How Scots could be better off by going it alone

The biggest winner in next week’s Scottish elections could be the law of unintended consequences. If the Scottish National Party emerges as the dominant force in the Edinburgh Parliament, its campaign for independence could change not just Scotland but also England and the rest of Europe in dramatic ways that voters neither expect nor desire.

For England, there would be a seismic shift to the right, as the Labour Party was sent into permanent opposition by the loss of its Scottish heartland. For Europe the contagion effects of the first peaceful break-up of an advanced democratic country would be felt in many regions whose secessionist tendencies have historically been much stronger than Scotland’s – Catalonia, the Basque Country, Corsica, Wallonia, parts of Northern Italy, maybe even Bavaria. But of greater concern to Scots voters may be the economic effects on Scotland itself.

The economic debate about independence has focused mostly on intricate calculations of North Sea revenues, Treasury subsidies and public spending plans. The honest answer to all questions about whether Scotland would gain or lose revenues from independence is that predictions on this are impossible and don’t matter very much.

Impossible, because the sums flowing into and out of Scotland vary widely from year to year and depend on unpredictable factors such as oil prices and relative wages in the private and public sectors.

Irrelevant because the sums involved – a net inflow this year of about £3 billion annually, roughly matched by similar outflows in the 1980s when North Sea output was near its peak and public sector wages were lower – are far too small to affect the balance between the immense historical arguments on both sides of the independence debate.

In any case, the real economic arguments for or against independence must be based not on bean counting, but on two broader principles. On one side there is the concept of “economies of scale”, which asserts that large entities have an inherent advantage over small ones because they can spread their risks and administrative costs. On the other hand, there is the principle of comparative advantage, which shows that countries should specialise in the goods and services they can make most efficiently and import everything else.

Until the mid-20th century, economies of scale had the upper hand in this debate. The nation state’s main function was waging war and creating empires, where size really did matter. Comparative advantage could only be applied within national or imperial borders, because trade barriers split the world into hostile economic blocs. However, since the Second World War the balance has shifted. There is little to be gained from sharing military costs among vast populations. And free trade, reinforced by cheap communication, has vastly increased the scope for specialisation on a global scale. As a result, it makes more sense than ever for small economies to concentrate on areas of clear comparative advantage.

The SNP rests its economic arguments on the spectacular success of several small countries in an “arc of prosperity” in Northern Europe – the Irish Republic, Norway, Sweden, Finland and Denmark. But small size is not in itself the key to these countries’ success. Rather, it is their successful specialisation in niche businesses – Ireland has turned itself into a financial tax haven and a global hub for software services; Norway has specialised in energy equipment; Sweden in precision engineering and telecoms; Denmark in biotechnology, shipping and wind energy; Finland in mobile phones.

In Scotland’s case, however, specialisation would require reforms that contradict the left-wing trends of modern Scottish politics and rediscover the country’s 19th-century traditions of free-market economics. If Scotland were an independent country it would, for example, have closed down its coal, textile and heavy engineering industries long before the hated English Thatcherites. Today, instead of receiving English subsidies for manufacturing plants and government back-offices, in which it has no clear comparative advantage, an independent Scotland would be forced to create conditions conducive to businesses, such as offshore financial services, up-market tourism and maybe advanced energy research. One plausible approach would be for Scotland to become a tax haven like Ireland, with taxes well below the English level and corresponding reductions in public sector employment. But what, then, would happen to Scotland’s traditional support for “social justice”?

Exploiting Scotland’s comparative advantages would even have moral implications. Instead of banning hunting, an independent Scotland, just like Ireland, would be promoting it, retraining crofters and coalminers as gamekeepers and huntsmen.

Instead of draining university finances by abolishing tuition fees, Scotland would be restoring Edinburgh and Glasgow to the prestige of Oxbridge and Harvard. And Scottish politicians, instead of denouncing American imperialism, would have to tour Midwestern Rotary clubs, promoting tartan trousers designed in Glasgow, but manufactured in Bangladesh.

But what if Scotland decided to follow the opposite course – expanding the public sector and trying to revive traditional manufacturing industries? Small size increases the costs, as well as the benefits, of specialisation. If a small country concentrates on the wrong activities or fails in its efforts to achieve global leadership in particular niches, its standard of living can rapidly fall. It is true, as the SNP claims, that many of the world’s richest countries are small; but small countries are also over represented among the poorest economies, both in Europe and globally. The mathematical law of averages dictates that small countries will always tend to be at the extremes of both success and failure, while large countries such as England will inevitably cluster nearer the middle of any international league.

In the end, the economic arguments over independence depend on attitudes to risk. Do the Scots want to take some big risks and then accept responsibility for their success or failure? Do they want, in effect, to become a nation of risk-seeking political entrepreneurs, or do they prefer the safety net of the British welfare state?

If the Scots really wanted to return to their 19th-century tradition of entrepreneurship, instead of their 20th-century passion for social security, then the Scottish economy would probably be stronger than it is at present, whether it stayed in the UK or split away. As for the English economy, it would almost certainly enjoy a modest gain if Scotland departed, since the Scottish subsidies would vanish and England’s economic specialisation would modestly increase. Few English people would suggest, however, that such modest and uncertain economic calculations could justify ending 300 years of glorious history and dismantling one of the world’s most successful states.

Anatole Kaletsky