Back to realpolitik: only the promise of prosperity will ensure the return of liberal diplomacy

Yet another ceasefire has been arranged in Syria’s civil war, although this morning it looks close to collapse. The difference with this one is that the US and the EU have not been involved in its negotiation. And, not coincidentally, it does not include the Kurdish forces. It is the result of a rapprochement between Russia, Iran and Turkey. It looks as if this is the shape of things to come: a world where there is only the faintest pretence that countries should look out for the needs of people outside their own borders.

It looks like the death of an idea: liberal diplomacy. For liberal diplomacy, and its cousin the ethical foreign policy, the object of diplomacy, and the use of military power, should be to create a better world. A world of peaceful relations and prosperous trade, where human suffering is the responsibility of all. In its place we are left with the idea that countries should pursue their interests, and seek whatever advantage they can. There is an old name for this approach: realpolitik. It was the way most countries ran their affairs before the First World War, with only a few prominent dissenters, such as the British Liberal leader William Gladstone.

How it resolved in that era was that countries were ordered into a small number of great powers, able to conduct independent foreign policy, and project their power over a sphere of influence. Then came minor powers, nominally independent, who did the best they could in the spaces left behind, and finally subject nations – colonies, protectorates and such, managed by great powers, and sometimes minor ones. It was a system established at the Congress of Vienna in 1815, after the fall of Napoleon. It was taken for granted that major powers would use force to pursue their interests – and that their only constraint was avoiding wars between themselves. This did not always work. From 1853 (the Crimean War) to 1870 (the Franco-Prussian War) there were a series of short wars between European powers. But, compared to previous periods of 99 years, the years from 1815 to 1914 were remarkably peaceful for Europe. But it had its dark side. The great powers exercised their might with little restraint within their spheres of influence. It was a century of colonial oppression. The weakness of the Chinese empire was cynically exploited: amongst other things the British used force to maintain the opium trade there; the death and destruction wrought in Belgian Congo is probably the biggest blot on a cynical century. And in the end the prevailing matter-of-factness about the use of warfare led to the European powers to drift into a catastrophic war in 1914.

After 30 years of war and an unstable interwar period, in 1945 the world moved into a different order: the Cold War. The Cold War resurrected the idea of realpolitik, but between just two great powers: the United States and the Soviet Union. And these powers projected their power within their respective spheres with an ideological slant: promising to promote peace and prosperity amongst their allies through their political philosophies. But the failure of the Soviet system to deliver its promises became so obvious that it collapsed from within in 1990. This ushered in the period of liberal diplomacy that now seems to be coming to an end. It was not without its success. Perhaps no period of 30 years in human history has seen so many people lifted from abject poverty – as the countries left behind in earlier phases of development took advantage of a peaceful, trade-friendly world (and ,some might say, the enlightenment of neoliberal economics).

What caused it to fail? I think there were two main problems. The first was that the United States, which emerged as a hegemonic power, became tempted to abuse its position. Many Americans felt that their country should use its massive military power impose its will in a manner more explicitly to favour its narrow interests. These were led by the Neo-Conservatives who gained influence in the presidency of George Bush from 2001 to 2008, and reached its apogee with the US invasion of Iraq in 2003. The Neocon strategy was dressed up in the language of spreading peace and democracy – but this convinced nobody. The feeding frenzy of US businesses following the invasion of Iraq was shocking. Other countries, especially Russia and China, resented what they saw as an abuse of raw power, and drew the lesson that they too should advance their interests by building military power.

But the election as US president in 2008 of Barack Obama might have saved the day. No US leader has been as faithful to the idea of liberal diplomacy. But by then it was too late. The financial crash of 2007-2008 had fatally undermined the authority of liberalism. The winning idea of liberalism was that it was the surest route to prosperity. That was how the US won the Cold War, after all. But after the crash, people lost confidence in it. The economies of the developed world stagnated. Amongst those who lost confidence were many American people themselves: Donald Trump won the presidential election by promising to go back to realpolitik. But authoritarians from Vladimir Putin to Recep Tayyip Erdogan, to say nothing of the Chinese Communist Party, saw that they had nothing to lose by pursuing an authoritarian path. And liberal diplomacy without the promise of economic prosperity simply looks like weakness.

So what happens next? The objective of the nascent Russian-led Syrian peace process looks to be first to persuade the Syrian Kurds to submit to the authority of the Syrian government. Russia no doubt also wants to wind down its presence. They also hope that the Sunni rebel groups will either submit or be crushed, except those allied to Turkey, who can expect some form of autonomy. That leaves the question of Islamic State, but the US will help with that. This way forward may bring an end to the civil war, but at a terrible cost. We had hoped for a less oppressive government – instead we will no doubt have to confer status onto one of the most vicious regimes in post-1945 history.

The main uncertainty in this new world of realpolitik is how the new US government will interpret its national interest. The main ideas that are emerging are: the identification of US interests with those of Israel, including a vigorous pursuit of Iran; renegotiation of trade deals to reduce access to US markets; the finishing off of Islamic State’s control of territory in Iraq and Syria; and some kind of engagement with Russia. This does not look particularly coherent, and neither does it look particularly rigorous in following the US national interest – so how it will play out in practice is anybody’s guess.

Meanwhile China will proceed to consolidate its influence in Asia as America reteats. Russia’s main aim for now is to weaken and lift the economic sanctions imposed on it. Russian leaders probably want to establish all the countries of the former Soviet Union in its sphere of influence – but just how far it will be prepared to go in that aim is moot.

But there is one key problem behind all this. The authoritarians taking over leadership of the world powers understand realpolitik and the consolidation of power. But they do not have an answer to economic prosperity. Each country, including Russia, Turkey and even China, is threatened by economic stagnation or worse. That fate also awaits the United States if Mr Trump prevails on protectionism and the Republican deficit hawks prevail on budget policy. That will undermine their authority in the long run, though no doubt the ruling elites will still prosper.

If liberalism, ethics and humanity is to return to world affairs, then its advocates need to show that it is the surest route to economic prosperity. Absent that, the world faces a grim prospect.

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Macroeconomics is becoming a pseudoscience, and that’s not good for us

Recently the FT’s Wolfgang Munchau referred to an article by prominent US economist Paul Romer, The Trouble with Macroeconomics, published in September 2016. Mr Munchau used it as an argument to rethink the conventional wisdom of macroeconomic management, such as independent central banks and inflation targeting. I agree we need a rethink, but Mr Romer’s article is the wrong jumping-off point for that idea. Instead Mr Romer shows that academic macroeconomics has lost touch with the real world.

Mr Romer references the Trouble with Physics an article from 2007 by Lee Smolin. At this time there was a lot of nonsense going on in theoretical  physics, in particular with the idea of string theory. String theory attempts to be a theory of everything, and at its core is a lot of hard mathematics. But it makes no verifiable predictions and, indeed, seems to avoid areas where there is any danger that data might challenge it. It is more metaphysics than physics. And yet it commanded a sizeable academic following, including a number of big hitters – or at least it did in 2007.

Mr Romer suggests that something similar is happening in academic macroeconomics. People are creating elaborate models whose complexity runs well ahead of any data that can test their relationship to reality. This is covered up by sophistry and obfuscation. By itself this is not so strange, except that people are reluctant make public criticisms of these models, and the often prominent academics whose names attach to them. And yet that process of criticism is the stuff very of science. This makes it a pseudoscience – something that adopts the outward language of a science, but where a core set of beliefs and people are beyond criticism. (There is, of course, always a core set of beliefs in any system that are beyond challenge, including science, but I am talking about something wider here).

The prime target of Mr Romer’s criticism is a theoretical system referred to as the real business cycle. This was developed in the 1980s, and commanded supporters such as Chicago Nobel laureate Robert Lucas. It suggests that government actions, such as fiscal and monetary policy, have little effect on the real economy, and that the business cycle is almost entirely driven by changes to technology, a macroeconomists’ way of saying “just noise”. The real business cycle was presented to me as an economics undergraduate in 2006 as a curiosity that was so silly that it didn’t need comment or study. I can think of no serious piece of economic policy in recent years, and certainly since the financial crash of 2008, that makes reference to it. So it was a surprise to me to read that it remains the subject of serious academic support in the US – and that other serious academics look the other way rather than criticise it.

While Mr Romer spends most of his paper taking apart models based on the real business cycle, he makes it clear that this is a general problem, affecting Keynesian models too. And in particular the Dynamic Stochastic General Equilibrium (DSGE) models that are used for economic forecasting, and so hard-wired into economic management. Economists like to create huge models with lots of variables, and then pump huge amounts of data through them. But it is mathematically impossible to identify, that is to fix, the variables without building assumptions into the model about how they relate to each other – which the model is then unable to test. The models are therefore more a product of their assumptions than a test of those assumptions against data. Mr Romer complains of a conspiracy of silence not to undermine the fragility of all this. This ressembles string theory and other hobby horses of theoretical physics – though these days I read a lot about constructive work going on in physics, as scientists grapple with the problems of dark energy and dark matter. Also I think theoretical physicists are much more transparent about what they are doing – so far as I can see they aren’t even pretending that what they do is useful, except in some abstract sense of advancing the boundaries of human thought. Macroeconomists are dishonest by comparison.

How has all this come about? I don’t think it helps that macroeconomics has been politicised, and in the highly polarised environment of US politics. Real business cycle models are beloved of the right, as a basis for cutting government down to size; DGSE models are liked by the left, as the basis of fiscal and monetary intervention. Pretty much any important development in macroeconomics is parsed for its political significance. Neutrality does not seem to be an option – and yet cloaking policy prescriptions in academic mumbo-jumbo make them look more authoritative, and so demand for academic economists remains strong. US academics used to knock seven bells out of each other (the famous dispute between “salt water” and “fresh water” institutions) – but no doubt they now realise that this just devalues the whole discipline, and so the different schools ignore each other instead. Besides, they both rely on similar conceits.

How much does this matter? Those involved in the practical business of running economies have long since ignored real business cycle theory. Econometric models are used, but with a great deal of caution. Alternative ways of constructing models might be fruitful (for example Kingston’s Professor Steve Keen suggests the use of non-equilibrium complexity theory, as used in meteorology) – but these are liable to suffer from same identification problem. The future is inherently unpredictable. Practical economists can get on with the job without help from an increasingly irrelevant academia.

And yet there is a clear crisis in economic management. Too many people in developed economies feel left behind, fueling political instability that will not help economic management. The authority of the western democratic and inclusive system of government is waning as a result. If academic macroeconomists coud somehow change the direction of their discipline, rather than resorting to obfuscation to insist they were right all along, and deluding themselves that massive computer models are telling us anything useful, then the outlook would be better.

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Syria is the biggest blot on an awful year

2016 is not over yet. And one of my bugbears is people reviewing the year before it is finished. Sometimes life delivers a finale in the last week. Who can forget the Boxing Day tsunami? Older readers may remember the Soviet invasion of Afghanistan in the last days of 1978 – an event which changed everything. But surely there is nothing that can possibly happen in the last few days of 2016 that can redeem it – though things could happen to make it even worse. If Jesus Christ was to make his second coming, and call out Nigel Farage and Donald Trump for the evil that they have perpetrated, nobody would believe it was the real Christ, and nothing would change.

Brexit is, of course, the event that most colours my view of 2016, as it is has the most direct impact on me. It has plunged my country into years of bad-tempered, divisive politics and an administrative quagmire for no obviously good purpose, and given has licence to the intolerant to deliver their bile in the name of free speech and democracy. And the election of Donald Trump as US President does similar things – a campaign built almost entirely on untruth and false promise.

But rumbling behind this is Syria. This is not a new story, but one that took an evil turn in 2016. And unlike Brexit or Trump, it has been killing and maiming many thousands of people, and displacing millions. Its effects ripple through to Europe and the rest of the world. The fall of Aleppo to the Assad regime shows the collapse of liberal intervention, led by President Barack Obama, and the triumph of the evil methods of Bashar Assad, supported by Vladimir Putin’s Russia and Iran’s hardliners. It seems that there is nothing we can do to stop the spread of evil without crossing the red lines that liberals have drawn – about the ethical use of force, and intervention on purely humanitarian grounds. We must kill innocent people and ruthlessly pursue national interests in order to achieve anything, it seems.

2016 (so far) has been an excellent year for Vladimir Putin. Earlier in the year I drafted a post comparing him to Napoleon, and urging the rest of the world to emulate his Nemeses of the Russian Prince Kutuzov and the Austrian Prince Schwartzenberg in undermining him and destroying him. (I do not rate Waterloo as the decisive event in the fall of Napoleon – had he won that battle he would have been beaten soon after). For some reason I never posted it; I would have looked foolish if I had.  Russia has not become bogged down in Syria, as I was forecasting. Mr Putin proved too clever for that. The Russian military has developed tactics for dealing with insurgencies that are economical and effective. They include the indiscriminate bombing of civilians and the targeting of schools, hospitals and anybody who seeks to aid the suffering. These are tactics that liberal democracies find unethical – but we will not intervene to stop their use. Our doctrines of non-intervention make our actions predictable, and that has been exploited by the chess-playing Russian regime. The political left, so critical of much milder tactics when used by the US, stay silent. The right try to divert people’s attention to the lesser evil of the Islamic State terrorist network, pretending that it is an existential threat, and that we should ally ourselves with Assad, the Russians and Iran to suppress it – not caring about any innocent lives destroyed by this pursuit of national interest.

The worst of Syria is that all approaches look hopeless. I have been advocating non-intervention by the West, leaving it to regional actors to sort the problem out. But that simply leaves the door open for other actors, like Russia, to intervene on the side of evil, while the interminable suffering continues. Humanitarian intervention? This is treated as a political act and prevented or attacked by the Assad regime and the Russians so that those interventions tilt the balance in their favour. And yet military intervention would have led to a quagmire that would not have made things obviously better. Our allies would quite likely have turned out to be just as nasty as everybody else. We can, with some justice, shrug and blame others for the problem -there are no shortage of culpable suspects) – but that won’t stop the suffering.

So there seems to be not much more that we can do that watch, helping refugees where we can. Russia will no doubt seek an exit – though its campaign looks to have been quite economical, it will still cause stress to that country for no obvious tangible benefit. The new Trump regime will be left with the puzzle of how it continues the campaign against IS without goving succour to Iranian hardliners, whom it loathes. Maybe some kind of political settlement will be achieved which leaves Assan in place, but allows other factions space.

But the outlook is dismal. The era of liberal intervention, which started in the 1990s with Tony Blair in the van, is well and truly over. The Middle East has proved too big a task for it. But the policy’s virulent left wing critics cannot claim victory – they have been exposed as vacuous complainers with no interest in any alternative strategy for alleviating suffering. The western liberal democracies are diminished. That may not be a bad thing of itself, but we must hope that other powers come forward, able to look beyond narrow self-interest. They must understand that creating a stable and prosperous world is in everybody’s interest, but that it cannot be delegated to just the US and its allies. That is slim hope indeed.

Syria represents the worst of an awful year.

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Why did the dollar rise with Trump but the pound fall with Brexit?

If you are part of the conventional liberal “elite” like me, 2016 has been marked by two colossal acts of democratic self-harm: Brexit and the election of Donald Trump. It is easy to understand why the pound sunk after Brexit. By why has the US dollar being doing so well after the election of Donald Trump as president? It is a useful lesson in macroeconomics.

The first thing to say, though, is that the way most of the media cover such market movements is unhelpful. They talk of sentiment and emotional judgements made by anthropomorphised “markets”. These may provide a satisfactory story line for a journalist, but they yield no real insight and no predictive power. They are simply projections onto past events. But very often, and this is no exception, far more satisfactory explanations are available, based on the way money flows through economies and financial markets.

Take Brexit. The obvious explanation is that markets (sticking with the anthropomorphism for now) take a dim view of Britain’s prospects amid the confusion and uncertainty thrown up by Brexit. But by itself that explanation is inadequate. The fall in Sterling was not matched by falls in stock markets (after an initial wobble) and other markets which also depend on future economic prospects. In fact there seems to be much more of a wait-and-see approach by the people and institutions who set market prices.

But wait-and-see is not so neutral. The UK runs a substantial current account deficit (5.7% of GDP according to the Economist, the highest of the 43 countries in its data table – and the second largest in money terms, at nearly $150bn in the last year). That means that the country is consuming much more than it is producing, which in turn means that the country is spending more pounds than it is getting back from exports, etc (or spending more foreign currency on imports than it is getting from exports). This deficit must be made up from the capital account – by investors buying UK assets of one sort or another (or Britons selling off foreign assets). Wait-and-see means that foreigners are more likely to defer making investments, which reduces the demand for Sterling on capital markets, causing its price to fall. This makes UK assets more attractive, UK exports more competitive and imports less attractive. All perfectly textbook.

So, what about the US? This country has a current account deficit too (2.6% of GDP which is $488bn in money terms, the largest current account balance in any direction by some margin, in the Economist table). Surely there is a lot of waiting and seeing to be done here, as Mr Trump’s policies, shall we say, lack clarity? But there are a number of differences with the UK. The first of these is that the US is an economic superpower, which dominates global financial markets, with the dollar used as the top reserve currency. It is much easier for the country to draw in investment that the aging middle-ranking country that is the UK. It has much more secure access to liquid, short-term funding. And with a huge domestic market the outlook for its businesses look less precarious than that for British ones.

But the most important difference is that, for all Mr Trump’s lack of clarity, what is known about him, and the Republicans who control Congress, points to a loosening of fiscal policy. This mainly takes the form of tax cuts. This increases the demand for dollars, because it will increase spending in the US domestic economy. Exactly how remains to be seen. On one version US corporations will repatriate foreign profits and invest in infrastructure. This is all uncertain – but Mr Trump and the Republicans in Congress certainly agree on tax cuts, especially for the wealthiest. And this happens at a time when most people are convinced that the US is running at close to capacity – so there is no question of fiscal laxity being complemented by monetary laxity, which would allow the increased demand for dollars to be met by extra supply. Indeed the Federal Reserve is in the process of tightening policy, and increased interest rates this month.

This economic dynamic is often not appreciated – that in a world of freely floating currencies and open capital markets, loose fiscal policy leads to an appreciation of the currency. But there are plenty of examples if you look for them. When Germany unified in the early 1990s, it involved a considerable relaxation of fiscal policy – which caused the Mark to appreciate, and a crisis in the European Exchange Rate Mechanism in 1992 that forced Sterling to leave, shredding the credibility of John Major’s Conservative Government. My Economics lecturer at UCL used the British government of the mid-noughties as another example – the government ran a larger budget deficit than was warranted at that point in the economic cycle, at a time when banking laxity had already led to excess demand in the economy.

The effect of fiscal policy on a floating currency is part of what is known by economists as the Mundell-Fleming model, proposed independently by economists Robert Mundell and Marcus Fleming, leading theorists of floating currencies. It is one of the reasons that floating currencies are not quite the free lunch suggested by many Anglo-Saxon commentators. It means that a floating rate tends to neutralise fiscal policy (just as a fixed rate neutralises monetary policy). As a currency appreciates, the current account reduces (or deficit gets larger), and any increase in aggregate demand is lost across the world economy. Unless monetary policy operates in the same direction (including “printing money” to monetise the budget deficit), in which case you are in effect operating a managed exchange rate policy. This often ends in inflation or default.

This points to one of the tensions in Mr Trump’s economic policy. Fiscal laxity will lead to a widening trade deficit – exactly the opposite to what he promised on campaign. That will tend to force him into protectionist policies, which in turn could create a doom-loop of global proportions. Many believe that we have the makings of another global financial crisis, especially given developments in the Chinese economy – for example read this from Yanis Varoufakis.

But another tension could be that Mr Trump’s fiscal stimulus proves ineffective. The rich people and corporations that benefit from the tax cuts save most of their winnings; planned infrastructure spending is lost to political friction; and Congress insists on dismantling the social safety net, especially Medicare, sucking demand out of the system by hitting the less well-off. That would mean that growth is disappointing, breaching another Trump campaign promise.

But that’s in the future. For now participants in the financial markets are readying themselves for more demand for dollars, and weaker demand for pounds. They aren’t taking a view on the wisdom or otherwise of either Brexit or the new US regime.

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The Labour Party is not dying, but it is in retreat

To judge by the stories coming up in my Facebook feed, you would think that Britain’s Labour Party was in its death throes. The party is further away from winning national power than ever, but it is far from dying. Something more subtle is happening.

The chatter arises from the two most recent parliamentary by-elections, where Labour’s vote has crashed. I have written about Richmond Park already – this was a straightforward squeeze to get the Tory out. A week later came Sleaford and North Hykeham – and this is much harder to explain away. This is a safe Conservative seat in Lincolnshire, which voted heavily for Brexit (unlike Richmond Park).  The Conservatives lost a couple of percent in vote share, but Labour crashed by 7% to 10%, from second to fourth place behind Ukip (whose vote share fell by 2%) and the Lib Dems (who increased by 5% to 11%). Various other candidates scooped up an unusually large 11% (up 5%), including a Lincolnshire Independent who took nearly 9%.

The first thing to say about this result is that it is a remarkable victory for the Conservatives, a year and a half into this parliament. While Whitney and Richmond Park showed that pro Remain voters distrust the party, in pro Brexit seats (which are in a hefty majority in England and Wales) there seems to be no problem. It seems likely that they are picking up votes from Ukip, while losing a few Remainers to the Lib Dems. This seems to explain Ukip’s lacklustre performance in what should be home territory for them. But Ukip and the independents clearly picked up votes from Labour.

And thus come the predictions of Labour’s demise. Their lack of a clear message on Brexit, the main issue in British politics for the foreseeable future means that they are being squeezed by both the Lib Dems and Ukip, and will not be able to hold the line between the two. Voters sceptical of Brexit will be attracted to the Lib Dems; enthusiasts for Brexit will be tempted by Ukip or the Conservatives. Meanwhile Labour members’ attention is being drawn by its internal politics, as far left activists led by Momentum, fresh from their victory of re-electing Jeremy Corbyn as their leader, try to take control at all levels, and dictate the candidate selection process. The spectre of the party repeating the collapse it has already suffered in Scotland in England is raised. Amidst all the chatter, though, it was instructive to read Andrew Rawnsley in the Guardian. He describes how Labour veterans are consolidating their hold on the Labour organisation through solid, grassroots organisation. Momentum, an awkward alliance of veteran hard leftists (many expelled from Labour) and younger idealists freshly recruited to politics, is, in fact, losing momentum. Internal splits within the pressure group have been widely reported.

The truth is that in much of the country, Labour does not face a serous political challenge, and in a few places it is mounting a serious challenge to the Conservatives. The threat from from the Lib Dems is grossly exaggerated. The Lib Dems have barely begun to claw back their standing amongst both metropolitan leftists (who will not forgive the coalition with the Conservatives and the breaking of the party’s pledge on tuition fees) and working class voters of all ethnic groups. Richmond Park showed that such voters may once more hold their noses and vote tactically for the Lib Dems, but this logic does not affect areas where Labour is already strong. The Lib Dems seem to be mainly picking up Conservative Remainers – and that may help Labour rather than hinder it. Certainly in the area of London where I live the Lib Dem revival, such as it is, is evident in Tory areas, and there is no evidence of it all in the poorer estates.

Ukip threatens more, with an appeal to white working class voters, an important part of the Labour coalition. Labour seems unable to craft a message that appeals to these voters, or not without upsetting other important parts of the coalition, such as ethnic minority voters and metropolitan liberals. But Ukip is not a well-organised party. It lacks maturity. Furthermore its culture celebrates the awkward squad – the oddballs and angry types – from which it is hard to forge a cooperative team, as can be seen from the farcical attempts to replace Nigel Farage as leader. Liberals have a big advantage here – having a predilection to listen and cooperate. Ukip’s new leader, Paul Nuttall, is rightly focusing on Labour voters, but delivering a credible challenge will be an uphill struggle. They do not remotely present the scale of threat to Labour as the SNP have in Scotland.

And we must remember that Labour remains strong in large parts of the country, particularly London. They have plenty of members, strong local party organisations, and councillors. They have the ability to reach out to voters person to person to establish local bonds of trust. The party was not strong in either Sleaford or Richmond Park, so the results in these seats say little about how the party will perform in its strongholds. Around where I live the party is comfortably winning the local by-elections – and is as strong as I have seen it in 25 years or so.

So Labour is long way from dying. But it does seem to be in retreat in areas where it was not so strong in the first place. The Lib Dems do seem to be picking up here, resuming their role as the main challengers to the Conservatives in rural areas, to judge by a steady record of success in local by-elections (with another good set of results last night). As last week’s Bagehot column in the Economist points out, Britain’s political geography is fragmenting, with the country becoming a patchwork of different political contests. Labour will find it very hard to break out of its strongholds, as Lib Dems, Ukip and the SNP consolidate their hold on other areas.

Can Labour break out of this dynamic and regain a national appeal? It has been done before, in the 1990s by Tony Blair. The party’s current leadership, hopes to do so, with a re-launch promised. It hopes to pick up on an anti-establishment mood, using Mr Corbyn’s  persona and a left-wing policy platform. We will see. Labour’s problem is less its policies than a perceived lack of competence, something that Mr Corbyn’s persona will do nothing to correct. The public may yet be attracted to radical left-wing policies in these strange times – but the platform is being developed in a process of members talking to themselves (which activists optimistically regard as “democracy”) rather than engagement with a sceptical public.

Meanwhile, the Conservatives have little to worry about from Labour. Their main worry is the internal tensions in their party arising from Brexit – a process that will be quite unable to sustain the expectations placed on it. As doubts over Brexit grow, the party’s support is bound to melt. That will be the big political opportunity. The Lib Dems and even Ukip are readying themselves for that moment. There is little evidence that Labour are. But the party is far from dying.

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Back to the village? Globalisation is changing direction

The human mind is hard-wired to think that present trends will continue, as many a study cited by behavioural economists attests. It takes a real effort to see things another way, even when there is evidence aplenty. So it seems inevitable that technology change and globalisation will continue to hollow out society, destroying jobs while a rich elite enjoys the high life in specially protected enclaves. But a change of direction is coming.

Recently I read a review in the Economist of a book by Richard Baldwin: The Great Convergence Information Technology and the New Globalisation. This is another variation on the same old story of advancing globalisation, but it offers a narrative that is useful.

Mr Baldwin sees the advance of technology affecting the human economy in two waves. Originally mankind was stuck in a village economy, forced to produce virtually all it consumed. The first wave of technological revolution detached production from consumption through advances in the technologies of transport. Goods (and energy) could be moved cheaply and easily. Society rearranged itself around industrial centres that produced things that were distributed worldwide. But knowledge, ideas and skills did not move so easily, which meant that production was concentrated in integrated geographical clusters.

The second revolution came with information technology, which allowed the spreading of knowhow, which in turn allowed the traditional clusters to fragment. Sub-assemblies could be manufactured far away. And indeed whole factories could be transplanted from Detroit to Mexico. This proved wrenching for the developed countries, but a big opportunity for the rest of the world. It is a backlash against this process which is behind the current wave of political turmoil. Mr Baldwin seems to assume that this process has further to run, and that we should facilitate its progress.

He may be right, but we should not miss two further dynamics, both based on conventional economic theory. The first dynamic is convergence – a different aspect to that suggested in the book’s title. Just why is it that so many factories have been relocated to developing world countries? The knowledge economy facilitates the move, but does not tell us why it is happening. It happens because workers in the developing world are paid less than those in the developed countries. But why?

The reason is that developing world economies have very low productivity. This low productivity is mainly because they have very inefficient agriculture, which ties up a huge proportion of the workforce, and which is massively uncompetitive in world terms. This drags down the cost of labour. But as developing world societies adopt modern technologies, and as more of their populations flock to cities, the productivity gap between town and country reduces. We have witnessed this in Japan, followed by South Korea and Taiwan. Now mainland China is following these exemplars. This means that what economists call comparative advantage (driven by the balance between different sectors of an economy, and considered to be the main engine of trade) is equalising. It’s quite a subtle point (which I explore in my economics essay on trade on why global trade is going into reverse), but the upshot is that the economics of outsourcing overseas is becoming less attractive.

There is plenty of evidence that this trend is quite advanced. It does not mean that large numbers of manufacturing jobs are coming back to developed countries though – because many of the jobs have been automated away. It does mean that future disruptions wrought by technology (and there are more to come, especially in white-collar work) will be less international in scope.

The second dynamic comes from looking at the economic impact of consumption. Not so long ago, the world’s consumption was mainly food. The agriculture sector comprised most of the economy. Now agriculture takes up a tiny share of national consumption in developed economies, and we take it for granted. That same process is evident with so much else of what we consume. Manufacturing industry is vanishing as a proportion of the economy. Various parts of service industry are following suit. So what does that leave? Increasingly our economic activity is about interpersonal contact with people in or around our neighbourhoods: hospitals, care homes, schools, gyms, restaurants, cabs and so on.

And what about technology itself? Though we hear much about it driving a process of mass automation, including through the use of algorithms in artificial intelligence, we may not have noticed that much technology is not about this at all. It is about the empowerment of individuals. Think about what you can do with your smartphone. Think of the personal liberation that comes about through such services as Uber (though not for the drivers perhaps, admittedly). And think about additive manufacturing (or 3-D printing) that makes it more economic to have a production run of one. And think of energy technology. The idea of massive nuclear power stations at the heart of a huge grid of high voltage cables is fading, as it becomes harder to make the economics work. It is being replaced by the idea of localised renewable energy sources, much more efficient consumption, supplemented by medium-sized power stations.

Put these things together and you might start to see the village coming back together again. The centrifugal forces are becoming centripetal. Not yet, to be sure, but the idea is becoming more technologically viable. And there is human need: most people crave denser social networks where recent trends have weakened them.

The new village will be very different from the old one. The old village was very insular, with people rarely mixing with their neighbours. In the new village people will travel freely, and the interchange of ideas will be global. And the new village remains dependent on national and global supply networks and information infrastructure. But most economic activity will be within the village (which could be a small town or suburb or network of actual villages in fact- or perhaps even a large town). The old village was a prison. The new village, or the liberal vision of one, should not be.

Let me hazard a further guess at this new village economy: public services will comprise a very high proportion of what it does. Education, health care, public protection, social care; I do not think these will be marked by high productivity gains in the future, so their importance in the overall economy will rise. And much of the infrastructure that the new society will depend on will be provided by natural monopolies, many of which will end up being run publicly, if not run publicly already. That poses some big challenges for governance and tax.

Those challenges will be among the many for public policy posed by this trend. Another is the status of that liberal icon, free trade. We are stuck in an old way of thinking about it, appropriate to older phases of technological advance. We will be still be dependent on the free trade of things, even if the distances shrink: but things will be less important to us, compared to the services we receive from our neighbours. Free trade may hollow these out by sucking resources away to centres of power elsewhere. Compare a Starbucks to a locally run café.

And another point is that I am coming at this with a very optimistic and liberal gloss, but there may be darker ways that these trends can take shape, with a return to insularity.

But that said, we need to adapt our political ideas to the world as it is, and what it is becoming. We should neither expect current trends to continue forever, nor for the past to return. Not enough political thinkers are responding to this challenge.

 

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What is the meaning of Richmond Park?

My (many) Liberal Democrat friends are ecstatic. The party has just won the parliamentary by-election in Richmond Park, overturning a massive majority from the sitting MP,  Zac Goldsmith. As the dust slowly settles, what is there to learn about the state of British politics?

Richmond Park is quite close to where I live. I have been visiting it since the 1980s, helping out the local Liberals and then Liberal Democrats, including a few visits this time. It consists of the suburb of Richmond, together with a slice of Kingston, near Richmond Park, nearly up to Kingston town centre, and including the local hospital. The seat, and its predecessors, has been the scene of epic battles between Conservatives and Liberal Democrats. After a series of close results, the Lib Dems won it in the Tory collapse of 1997, with the rather eccentric Jenny Tonge as their MP (she kept testing the boundaries of what respectable politicians it could say about the Israel-Palestine conflict, transgressing on occasion – she has now left the party). She held the seat in 2001, but then stepped down. In the high water mark election of 2005 for the Lib Dems, which gave the party the illusion that seats that could be readily handed on from one candidate to another, the Lib Dems held the seat with Susan Kramer.

But in 2010 Zac Goldsmith, a local boy and inheritor of a substantial fortune, took the seat back for the Conservatives. He held it with a crushing majority (with 58% of the vote) in the Lib Dem meltdown of 2015, though the Lib Dem candidate, Robin Meltzer, managed to hang on to second place with 18% – a feat that could by no means be taken for granted. Many Lib Dem activists sighed and suggested that the influx of rich voters meant that the seat was gone for good.

But Mr Goldsmith was an independent minded MP, who had campaigned hard against the expansion of nearby Heathrow airport – which blights an area that otherwise offers sites of outstanding beauty. This is necessary for anybody that aspires to be an MP there. When the Conservative government under the new prime minister, Theresa May, finally opted to expand the airport, Mr Goldsmith fulfilled a campaign promise by resigning and standing as an independent. But the Conservatives did not put up a candidate against him, undermining his claim of independence.

Notwithstanding the mountain that the Lib Dems had to climb, expectations on the party were high. They had surged in the Witney by election, and a similar surge might take the seat for them. The Lib Dems had been doing well in local by elections (as well as Witney) over the summer, though their national poll rating remained dismal. To prove that that this improved electoral performance had substance, many commentators suggested that it was an election they had to win. All Liberal and Liberal Democrat revivals since 1945 had been led by spectacular parliamentary by election wins. If not here, where was that boost going to come from?

But Mr Goldsmith had clout on the issue that triggered the election: Heathrow. The Lib Dems had campaigned just as hard on the issue, and the government’s decision had proved the party’s contention that the best way to prevent the government from pressing ahead was for a strong Lib Dem party in coalition. Five years of coalition had held off the considerable political pressure for expansion. (Though Lib Dems might want to ask themselves why the party showed backbone on Heathrow, but not student fees). Barely a year of even a small Conservative majority and the resistance to expansion folded. But that’s a subtle argument, and the Lib Dems needed something bigger to shift enough votes their way. And so they campaigned on Brexit. Mr Goldsmith is a prominent supporter of hard Brexit, while the constituency voted 69% to remain in the EU. That did the trick.

What does this mean? Let’s start with the red herrings. First it says nothing about the state of play in Britain’s battle over Brexit. One of the strongest Remain  constituencies voted for an anti Brexit MP. That does not change the calculations for a large majority of MPs, whose constituents voted to leave. What would change the nature of the debate is a large number of Brexit voters changing their mind. With 45% of the electorate still voting for Mr Goldsmith, there was no sign of that.

A second red herring is that the collapse of the Labour vote (they lost their deposit, polling less than their party’s membership in the constituency). This is what happens in this sort of by election, and says nothing about the party’s chances in a future general election. A resurgent Lib Dem party could be a worry, but Labour still holds the aces, and this should not be a problem for a half-way competent leadership. Indeed if the Lib Dems draw off Remain voters from the Tories, it could help Labour. That Labour voters can be persuaded to vote Lib Dem tactically does not hurt Labour at all. The reversal of this trend in 2015 was a disaster for Labour.

The first lesson I would draw is that the Lib Dems have nailed their colours to the pro-EU mast. That seems to cover about a quarter of the electorate, a big enough pool for the party to fish in in its current state. It answers the question “what is the point of the Lib Dems?”, as the Tories adopt Brexit as their own, and Labour collapse into muddle. Those Lib Dems, like me, who are inching towards some form of reconciliation will have to bite their tongues. We need to understand that this is the best way of that the party can demonstrate its open, liberal values and present itself as a bastion against the rise of nativism and intolerance. It does not quite answer the question of whether the party is going for a core vote strategy, though. If the party gets the by election bug they will be tempted to water the message down in pro Brexit constituencies.

The next lesson is that organisation matters in British politics, and that the Lib Dems still have it. It was possible to feel sorry for the Zac supporters, overwhelmed by a blitz of Lib Dem literature and canvassing, while not having adequate data themselves. Many of them felt shell-shocked, and the graceless Mr Goldsmith whinged about being crushed by a machine. This delighted Lib Dem activists. Having been written off in 2015, after being crushed by a ruthless Tory machine, to be accused of being a ruthless machine themselves is a compliment indeed. The party pulled together, mobilising old members and new, in an optimistic, cheerful campaign, led by their candidate, Sarah Olney, who only joined the party in 2015. Both Labour and the Conservatives, with their bigger and better party machines, will take note, and will not be too upset. Breakaway parties, such as some Labour members were contemplating earlier in the year, look as hopeless an enterprise as ever. Lesser parties, including the Greens and Ukip, are presented with a big challenge.

A further point of interest comes from the fact that Ukip and the Greens did not put up candidates, and instead deferred to Mr Goldsmith and the Lib Dems respectively. The former reflects Ukip’s current  turmoil, and the party is weak locally – it has created no debt on the Conservatives. The Greens’ move is more significant. They too were in a weak position, and faced being crushed by the Lib Dem juggernaut, as Labour were.  By pulling out they made a virtue out of this weakness and will have softened the attitude of Lib Dems to do electoral deals with party in future, as part of a “progressive alliance”. Under Britain’s first past the post electoral system this kind of dealing is a logical response that may well take hold. Labour came under quite a bit of pressure from many of its members to do the same. There was never much chance of this from the still very tribal Labour party with its weak leadership – and Lib Dems will be relieved. They do not want to be under any kind of obligation to Labour under its current leadership.

What we don’t yet know about this election is whether it will boost the Lib Dems national standing amongst the public. The media is starting to take the party more seriously, but it will be some time before we have enough polling evidence to tell. What is clear is that the party is in fighting form, and has a much greater political weight. That is good news for supporters of liberal values, for which it is the clearest upholder on the British political scene. If Labour and the Conservatives can take their reluctant liberal supporters less for granted as they face the challenge of the populists, it will make all those efforts by the party’s volunteers worthwhile.

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Competence, cosmopolitanism and change. And fewer experts needed forthe liberal fightback

Liberals are traumatised by the Brexit vote in Britain and Donald Trump’s victory in the USA. The margins were very fine in both cases, but that is little comfort. Things weren’t meant to be that close. And more shocks could be to come. It isn’t too late to fight back. But how?

And here there is a lot of confusion. Some want to coopt the tactics of the populists and fight dirtier (like the Guardian’s Jonathan Freedland); others say that we should stick to the issues and avoid personal attacks (take this piece from Luigi Zingales, building on experience with Silvio Berlusconi); others again suggest that we follow a populist left agenda in the manner of Bernie Sanders; or perhaps stick with the centre right (such as France’s Francois Fillon or Britain’s Tony Blair). Or meet the populists half-way by conceding immigration controls and restrictions on trade.

All of these ideas are flawed. One striking feature of both the British and American situations is just how divided the public has become. Accommodating one side of the argument means creating resentment on the other. Bernie Sanders would surely have lost more votes from Hillary supporters than he would have picked up from Trump ones. Recent polling on Brexit voters show that very few on either side have changed their minds.

We should be careful about accepting the populist narrative: that they represent a rebellion by the public against an elite. Most of the people I meet are on the establishment side of the argument, and are passionately opposed to Brexit and Mr Trump. But they are very far from any elite establishment; we are as ordinary in our way as the rebels. And all any political process does is to exchange one elite for another. As Brexit and the Republicans take over, there are going to be just as many angry and resentful people as before – but they will be different people.

Two ironies strike me here. First is that Mrs Clinton was right when she accused half of Mr Trump’s supporters of being a “basket of deplorables”. Saying so was one of the biggest mistakes of her campaign, and it showed a complete lack of political judgement  because it reinforced the idea of a sneering elite. And yet it is hard to see that there will be any reconciliation with people who have convinced themselves that the problem with the US (and Britain) is that an essentially white heritage is being polluted by incomers, and that the country needs to return to the values of the past. But there is the other half of Mr Trump’s supporters, who simply lost confidence in the establishment and just want to shake things up.

The second irony comes from  a seminal moment in the Brexit campaign when leading Brexiteer Michael Gove said that people had had enough of experts – because so many experts were advising against change. And yet the liberal side of the argument was badly let down by experts – or those that were advising their campaigns.  In America those experts has parsed the 2008 and 2012 election campaigns in minute detail and thought they had cracked it. Poll analyst Nate Silver made his reputation by predicting the result with precision in 2012 long before polling day. And yet the expert strategies in 2016 amounted to picking up pennies from in front of a steamroller. They lost the wood for the trees.

What are the experts saying now? They are very quiet, but I think can I guess what they will be saying. Don’t panic. Use the confusion and resentment emanating from the new ruling elites to build up a protest vote. Normal service will be resumed.

Well the Trump administration and the Brexit-supporting Conservative government will offer plenty of ammunition to opponents. But it isn’t enough. The British Labour Party thought it had the Conservative-Lib Dem coalition on the ropes in the years up to 2015 – such was the popular anger against austerity policies. And yet they lacked a convincing alternative, and all they succeeded in doing was pushing Lib Dem voters into the arms of the Conservatives, while being unable to contain the popular backlash in Scotland. Labour are trying something different now, with a lurch to far left – and the signs are that this will be even less successful. The populists are absolute masters of blaming anybody and everybody else for their problems, and they know how to stir up their supporters and create doubts among the uncommitted.

So what to do? I think that three things need to be at the heart of any fightback: competence; cosmopolitanism and change. Competence because that is what people will soon be yearning for, especially in America as the Trump regime takes control. People like the idea of somebody that creates chaos more than the fact. So any alternative must look like a cool, safe pair of hands. And, I would add, because this goes alongside it, somebody that cares about truth, and can admit awkward facts.

Cosmopolitanism because that really is the only way forwards. The genie is out of the bottle. We are going have to get along with people of different nationalities, races and cultures. There is no future in harking back to cultural distinctiveness. We must grow more confident in our own cultures and learn more from others. Ironically even the populists are doing this amongst themselves. If there is anything that unites the half of the population that is resisting the populists, it is a belief, at some level, in cosmopolitanism. Rallying this group is critical.

Well, Hillary was competent (except at campaigning) and cosmopolitan; and that was not enough. We also need to show that we believe in change. We must accept that the establishment orthodoxy of the 2000s was wrong in many respects. The relentless quest for a narrow vision of economic growth and the crushing of human control in the name of productivity and modernisation must end. All they do is enrich a few lucky people. We need a new vision of modernisation that takes to heart that most successful of Brexit slogans: “take back control.” And our experts won’t be much help here: we need new vision.

So we need new leaders that stand for competence, continuity and change, and are able to see beyond the myopia of experts. Justin Trudeau has done it in Canada. Who will do it in Britain and America? Oh how I wish I knew the answer to that!

 

 

 

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What TalkTalk can teach us about the modern economy

I don’t often read George Monbiot. He is far too polemical for my taste. But for some reason I read an article of his last week in the Guardian, and I found myself mainly agreeing.

The article was an attack on the idea that Donald Trump’s victory will bring prosperity back to the rustbelt. Its conclusion was that war is becoming more likely. That was not what drew me to the article, though. It was the way he invoked society’s failure to deal with complexity as one of the real cause of its economic and political malaise. And here he is onto something very important. He links to an article by blogger Paul Arbair as his source, which he rates as “the most interesting essay I have read this year”. Well, see for yourself by all means, but I found that the article uses a lot of words to say not very much that is new. Attentive followers of this blog may remember that I have raised this issue myself, through the book by Cesar Hidalgo, “Why Information Grows”.

The thesis runs that the human mind can only handle a certain amount of complexity, and that we find arbitrary ways of trying to make our lives fit within that limit. The result is that we are continually hitting sub-optimal solutions, and we find the world running away from us. In Mr Arbair’s and Mr Monbiot’s view this human capacity to manage complexity is one of the main limiting factors to our current society’s development. I agree.

Let’s now try to make this less abstract. Over the last few weeks I have been trying to get a new landline installed for my 90-year old aunt, who lives on her own and has never succeeded in grappling with mobile technology. How she lost her phone line in the first place is another revealing story, but the issue for now is how to get a new connection. This has involved dealing with a major phone company, TalkTalk – though I am sceptical that their competitors manage these things any better. This initially involved an hour-long phone call, which I could only start by working out how to break the system so that I could talk to a human being – albeit that the human being only spoke with an accent that I could understand 75% of the time over my mobile connection (my aunt herself, when her consent was needed at one point, could understand almost nothing at all). Whether intermediated by a human or not, it meant navigating a set of pre-mapped options, without access to any real context. For example we were told that she could not have access to her old phone number – but I had no idea what the problem with this was. On the date installation was due I called again (even though the line offered to check progress required you produce a current TalkTalk number to proceed – before a number had been allocated!) and was then told  that the whole order had been lost. I started the process again, though, having thrown my toys out of the pram, I was talking to somebody more senior with a stronger command of English. I was given a distant future date for connection, which was blamed on BT Openreach, whose lines carry the calls. This date is later today; we will see what happens.

This story will be familiar to anybody who negotiates the modern world. At every turn you are made to conform to a simplified structure that makes as few concessions as possible to context. Navigation requires a degree of cunning on the customers’ part or  they end up in a dead end. It often takes the customer a lot of their time – though suppliers limit any time spent by their operatives. And disappointment is usually blamed on somebody else. Companies that use a more contextualised, intelligent approach can’t compete in the market, apparently – or else they only can do so if part of an exclusive service aimed at the wealthy. There is a limit to the complexity that a company like TalkTalk can handle, and you must pay that price if you want to use their services. Many people, like my aunt, could not hope to navigate this system without somebody to do it for them. The many failures that this approach leaves are simply shrugged off.

Now let’s reflect that so many politicians and economists tell us that one our society’s biggest problems is a lack of productivity growth. But more productivity means more experiences like ordering a new phone line with TalkTalk. To most people it is simply replacing one imperfect world with another that is not necessarily better. Is it really any wonder that progress is so slow?

In my view, this kind of problem – information processing and our capacity to deal with it – lies behind many of our society’s problems, including the rise of inequality between people and regions. It hollows out jobs while leaving many human problems unsolved. And yet amongst the intellectuals who analyse society’s problems it seems largely unrecognised. We lack a clear language with which to communicate and analyse it. One important question, for example, is how much artificial intelligence can help, or whether it can help at all.

What is the way forward? We need to recognise that limits to handling complexity affect how efficient political and economic organisations can be designed. You have to be able to manage complexity somehow. One favoured method, used by the likes of TalkTalk, is to create a system of simple scope but far reaching extent – able to deal with a small number of needs for large numbers, millions, of people. This thinking is grounded in the way modern societies have embraced the world since scientific discovery took hold in the 18th Century. You tackle a large scope by breaking it into pieces and then examining each piece in depth. This gets you a long way – but how do you fit the pieces back together again?

The other to tackle complexity way is to broaden the scope but reduce the reach – deal with smaller numbers of people, but handle a much broader array of issues. This is a commonly used technique in business and politics. The 1990s craze of “business process reengineering” was based on the idea – I built a large part of my professional career applying it to financial services. But it has fallen from favour. It would be interesting to understand why –  I think it is because there are strong incentives for business leaders to increase the size of their organisations, because their own wealth and prestige grows with it. This delivers a natural bias towards large organisations of narrow scope – even though these are not necessarily the most efficient. Our legal, political and regulatory systems have in inbuilt bias towards such large organisations too. When the BSE crisis hit the British meat industry in the 2000s, for example, the men from the ministry simply assumed that small abattoirs had to be closed down, and so produced regulations that made it virtually impossible for them to operate.

Which is not to say that the world does not need big businesses, and big government too – but we need to rebalance these to make small government and small businesses more viable – because these will deal with more complex problems more efficiently.

But what on earth will it take to make people realise that?

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Britain’s economic outlook is dismal. We need a new direction.

Yesterday the British Chancellor of the Exchequer, Philip Hammond, gave his Autumn Statement. It was his first big set-piece in that role, and the time the government has attempted to set out its financial plans since the country voted to leave the European Union. Amid the noise and kerfuffle that such events generate, it is easy to miss the big picture: Britain’s politicians have no answer to a dismal outlook.

What drives my pessimism? The most important piece of public life that I am involved with is schools. Looking back over the last decade there is much to be proud of in this patch of inner London. The professionalism and dedication of school leaders and staff have grown. The imagination they have used to reach out to disadvantaged children is wonderful to see, and the results impressive. Where once teachers vehemently defended their little classroom empires against any outside scrutiny, and blamed poor results on social conditions, I now see a new generation of professionals, willing to accept advice and scrutiny, and enthused by a team mission to ensure that all pupils achieve potential. Political credit needs to be spread widely. The New Labour government started the process by putting pressure on London schools to break out of the tyranny of low expectations. The Conservatives sharpened the focus on teaching quality. The Liberal Democrats’ Pupil Premium policy led to a step-change in the treatment of disadvantaged pupils, and will be their most enduring achievement in coalition. But the clouds are gathering.

Education funding is being squeezed. London schools are funded generously by comparison with many parts of the country, and so the pressure is being applied there sharply. Teaching Assistants, who do not have professional qualifications, are feeling the squeeze the most – just that section of society that is finding it hardest to make ends meet. And services, slowly but surely, are under threat. Children’s Centres, which provided pre-school support, we the first to be hit. Now nurseries are under threat. A system that was tackling the gap between the haves and have-nots is slowly being dismantled. And this picture is being repeated across public services generally. Health and social care services are gradually failing to cope with the steady rise in older patients. Neighbourhood police teams have been cut drastically, choking the process of community links and intelligence gathering. And so on. All this is slowly creating a society divided by education and the lottery of property ownership.

The Chancellor offered us no hope of relief. The government budget deficit is still 4% of GDP, a level not usually thought of as sustainable. A large current account deficit shows that the country as a whole is consuming more than it is producing, as it has been for the last two decades. To be clear, neither of these deficits is a cause to panic. In current global economic conditions they look quite sustainable for a good while yet. But they show that there are limits to what the state can fund. In conventional analysis what is needed is a bit of economic growth, and more productivity from British workers. But, for all sorts of reasons, that productivity growth has dried up globally. Mr Hammond boasted that growth in Britain compared favourably with other developed world economies. That is not good news, because it demonstrates that the country’s problems are deep-seated and unlikely to be solved by a bit tweaking here and there. We are all in the same swamp.

What we need to understand is that these problems follow from profound changes in the world around us. Developed world populations are aging – by which I mean that the proportion of older people is rising and leaving the productive workforce. Technological change is wiping out working class jobs, pushing economic rewards towards a minority of professionals and the owners of capital. Globalisation was making things worse in some ways for developed economies, but provided solutions in others – but in any case it is slowing down as the Chinese economy in particular matures.

And to this rather gloomy picture we are adding wonton acts of self-harm. Climate change is helping to destabilise the world, creating waves of refugees. In Britain, Brexit will make things worse. It is not that economic integration of the type offered by the European Union was helping particularly, but the act of leaving the union is creating a colossal distraction for both government and businesses.  It has also given populism, a turning inwards and the rise of charlatan political leaders bent on self-aggrandisement, a big lift, Donald Trump’s American isolationism promises to do more harm than good both inside and outside the USA.

Politicians  left and right are responding mainly by trying to turn the clock back to imagined happier times. The right imagine a world of self-sufficient, ethnically homogenous nation-states undistracted by the pressures of global integration and technological change. The left fondly recalls a time of institutional Keynesianism and an ever-expanding state. Neither confronts the challenges of technological change and the need to heal fracturing communities.

So what about hope? We have some things to play with. The current younger generation is the best-educated and most cosmopolitan ever in the developed world. By and large they are not fooled by the lure of the past – one reason why they are so disengaged by current politicians. That their expectations of an easy, inevitable and prosperous life are being dashed means that at least they will be open to positive change. Technological change has its plus points too, by enabling cooperation and personalisation. The advance of renewable and energy-efficient technologies offers plenty of hope too.

But we do need to start thinking of different ways of organising political and economic activity. Ways that offer less power to corporate monopolies, and better able to tax and recycle their profits (perhaps the most persuasive reason for staying with the European Union is  its ability to confront the multinationals). We also need to place less faith in highly centralised systems that struggle to deal with complex problems, while concentrating political and commercial power. We  need better schools, better public healthcare, and stronger, local public services to support struggling communities – and controlled by those communities rather than the whims of politicians in a far-off capital.

As blogger David Boyle wrote recently, we are in a dark tunnel, but we need to press towards the light at the end of it, not try to turn back.

 

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