Thursday 18 April 2019

Sunk costs and future costs

The latest announcement of job losses in Llanelli is just one of a long line of decisions taken by companies against a background of uncertainty.  There is debate, naturally, about the extent to which Brexit may or may not be the cause.  In reality, it would be surprising if Brexit were the only cause, just as it would be surprising if Brexit were not to be a factor at all.  And companies wanting to avoid political controversy don’t necessarily put things in black-and-white terms when they make their decisions public.
But let us suppose, as many of those opposed to Brexit might wish, that it were possible to prove that Brexit is the direct, prime cause, time after time, in decisions leading to job losses.  There is an implicit assumption that, were this shown to be true, it might affect people’s views as to whether Brexit should be halted.  I think this is over-optimistic.  Once the jobs are lost, halting or reversing Brexit will, generally speaking, not bring them back (there may be a few exceptions to this, but once a decision has been taken and implemented – and the costs of so doing have been incurred – businesses would need an extremely good reason to reverse such a decision).  Effectively, the price of Brexit has by then already been paid, even if it never happens.
It gets worse.  The sunk cost fallacy – with which I’m pretty familiar after years of working on large and expensive IT projects – tells us that, having paid the price of Brexit, those committed to Brexit are more likely to double down on their enthusiasm than to change their views.  All the ‘investment’ made to date – whether in job losses or in costs of preparing for a no deal Brexit – will have been completely wasted if we don’t now proceed with the project.  I know from experience that it takes a very brave person to look at a huge sunk cost and say, ‘let’s write that off as a bad investment’ and cancel.  It’s much easier to argue, ‘well, having paid all that already, we may as well proceed’.  Assuming that repeatedly drawing attention to the huge costs which have already been incurred by Brexit will somehow change opinions is a mistake  it may actually be merely reinforcing them.


Anonymous said...

Errr, just a thought ...

1.9% inflation, 3.5% growth in wages, 32.7m in work (a record), 457,000 more in work than a year ago (all either full-time employed or self-employed), 3.9% unemployment (the lowest since 1975) & 852,000 current job vacancies.

The UK is clearly working, perhaps it's just Wales that isn't working!

John Dixon said...

And your point is? None of those statistics change the fact that Brexit uncertainty is costing jobs and investment.