to new ideas, both domestic and foreign, was able to grow ever stronger over the centuries, leading to stagnation. In Mokyr's view, intolerance to new thinking is the natural state to which all societies would converge--that is, unless it is checked by competition between political (and religious) elites, allowing thinkers facing resistance to find a new home.

Mokyr's not the only recent historian to point to the importance of political fragmentation in the making of Europe. In his "State, Economy and the Great Divergence," Peer Vries argues that the survival of a European state was, historically, closely linked to its economic might. Having to fend off numerous close neighbors required having sufficient fiscal revenues to fund the military. This led European states to keep a close eye on each other's economies and their associated economic policies, leading, in the long-run, to the diffusion of pro-growth policies. Multiple political entities inevitably led to variety in policy ideas and, where they were in competition with each other, to the diffusion of the best. Unlike China, individual European states had to be outward-looking in order both to understand and so defeat their neighbors, and in an effort to keep ahead.

The irony is, therefore, that while political unification might help increase competition in the marketplace, it risks restricting competition. The long-run benefits of variety and experimentation are lost.

It's best not to get carried away with historic parallels though; Mokyr offers only limited refuge for British euroskeptics. Given that the world is much smaller than it was centuries ago, a single unified European state would be much less of a hindrance today than it would have been in the past. But in the important debate about whether Europe ought to further integrate or pursue a multi-speed course, his insights suggest that from a growth perspective, less may be more. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.