Yesterday, on the Andrew Marr Show, Richard Tice of Leave Means Leave, said that every business person knows that no deal is better than a bad deal. Do they? Tories and Brexiters frequently throw out these supposed truisms without them being challenged. A moment's consideration of this proposition shows it to be complete nonsense, and something that, in fact, every business person rejects quite frequently.
Suppose you are a business that has spent £1 million producing your output of widgets. You now come to sell them. If the average rate of profit is 10%, you might expect to sell this output for £1.1 million. However, what you expect to be the case, and what is the case are two different things. Suppose your output amounts to 1.1 million units that you expect to sell for £1 each. There are any number of reasons why at a market price of £1, you may not be able to sell the whole 1.1 million units. If, in fact, say you can only sell 1 million units at a price of £1, you will only get back the capital you laid out, and so make no profit; if you can only sell 900,000 units you will actually make a loss. Or it might be the case that you can sell all of the 1.1 million units, but only by charging say £0.90 per unit for them, in which case your income would amount to £990,000, leaving you again with a £10,000 loss.
Tice's argument is that any of these situations where you do not make the average profit constitutes a bad deal, which "every business person" knows you should walk away from. But, what would be the consequence of that? It would be that you then do not sell any of the 1.1 million units you have produced, and so you would actually have lost the whole of the £1 million of capital you laid out for this production, solely in order to have the satisfaction of knowing that you had not accepted a "bad deal"! Any business person that operates on that basis would quickly go out of business.
No business person wants to think that they have had to sell their output, or stock for less than a price that provides them with the average profit, but the vagaries of the market mean that it is frequently the case that you have to do so, just as at other times you might be able to sell at prices that give you more than the average profit. Still less does a business person want to sell at a price that results in them making a loss, but in order to be able to replace your capital, so as to be able to stay in business, it is sometimes necessary to do so. If you only get back £900,000 of your capital, rather than the £1 million you laid out, at least you have that £900,000 to use to engage in production again, or to buy different stock to sell. If you adopt the "no deal is better than a bad deal" position you have no capital returned to you with which to stay in business.
This no deal is better than a bad deal nonsense that the Tories and the Brexiters keep repeating is simply a reflection of the fact that they simply have not freed themselves of the delusion that Britain is in the driving seat, and in some way able to dictate terms. The argument would only apply if it were the EU that were trying to sell something to Britain. A buyer, unless they are in peculiar conditions, can always walk away from a "bad deal", and wait for the seller to change their mind, or take their business elsewhere. But that is not at all the position that Britain is facing here.
Britain already sells into the EU as part of the single market and customs union. What it wants to do is to keep selling to the EU on those same terms, but not to undertake all of the costs and obligations that other members of those institutions are bound by. It is the EU that is in the position of being able to say to Britain that it is prepared to walk away from such a "bad deal", not Britain. Britain is a trading nation that relies on being able to undertake vast amounts of importing and exporting of goods and services, and currently the majority of that trade is done with the EU, on these favourable terms. If the EU decides to walk away from the "bad deal" that Britain currently wants to impose on them, it is Britain not the EU that will lose out as a consequence.
The Brexiters argue that the EU sells more to Britain than Britain sells to the EU. But, the EU is a $14 trillion economy, with 450 million people, whereas Britain is a $2 trillion economy with 70 million. If Britain walks away with no deal, it means that British exports to the EU will face tariff and non-tariff barriers. That means that Britain will find it harder to sell into the EU, thereby hitting UK jobs, and company profits, and the government taxes that are paid out of them. Britain will then find itself in the position described above of a company that has laid out £1 million of capital to produce its output, but can't sell it profitably. Nor is the solution to that for Britain to sell that output instead to China, India or some other non-EU country. Selling to those countries would involve at least the same kind of levels of tariffs, as would be faced by Britain outside the EU without a deal. Moreover, in terms of some of these larger economies like China, India, the United States, precisely because they are big economies and large markets they would be unlikely to offer favourable trade terms to Britain, because all of the economic muscle and leverage would rest with them not Britain. It would be impossible to negotiate such a favourable trading arrangement with them as Britain already has within the EU.
On the other hand, the EU could easily replace the imports that currently come from the UK. In fact, take a company like BMW that produces the Mini. If it found that without a deal it was difficult to maintain sales into the EU, the incentive would be for BMW to shift its production from Cowley to the European mainland. On the other hand, many of the commodities that Britain imports from the EU, it would still have to import, even if tariffs were placed upon them, because they form part of complex production chains, whereby components move back and forward across borders many times.
The Brexiters, like Tice, have argued that already some British producers are switching to UK produced commodities, but this again illustrates the problem. Suppose, Britain were to introduce a 10% tariff on goods imported from the EU, and this meant that some UK production was then cheaper, what is the actual consequence? Firstly, it means that whatever this commodity is, UK consumers are now paying more for it, even if less than the additional 10% of the tariff imposed on it, although its likely that UK producers would adjust their prices up to that level. So, the cost of living for UK workers rises. Consider the further effect of that.
Suppose that UK workers require £100 per week each to reproduce their labour-power, and this is then paid to them as wages. If UK capitalists have £5,000 of capital to employ, they might then employ 10 workers at a cost of £1,000 a week, using the other £4,000 for materials and instruments of labour for those workers to work with. Now, if as a result of the 10% tariff, or the fact that UK workers have to buy more expensive domestically produced commodities, they require £110 per week, which is paid to them in wages, the capitalist with their £5,000 of capital can only employ 9 workers, and with the given technical composition of capital, that would also mean that they would only employ £3,600 of capital for materials and instruments of labour. It means that not only does the rate of profit fall in Britain, as the higher value of labour-power reduces the rate of surplus value, but it also means that less capital can be employed in total, which results in an economic contraction.
In reality, the economic contraction would be greater precisely because of the fall in the rate of profit. First of all, capital would move to other countries where it could make a higher ate of profit. That can be seen already in a number of spheres, for example in IT, and new industries such as media and computer game production, but it is likely in industries such as agricultural production and food processing, which will also face increasing problems obtaining labour, as free movement ceases, and so where that capital will move to those parts of the EU where currently much of that labour comes from, such as Romania, Bulgaria etc. It will mean that those parts of the country such as the East Coast, where those industries are important will suffer a further economic stagnation, and decline as opposed to the recovery that the Brexiters promised them.
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