New British Prime Minister Theresa May and her Conservative Party cabinet will soon begin the difficult task of managing Brexit. The immediate financial market panic is behind us, and now that the dust has settled, policymakers in the United States and around the world should look ahead to the long-term implications of the United Kingdom’s separation from the European Union. The good news is that a carefully considered Brexit—one guided by the lessons of economic history—can be a significant positive both for the United Kingdom and Europe.
Trade and mobility of capital, labor, and ideas have increased dramatically over the past few decades, especially in Europe. But even more widely, the emergence of English as the primary language of trade; advances in the Internet, education, and health care; and myriad other developments have made Berlin, Hong Kong, and London closer substitutes for one another for today’s firms and workers than Boston, New York, and Philadelphia were a hundred years ago.
The flatter world has made necessary supranational organizations such as the EU, and economic theory has a lot to say about how they should function. Our view, as we first outlined in a 2012 paper that we coauthored with Matthew Jensen of the American Enterprise Institute, is that such bodies can play an enormously positive role in the evolution of the world economy. In practice, however, they haven’t achieved all of their promise, primarily because those bodies have yet to fully understand the role they need to play in the interconnected world. The key insight harkens back to a dusty economics seminar room in the early 1950s, when University of Michigan graduate student Charles Tiebout purportedly made a joke that ended up revolutionizing economics and economic policy.
The presentation that day was by Harvard economist Richard Musgrave, who was discussing the emerging body of research on how market economies work. If we take a typical private good, say, an apple, we don’t have to worry that