Economists are failing to understand the 21st century economy

When is a fact not a fact? When it is an economic statistic. Economists use  statistics like GDP, productivity or inflation, as if they were facts. And because economists set the terms of public policy debate, the rest of the world follows them. But they are abstract artefacts, designed to help us see the facts, but which conceal as much as they reveal. There may have been a time when this didn’t matter much. That is certainly not the case now. We are missing something very important.

Economists like to accuse others of the fallacy of composition. That is the assumption that the finances of a nation work on the same principles as that of the households that make it up. For example, the budget constraints in a household work in an entirely different way to those for state finances – which doesn’t stop politicians lecturing us about the absence “money trees”. But economists are the world’s worst at a very similar fallacy: assuming that national level statistics represent the truth for individual households and businesses.

This is very striking with discussions about productivity, such as on this morning’s Radio 4 Today. This is newsworthy here in Britain. Growth in productivity grew at about 2% a year in Britain until 2008, during the financial crisis. It then stopped growing – creating what is often called the “productivity puzzle”. This is happening, to a lesser extent, in other developed countries too. It is the news now because the Office for Budget Responsibility has admitted that its assumption that productivity growth would revert to historical norms has failed to materialise for yet another year. That matters because it affects forecast tax revenues, around which the Chancellor of the Exchequer must base his annual budget, due next month. It is also the explanation offered for the fact that rates of pay seem to have stagnated for many Britons.

What is productivity? It is output per worker per period worked (typically a day or an hour). If you work in a ball-bearing factory it is relatively easy to understand what this actually means. You count the number of ball-bearings produced in a month, say; you count the number of hours worked in that month; you divide one by the other. Because of this simplicity it is easy to imagine the national economy made up entirely of ball-bearing factories or close equivalents, so that if productivity rises, it means that more ball bearings are being produced for the same number of hours. And most of the discussion about productivity uses something like this mental picture. Economist speculate about businesses using cheap labour as a substitute for upgrading capital equipment, for example. This is like the butler in Kazuo Ishiguro’s The Remains of the Day who immerses himself in his familiar daily duties so as not to confront the realities of the changing world around him.

To understand this, consider two groups of problems. The first type of problem is how do you actually measure output? The more you consider this, the harder it gets. Start with some obvious problems: what is the output of a squadron of jet fighters? Then how do you compare organic carrots with carrots grown on a farm pumped with environment-degrading chemicals? Or an iPhone 6 with an iPhone 8? Or is a loss-making factory with few people and overpriced robots really more efficient that a profitable one with lots of labourers and primitive machinery? Economic statisticians wrestle with such questions, but largely hidden from view. Economics undergraduates are barely troubled with such issues, and are quickly ushered on to the certainties of supply and demand curves and medium term fiscal policy. The result is a series of estimates and fixes, but not enough discussion about what they all add up to. Occasionally a conservative politician will pop up to suggest that lower-paid workers should be much happier because improvements in technology aren’t properly reflected in inflation. But that’s about it.

The second group of problems is conceptually somewhat easier: it is variations in the composition of the economy. Overall productivity may be improving not because individual businesses, or even industries, are becoming more efficient, but because industries with a higher measured productivity are taking a larger share. In fact it turns out that this was largely the case in Britain before 2008, with the expansion of banking and professional services. Just how productive these industries were in reality was thrown sharply into question in the following year, when banking threw up eye-watering levels of losses, from which government finances have never recovered.

These difficulties have been known about for a long time, and professional economists are more aware of them than the public whom they lecture. But they are shrugged off, with the assumption that it all comes out in the wash. Policymakers should be doing something about productivity, they say. This needs some serious challenge. And the consequences of that challenge are profound.

My first challenge is known as the Baumol effect, or more usually known, revealingly, as “Baumol’s cost disease”, as if it was something to be eradicated rather than an ordinary physical constraint. Suppose a legal firm adopts a highly efficient artificial intelligence system and makes most of its workers redundant. And then those workers take up jobs such as being personal trainers or producing craft pottery. All the positive productivity effects of the firm’s investment in AI is neutralised by the displaced workers moving into low-productivity jobs. Perhaps we are at state where most productivity improvements are being statistically neutralised in this way? After all, the more efficient an industry becomes, the fewer jobs in that industry there are overall.

Now let’s get into territory that mediocre economists really want to avoid: human alienation. One way of looking at productivity is that it advances by two alternative means: cutting wastage and cutting human content. By and large nobody will argue with cutting wastage. Vacuum cleaners have liberated home-keepers; time spent in queues is good for nobody; and so on. But cutting human content, and human contact, is distinctly two-sided. This is the world of standardised products, specialisation and automatic interfaces that may reduce costs but leave workers and users alike cut off from their fellow human beings, and being forced to conform to somebody else’s idea of what they should be. That is alienation, an idea first made famous by none other than Karl Marx in the Communist Manifesto – a document of startling insight. Alienation can be to the good overall, but it often isn’t. And there are bad signs all around us, from the obesity epidemic, the poor mental health of teenagers (especially girls), to the breakdown of community activities in our cities. Now, to back to my example of the legal firm, what if one of those displaced admin assistants finds life much more fulfilling as a personal trainer, even if the pay is miserable? A conventional economist would fret that surely it is better for her clients to download a demo video from You-Tube so that the trainer can work in a soulless call-centre? Well it would for those aggregated statistics, but not necessarily for the state of the human condition. In fact many economists suffer from acute double-think. On the one hand they praise markets and the wisdom of freely made choices of individuals over bureaucratic planners. And yet when those freely made choices go to more leisure, low productivity work and locally-sourced vegetables, they moan like mad.

But there is one sense in which those economists are right. Those aggregate statistics have one useful purpose: in planning taxes. Taxes are based on the money economy, which is the foundation of those statistical measures. If the stagnation of productivity is a fact of life, and actually represents a struggle against human alienation, then tax revenues are going to stagnate unless the rates increase. And since demand for tax funded services is liable to keep rising, we are going to have to think very hard how we order people’s relationship to the state. We are surely heading for an era of higher taxes. But how to design these taxes?

Instead we just get useless calls for action to raise productivity. Time to move on.

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Theresa May is channelling Nick Clegg

I read somewhere this week that the Conservative Party gathering in Manchester felt like a “Potemkin conference”. It had all the forms of a party conference, with hordes of journalists and lobbyists, but few actual members. That reminded me of something: Liberal Democrat conferences during the coalition era of 2010 to 2015. So, after comparing Jeremy Corbyn to Margaret Thatcher, an ideological leader who had a shaky start before eventually becoming dominant, this time I will compare the Conservative leader and Prime Minster Theresa May to Nick Clegg, Lib Dem leader and Deputy Prime Minister during the coalition.

Nick (I usually use first names for members of my own party) was little known to the public before he burst onto the scene in the 2010 General Election. His performance in the leader debate astounded people, and led to a brief moment of Cleggmania, in which the party stormed up the polls. A concerted press campaign, and a late rally by Gordon Brown’s Labour Party, brought him down to earth somewhat. But the party did well enough to enter coalition with the Conservatives. That was a heady moment for the party; we had hardly dare hope that the party could enter government, and that some of our colleagues would be cabinet ministers. This looked to be another important step towards the party taking its place at the top table of British politics. But that was a serious misreading of the situation. Large numbers of supporters were outraged, support plummeted and membership drained away. And yet the party retained all the outward forms of success, including those Potemkin conferences. Insiders talked up the party’s prospects with various arguments about historical precedent, real achievements and the need for a centre party. But nobody outside the party was fooled. Nick limped on as captain of a sinking ship; nobody wanted to replace him, and a change of leadership looked too risky. The party’s collapse was confirmed in the 2015 General Election.

Theresa May too burst onto the scene suddenly, after the EU referendum did for her predecessor David Cameron, and one by one her rivals for the leadership were sabotaged. Her honeymoon lasted much longer than Nick’s. But then came that fatal moment of hubris when she called an early election. At first it looked a brilliant move that would usher in an era of Tory domination of parliamentary politics, and her personal authority would be unchallenged. The speed with which she fell apart staggered everybody. Suddenly the Conservative Party looks vulnerable: on the wrong side of history and, to mix metaphors, lacking the will to fight its way of the cul-de-sac it finds itself in. The party is haemorrhaging members. It all reminds me of Nick Clegg’s fall from grace in a few weeks in 2010. The Tories cling to power; they try to convince themselves that things aren’t as bad as they look; but to outsiders they look doomed. Only Labour can save them. But they can carry on in this living-dead state for years, just like the Lib Dems in coalition. Or John Major after Black Wednesday in 1992.

But wait, are things really that bad for the Tories? Their poll standing has not collapsed, unlike the Lib Dems after 2010; Labour’s lead is a narrow one – and not enough for that party to win a majority. Labour aren’t following Tony Blair’s strategy of pitching for the centre ground – instead they are trying to present a radical alternative. That gives the Tories more air to breathe. There is a potentially winning coalition of working class Brexit supporters, middle class conservatives, and private sector workers worried about Labour. That was Mrs May’s strategy in the Spring, and it looked like a winning one then. But there are three huge problems for the Tories.

The first is Brexit. After the referendum the party had little choice but to take ownership of it. But there is no coherent plan for Brexit; if there had been such a plan it would have given the remainers something solid to attack, and surely they would have won. There is no political majority to be forged for any particular vision of life after exit. Meanwhile Brexit will take the blame for everything that goes wrong in the country for the next decade, regardless of whether that is true or not. British politics is stuck between two incoherent camps who can each prevent the other from ruling effectively. And disruptive change is inevitable. Since hanging on to the certainties of the status quo is usually any government’s best defence, it is fatally undermined. And Labour’s radicalism doesn’t look so bad compared to the crazy talk of the more radical wing pro-Brexit Tories, such as Boris Johnson, Michael Gove or Jacob Rees-Mogg. This looks a hard situation for even the most capable government to handle.

The second problem for the Tories is demographics. Mrs May’s potentially winning coalition is a shrinking one – it depends disproportionately on older, white voters. And on people who own their own homes. But the proportion of such people is shrinking relentlessly. Somehow the party needs to break out of this bind to appeal to younger voters, and those renting their homes. Mrs May seems to understand this, but has little idea how to do it without putting off the party’s core support. A few gestures about building more houses will not be enough.

And thirdly there is the party itself. It has been shrinking for some time. There is a story circulating that its rank and file membership is now smaller than even the Lib Dems, who have seen a membership surge since 2015. No doubt fear of Labour will keep money flowing into the party – but a political campaign based on money rather than grassroots support is a fragile thing. Mr Cameron’s success in 2015 took years of careful preparation; the absence of such preparation was painfully apparent in the Tory campaign this year. And yet the party now lacks the stability and consistency of leadership needed for such planning to work. Things are hardly better when looking at the party’s elite: its parliamentary party. Mrs May is a gritty and determined leader, but lacks political skill, and her authority is shot. But her main rival, Boris Johnson, looks a more effective rebel than a leader. He showed no great skill or leadership in his role as Mayor for London, which is hardly the most demanding of jobs. In Lib Dem terms he is Tim Farron to Mrs May’s Nick Clegg (though, I need to add, that Nick has far more political skill than Mrs May). For all Tim’s talents he fell short of what was needed for the top job. And yet four years of the party being hollowed out under Mrs May’s leadership is a pretty much a guarantee of disaster.

The Conservatives have no serious rivals on the political right. Ukip has collapsed. The Lib Dems ar interested in picking off the Conservatives’ more liberal supporters, but not its core vote. The party can surely reinvent itself – just as the Lib Dems are doing. But you can’t do that in government. Tory prospects for the next five years look dismal indeed.

 

 

 

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Brexit is drifting into stalemate

Transitions are always hard. Honest Brexiteers always knew that about the UK’s exit from the European Union. So it isn’t surprising that pessimism about Brexit is fashionable in the metropolitan classes. Until recently I had dismissed it as just chatter: Brexit has its own momentum. Now I am not so sure.

Recently the focus on Brexit has been about a transitional deal – part of a phased exit from the union. This is an entirely sensible idea, and, this blog has argued from the beginning, practically inevitable. The EU is a massively complex thing, and 45 years of acquired institutional integration takes a lot of unpicking. Surely it is sensible to do so at a measured pace with democratic consultation along the way? But there is something strange about all this talk. Nobody is talking about what happens after the transition. Salespeople for airline flights are urged to sell the beach, not the flight itself. And yet Brexiteers have stopped selling the beach. Instead they keep talking about the past – the referendum and its supposedly decisive mandate: selling the airport after you’ve already been through it.

This is the latest sign of insecurity amongst the advocates of Brexit. The fact that they were arguing for so long against the idea of a transition period was an early sign. Now they reserve their passion for keeping the transition period short – and the need to avoid having a general election in the middle of it. The trouble is that a transitional arrangement looks too comfortable a place to inhabit; we might never work up the courage for that next brave step. As Janan Ganesh points out in today’s FT, a country that cannot face down enough nimbys to expand Heathrow airport stands little chance of doing the brave things needed to make Brexit happen. “Leave now at the risk of economic chaos or leave late at the risk of never leaving. It is the Eurosceptic dilemma,” he writes.

The truth is that the various optimistic visions of Brexit are wilting. There was never consensus amongst Brexiteers amongst them anyway. In particular the Prime Minister’s idea of the oxymoronic “Global Britain” is collapsing. The emerging dispute between Britain and Canada and the USA over the aircraft producer Bombardier shows just how difficult that vision actually is. Just after Labour leader Jeremy Corbyn said that he wanted to leave the European Single Market because of its state aid rules, Boeing is trying to close Bombardier’s factory in Northern Ireland on the grounds of excessive state aid. Boeing’s case is a weak one, but it is a big company in a big country, and such companies have no ethical compunction about bullying. They simply want to squash a potential future competitor by using principles designed to foster competition rather than suffocate it. The American government is happy enough to play along. The mechanisms of the World Trade Organisation (another transnational limit on sovereignty) look inadequate. Anybody who thinks that India or China will be any easier to deal with (or indeed the EU from outside) is not living in the world as it is. Small powers need a transnational order to thrive. But transnational order is going out of fashion amongst the world’s great powers.

Still, there are other visions for a post-Brexit Britain. They are of a more self-sufficient Britain. More complex manufacturing, such as the motor industry and aerospace, look doomed in the long-term outside the Single Market. But these are becoming less important to the whole economy. Modern technology is making smaller scale manufacturing easier. And the information economy is less bounded by the constraints of old-fashioned borders. A new meme on the political left (Jonathan Freedland in the weekend Guardian, repeated by Nick Clegg in today’s FT), that you can’t banish austerity outside the Single Market looks like nonsense to me. In the long term anyway. Britons might need to adjust their appetites on goods that are typically imported: cars and fossil fuels, for example, and things like foreign travel. But health care, social care, education, housing and employment support don’t require a major trading economy to support them, even if they need to be adjusted around the edges a bit. Except, of course, that “austerity” is code for any kind of disruptive change. Full Brexit will mean more disruption. But few politicians seem up for selling that to the British public.

And so we drift into a political stalemate. The country remains locked in a 50-50 split as to whether Brexit is right or wrong. The forces of remain look in no shape to launch a counterattack, and are content to obfuscate and delay. They have always been averse to selling the beach anyway. I cannot see that formal Brexit can be stopped. The purgatory of half-in and half-out seems a fitting verdict on a failing political system.

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Is Jeremy Corbyn channelling Margaret Thatcher?

Humble pie is a difficult dish to eat. I have had to eat a very large helping when it comes to the Labour Party, after their success in the general election. But now Labour’s Autumn conference is over, I need to venture back into the fray.

On reflection, I got two things badly wrong. The first was the leadership’s competence under Jeremy Corbyn. I based my scepticism on the ineffectiveness of Labour in parliament before the election, amongst other things. The second was that Labour would be able to defy the conventional wisdom about the “middle ground” by bringing large numbers of new voters into the fray. That was based on all manner of past experience. Basing conclusions on evidence is all very well and good, but the danger is that it leads to driving through the rear mirror. Also I had little direct experience of what was happening in the party, and was relying too much on journalistic sources, even if much of this came from Labour insiders.

During the election the leadership showed increasing command of the political game. They produced an excellent manifesto (in terms of its political usefulness, rather than as a programme for government) and showed a really good grasp of modern campaigning techniques. Since the election, Labour’s parliamentary game has been much better. And Mr Corbyn pops up on the radio sounding relaxed and in command of his brief. The Prime Minister, meanwhile, appears terrified of any encounter that involves her having to answer questions or explain herself. She delivers carefully worded set-piece speeches, and then runs for cover.

All those Labour activists that I dismissed as delusional must be feeling vindicated. If there is a bit of euphoria going on, that is completely understandable. Is there hubris? Clearly there is among some supporters, but I have underestimated the leadership before and I don’t want to do it again. It looks more to me that they are moving from Phase I of their plan to Phase II in a highly businesslike manner.

It is not surprising that many Labour supporters think that an election victory and government are within their grasp. There are quite a few sceptics, who pore through the entrails (or “evidence”) to show how difficult or unprecedented this might be. The Tories did well in northern working class seats, for example: can Labour really hold onto these at the same time as making further progress in metropolitan seats? And so on. But for once I’m with the Labour optimists. The Conservatives are now in complete disarray. They may be able to avoid some of the mistakes of June’s election, but without consistent, strong leadership they will be starting from a much weaker position. Labour, meanwhile have built up more credibility, and can catch a sense that it is time for a change from that conventional wisdom that leftists call “neoliberalism”. Labour can do it.

When trying to think back to a precedent in British politics I struggled a bit. Tony Blair, also up against a Tory party that had lost the will to win, used a completely different strategy. His revolution was of style only; in policy he closely matched the Conservatives, except for a few, carefully chosen policies that he could put on a small pledge card. I have called it “the same, only different” after an advertising slogan for a product I have long forgotten. Mr Corbyn promises a real revolution. True he is vague about the details. And the manifesto was considered quite moderate by many – in line with standard European socialist thinking, it is said (though what has happened to those European socialist parties doesn’t bear thinking too hard about). But the core ideas are a radical departure from conventional wisdom, even if that wisdom is looking rather tired.

It then occurred to me what it reminded me of: Mrs Thatcher’s Conservatives in the 1970s. Mrs Thatcher too took over her party’s leadership in opposition, after a humiliating defeat. And she struggled at first to impose her authority, and to present an electorally favourable image. She stuck to a radical, if vague, policy vision, which broke from the consensus. But the government (also in minority) was in disarray, and she managed to secure a victory after an election forced by a confidence vote. All this looks very like Mr Corbyn’s Labour Party. Are we on the threshold of 18 years of Labour rule that will transform Britain?

There are some shadows. First there is Mr Corbyn himself. He is now much more confident and energetic. But there are two questions. How long can he keep up being all things to all people? It doesn’t seem to matter what he actually says, people project their wishes onto him. He draws in Eurosceptics and Europhiles alike. Some people think he will abolish student debt, or implement electoral reform, though he has never said he would. I haven’t seen anything like it since the early days of Tony Blair. The second question is how long he can keep going physically? He is in his seventies. He can do one more election, for sure – but not Mrs Thatcher’s three. Securing a successor who can maintain the momentum looks very hard. I might yet be surprised on this – but I have seen younger leadership prospects come and go (remember Lisa Nandy?). They may be attractive in their way, but they lack weight somehow. Rebecca Long-Bailey is now talked of as the rising star. How long will that last?

The second shadow is over the party itself. Any successful political party is a coalition of people who don’t really like each other – but Labour have taken this to an extreme. Close to the heart of the new party is a group of people who are, shall we say, not very nice. The online (and sometimes  physical) abuse of people that disagree with them is shocking. The BBC correspondent Laura Kuenssberg needed a bodyguard at the party conference. On the other hand, this looks like the flipside of the drive and ruthlessness that is responsible for the party’s unexpected success. These are people who have been fighting against the odds for their whole political lives. The danger is that the many thousands of newer members, who still have some belief in decency and pluralism, get put off. I have to be a bit careful here. A lot of my information comes from the usual unreliable sources. And the party leadership may be more on top of the problem than I think. And at the moment, it needs to be said, Labour is more united than it has been for a long time. But that is partly because they are choosing not to bring divisive issues, not least Brexit, to a head.

And the third shadow is  policy. It may constitute a radical departure from neoliberalism, but that doesn’t make it the right direction to address the country’s many problems. A lot of it reads like a throwback to the policies of Labour in the 1970s. There may be some talk of decentralisation, helping communities and giving people a voice – but the overwhelming ethos of Labour is for big government solutions imposed by a insightful elite, as it always has been. A National Education Service, for example, is their answer to Britain’s education issues. To be fair, though, their new ideas on rent controls are about giving local politicians the power to intervene, rather than trying to impose the same solution on everybody. Am I underestimating the leadership again, as I did before their manifesto? I need to be careful.

I am a bit torn. One part of me wants to give Labour the benefit of the doubt – and hope that genuinely innovative policy ideas lurk behind the 1970s camouflage. Another part of me is a bit scared. I see a ruthless elite clinging to power by undermining our democratic institutions, as their policy solutions fall apart and people turn against them. For now the jury is out.

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The Great Divide in liberalism: school holidays or basic income? @Radix_UK

Featured on Liberal Democrat Voice

Liberal blogger David Boyle and I are the same age. We have worked together on Liberal Democrat policy. But, according to David, we are on the opposite sides of a great divide across the heart of what he calls the “radical centre”. But I don’t think we are.

David is a much more successful blogger and general activist than me, and has got as far as founding a think tank – Radix. He is an old Liberal, where I was a founder member of the SDP in 1981. But I thought we were converging – and I had regarded myself closer to the old Liberals these days than the SDP.

That was before I read David’s article in the most recent Liberator about Lib Dem tribes. That was followed by this article published by Radix, after a fringe meeting at Bournemouth, which I did not attend. On both counts it was clear that I was still a social democrat in his eyes, and he a Liberal, and that, furthermore, there was no more important division in what he calls the radical centre, and which I prefer to refer to as “liberalism”.

David set a test to show which side you are on. What is your attitude to the fining of parents who take their children out of school for holidays in term-time? He is against; I am for (though I am actually against automatic fining, which is what he posed to the Radix fringe). To him we should assume that parents know what is best for their children, and not the experts. What is needed in politics is to break the power of the experts, in his view, and  empower people to make their own decisions.

I don’t really disagree with that sentiment, but I do believe in state intervention in a number of cases, and compulsory schooling is one of them. The question of school holidays is not an abstract proposition in my case. I have been a primary school governor for 18 years or so, and chair of governors for ten (at two different schools). This issue is a hardy perennial.  The teachers insist that term-time holidays disrupt both formal education, and also the cohesion of the school community, and I have been on their side. We haven’t gone as far as fining people (or if we have that is only because regulations have become more restricted – and it is the local authority, not the schools which impose them). Instead there has been a sort moral war of attrition. I think the presence of fines is there to set the moral moral tone, and to give schools a weapon in this moral war. I’m much more hesitant about actually using them – hence my reservations about making the fines automatic. But withdrawing the fines could set in motion a disruptive free for all.

At the heart of this is an age-old battle between freedom and solidarity. Flourishing societies need both. My worry is that in modern Britain, and not least the poorer urban communities that my schools serve (alongside more prosperous ones), the elements of solidarity are breaking down. A lot of people are struggling, and worse, not really coping. The modern state would rather hide these people away. I am a deeply-believing liberal, but I recognise that liberal language can be used to camouflage hard questions. Why not say that the struggling individuals and families are free to solve their own problems, and that we shouldn’t burden others with them?

State schools are one of the most powerful forces for solidarity that we have. They can, and should, be a lifeline to struggling families, and make them feel part of a wider society. Schools also provide a a good place from which to make the sort of state interventions needed to give disadvantaged families help to cope with the stresses of society. They should also, in subtle ways at least, open the eyes of others to some of the difficulties faced by their neighbours. A well-run, socially mixed state school one of the wonders of the British state system; it would not happen without compulsory schooling, and it is undermined by an excessive emphasis on parental choice – which often leads to de facto segregation. Parental freedom on school holidays chips away at that solidarity.

So I worry that vocal Liberals are a middle-class pressure group who want to push their own families forward without regard to what is going on around them. But, of course, I know that is not fair.

I think I have a better question to divide the radical centre: do you believe that a universal basic income should an important part of the state system? I suspect that some Liberals and social democrats alike would say yes. It empowers poorer people by giving them cash to spend as they choose, and it offers a way replace a costly and divisive welfare system with universal entitlements. Others (like me) say no – it is just an attempt to hide away the needy with no-questions-asked cash so that the rest of don’t have to bother with them.

In fact I think the real choice is between grand designs to be rolled out nationwide, like UBI, and community interventions with a human face, carried out on a localised scale and based on a sense of human solidarity. I don’t know if that is Liberalism or not, but I’m sure that is what David is looking for, to judge by his railings against empty corporations (though he has said some favourable things about UBI).  There is an important line to be drawn, but I think he is drawing it in the wrong place.

Postscript:

I strikes me that my defence of school holiday fines doesn’t contradict David’s distinction between Liberals and social democrats. Social democrats are more inclined to appeal to solidarity. But social democrats also tend to like standards set nationally, and are suspicious of localised solutions. That’s where I part company. And I do that is the most important thing about trying to develop answers to the crisis in modern government.

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Why is government so incompetent?

Every day brings a fresh example of a government policy that is not working as it intended or a public service that has gone badly off the rails. It is usually accompanied by a government press release (rarely a ministerial interview) denying that there is any kind of problem, or minimising it. No wonder the public is losing faith in the political class. When human knowledge has never been greater, our education systems have never put out more well-educated people, and our technology has never been more capable, this problem should provoke more comment than it does. What is happening?

Let’s make this abstract observation more concrete with a few examples. The Grenfell Tower tragedy showed that safety regulation for the cladding of buildings had become meaningless, and consultation with residents completely empty. The only surprising thing about the recent reports of abuse of innocent immigrants in detention centres is that the scandal took so long to emerge. The implementation of the government’s new nursery care entitlement went off the rails many months ago, and will probably lead to less nursery provision, not more – and yet the government still denies it. New regulations on data protection in the pipeline look unworkable and retrograde to everybody I have met who has taken the trouble to examine them( and that is blamed on the need to comply with EU regulations, but I wonder if other member states are having such problems?).  I could go on. And on. Everybody who has direct involvement with public services or government initiatives (in education, health, unemployment support, etc.) will have an example of rampant policy madness. Sometimes these stories are ill-founded grouching by people resisting change. Mostly they are not.

But why? There some usual suspects. Politicians like to blame the other side. So Labour (and Lib Dem) ones will label this as Tory incompetence, and claim they would do better if only they were in charge. They would say that. But one of the most egregious bits of government incompetence in recent years was on the Labour watch, and they still deny it: the macroeconomic and regulatory failures that made the impact of the global financial crisis of a decade ago much more severe than in any other major developed country. Those in power tend to blame the supposedly deteriorating quality of civil servants trying to implement their clear vision – in the way that bad workmen blame their tools, or bad generals blame their subordinates. Another common complaint is that modern politicians have less real-world experience than they used to, of running businesses or commanding troops, say. And yet there has always been something amateurish about British politicians. And there is still quite a bit of real world experience on the political front benches.

For my part I can’t help recalling Tony Blair’s valedictory article in the Economist in 2007. Consider this quote:

The state today needs to be enabling and based on a partnership with the citizen, one of mutual rights and responsibilities. The implications are profound. Public services need to go through the same revolution—professionally, culturally and in organisation—that the private sector has been through.

The first bit is classic Blair. It sounds very good and liberal, but it isn’t clear what it actually means. It is used to dress up the second bit: that public services should learn from the private sector, and reflect the revolution that the private sector has been through. Well I was, in small way, a standard-bearer of that private sector revolution. I led the transformation of the various operational units I was responsible for, with massive advances in efficiency and improved customer service (certainly in the reduction of mistakes). But here’s the thing: since Tony Blair’s time that private sector revolution has shown its dark side (already evident when I was working, up to 2005). We are now being assaulted by examples of private sector incompetence that match those I have been complaining about in the public sector. The biggest by far was unfolding as Mr Blair was writing his article: the great financial crisis of 2007-2008 that climaxed with the collapse of Lehman Brothers. The levels of misjudgement in so many financial firms is completely breathtaking. Governments and regulators contributed (especially in Britain), but often because of pressure placed on them by businesses.

It’s worth mentioning just a few modern examples of commercial incompetence. In Europe we are reeling from the problems at Ryanair, where changes to pilots’ holiday rosters have caused thousands of flight cancellations. This has parallels with Southern Rail’s travails earlier this year, after they played with staff rosters – with the trouble wrongly blamed by the company and government on the trade unions,who are admittedly making things worse. Americans are alarmed about massive data breaches at credit firm Equifax. It is not hard to find other examples.

Perhaps the problem is for public services and government in Britain is not that they have learned too little from the private sector, but that they have learned too much. Or they have learned the wrong things (I can vouch that they could learn many good things…). The dark side of private sector transformation might be called “simplify and exclude”. A simple business model is much easier to manage than a more complex one, and in its own terms it is more efficient. It also makes increases in scale easier to manage. And it can benefit the world as a whole by cutting out wasted duplication. I did a lot of this at work – especially when my firm took on outsourcing contracts for operations in financial services. But even then the dark side was evident. If it didn’t fit the model, you excluded it. This leads to two distinct problems.

The first problem is tunnel vision. People running large businesses with simple operating models simply lose the capacity to engage with the complexities of the real world. The public is becoming increasingly aware of this as it tries to deal with problems and engage with larger businesses – it is harder and harder to have a meaningful conversation with anybody. This increasingly marks our engagement with public services too. This isn’t helped by what Douglas Adams called the SEP field in his hugely perceptive A Hitchhikers Guide to the Galaxy – a powerful cloak of invisibility. SEP stands for Somebody Else’s Problem. One prominent victim of the SEP field was Labour Chancellor and Prime Minister Gordon Brown, as the great financial crisis developed. He (or some of his apologists) complained that part of the problem was responsibility for handling finance was split between the Treasury, the Bank of England and the Financial Services Authority – though it should surely have been clear that it was his Treasury that was responsible for the system as a whole.

The second problem with Simplify and Exclude is the revenge of the excluded. This is much more of an issue with government and public service than it is with big business. The inconvenient people who do not fit your simplified service model do not disappear. Very often their needs are left unmet and they come back to deliver bigger problems later. Children excluded by schools are more likely to become drug addicts and indulge in crime and antisocial behaviour, for example. The Department of Work and Pensions (DWP), perhaps the biggest champion of Simplify and Exclude in government,  may celebrate that is has driven many people of their claimant rolls, but it is has no understanding of why. It has not attempted to to solve the underlying problems of worklessness – it has just made access to benefits more restricted. That just means more trouble for everybody else. Knife crime and acid attacks are rising here in London – it is hard not to think that this has something to do with the simplification of services in the DWP, as well as youth provision, employment and policing. This is closely linked to funding cuts (“austerity”) of course, but I am convinced the problem is much deeper than the lack of public funds. It is the narrow way in which public servants are approaching the problem.

At the heart of this is a trade-off between scope and scale. In order to improve the scale of services it is usually necessary to simplify the scope. But by reducing the scope you make them less effective. The answer, in public services, is to bring together services for different things around the needs of individual citizens. You can only do that by devolving political responsibility to a much more localised level. More people are realising this – but few are ready for the change in political culture required to drive it through.

 

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Information technology is enslaving us: we must learn to master it

I have a new hobby horse: the politics of information. The development of information technology is transforming our lives, but the politicians are being left behind. This is becoming at least as important as economics and finance to the way we live our lives.

But we amateurs face a problem. The IT industry obfuscates everything in jargon and tech-speak. It is easy to get intimidated. In the FT Gillian Tett draws a parallel with the finance industry before the great financial crisis of 2007-08. It is liable to end just as badly. We really must try to hack back the thicket.

I’ve been here before. Back in the 1990s I was appointed Director of Information Systems by my firm, in spite of having no direct IT background. I was nearly suffocated by the jargon and tech-speak. But gradually I came to realise that IT wasn’t as complicated as people were making it out to be. In fact it wasn’t fundamentally more complex than the average office filing system in pre IT days, and it was dealing with much the same issues. If you stuck to firm logical ground, the techies would retreat. I found a world dominated by bluff and which reasoned in a series of attractive sounding non-sequiturs. People were watching each other and saying whatever they had to to fit in. With just a little clarity of thought you could get a long way.

So I will take a deep breath and start to think about the world of information systems and technology, even though it is a very different one from where I left it in the 1990s, or even in 2005, when I stopped working with information systems professionally as a user.

And so to the basics. How do we, as people, manage information? We do two basic things. The first is to gather data from the world around us. The second is to process that data into information that we can use to achieve goals both passive (looking out for danger) and active (finding food, say). All this requires us to be both aware and focused – two things that tend to be mutually exclusive. How humans (and other animals) do this is a very complex process that is only very loosely understood by scientists. The interesting thing is that at its core is a duality – the outwardly referenced right brain, and the inwardly focused left brain. I am currently reading Iain McGilchrist’s The Master and his Emissary which builds a substantial intellectual critique of the modern world from a right-brain left-brain duality. At this stage, though, all I want to say is that the outward/inward duality is central to the understanding of how we deal with information.

This duality is recognisable in the way modern technology works. Here I think it is useful to distinguish between what I would call “big data” and “useful data”. Big data is the amassing of data from many sources. In the modern age this is often from such things as video footage, photographs and sound recordings. But big data is not directly usable to achieve anything. To do that it has to be reduced to patterns and digits that are useful data. The big modern development is the use of artificial intelligence (AI) to achieve this. Previously, useful data was mainly gathered through human input.

There is one key point that needs to be understood about the useful data sitting in computer databases. It works on the principle of distillation. It is an infinitesimal subset of the real world, and even that is before you deal with problems of reflecting time. To move from the real world to this data requires a series of simplifying judgements.In practice this means that data does not multi-task well. To be efficient the data has to be referenced to a particular need, and it will serve other needs less well. And yet the pressure to make such data multi-task is enormous. And this leads to widespread problems.

Lets take an example. One commonly used bit of data is the British postcode. It is designed to delineate postman’s walks to organise mail delivery. It is not designed to reflect insurance risks, for example – but it is often used for just that purpose. As an example I was told by an eminent geologist about how he was asked to assess landslip risks in a town’s postcodes. He found one code which consisted of a valley with no homes in it, with the edge of the town where people actually lived. The landslip risk in the valley was high, but in the town it was negligible. So how to rate the risk for that postcode? According to the rules he was being asked to abide by, he should rate it as high. And yet that would mean that the homes in that code would be overcharged for their insurance. He refused to do it; but doubtless the insurance company found somebody more compliant. Why should they care about a bit of collateral damage? That kind of problem  predates modern IT, but technology allows it to proliferate in multiple hidden ways.

That perhaps illustrates the scale of the challenge that IT presents to liberal values. We as individuals are being made to conform to a world of arbitrary categories, because that is more convenient for systems builders. Instead of technology giving us more control over our lives, it is forcing us to conform to somebody else’s will.

But humans can be masters of technology, rather than being slaves to it. That is the liberal challenge.

 

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Have the Lib Dems reached a Battle of the Marne moment?

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Following the fortunes of Britain’s Liberal Democrats is a niche interest these days. So much so that this Lib Dem blog spends most of time commenting on other things. But the party conference in Bournemouth has just ended, and I was there. Something needs to be said.

The party’s fall from mainstream politics has been dramatic. It peaked when the party was in coalition, with four cabinet ministers, in 2010 to 2015. At that time the party was scarcely out of the news. This year the party’s autumn conference rates hardly a mention. In yesterday’s London Standard, on the day of the the leader’s closing speech, the party got no coverage in the news pages. Absolutely nothing. This is not especially surprising. The party has but 12 MPs, a a tiny scattering of council leaderships, and single-figure poll ratings. In much of the country it can’t even scrape together enough votes to retain its deposit. Still, its position is much stronger than other minor parties that have hit hard times: Ukip and the Greens.

Why is that? The party’s infrastructure is much diminished, but it still dwarfs that of the other minor parties. It has even seen a membership surge, meaning that the conference was well-attended and lively, even if all the lobbyists and sponsors were absent. The party has been here before and progressed – notably when I attended my first conference in 1990, when it polled at a similar level to the Greens, the continuing SDP and the continuing Liberals. Furthermore its team of MPs has more government experience than Labour’s entire front bench. And its ideological space, internationalist liberalism, is unchallenged in Britain’s political system. And yet it is very hard to deny the pessimistic conventional wisdom, nicely summed up in this Economist Bagehot column.

But the party’s leaders remain determinedly optimistic. Could this be a Battle of the Marne moment? This was the early turning point in the First World War, after the Germans had driven the French and British armies into headlong retreat, and the fall of Paris beckoned. The French general Ferdinand Foch was promoted to lead the fightback, and famously said: “My centre is yielding. My right is retreating. Situation excellent. I am attacking.” The tide was turned, and France saved. The wider point here is that retreat can bring opportunity. Your opponents become overstretched and exhausted; meanwhile your own communication lines are tighter, and you become more cohesive. There are at least some elements of this for the Lib Dems.

The party’s main opponents, the Conservative and Labour parties, do show signs of overstretch. The former are stuck with a mediocre leader because they can find nobody better; they are saddled with implementing Brexit, and with being on the wrong side of demographic trends. The easiest votes for Lib Dems to win these days are disillusioned Conservatives. Labour are in many ways in much better shape but remain a fragile coalition with incompatible views; I will write more of them after their conference next week. And the Lib Dems’ main competitor on the political fringe, the Greens, look in even worse shape. They made a serious strategic error to occupy more conventionally left-wing social justice territory, and have been crushed by Labour’s revival, after briefly threatening to eclipse the Lib Dems in the coalition years.

Also the party itself is more cohesive. It is not constantly undermined by the pleas that this or that policy line will upset this or that local community in a Cornish Lib Dem seat. Those conservative rural voters have now gone elsewhere. As have inner city voters. The party is now more tightly focused in Britain’s suburbs, allowing it to sharpen its appeal and take greater risks.

And the party has its General Foch too, under its new leader, Vince Cable. As even the Economist admits, he is easily the more intelligent that the main party leaders. That intelligence was on display in Bournemouth. There was practically no question thrown at him to which he did not have an intelligent answer. Unlike his predecessor, Tim Farron, he is no tub-thumper; you would not call his speeches rousing. But he is facing up to some of the most difficult issues that confront the party. The biggest of these is the party’s stance on funding higher education. Up to 2010, the party did well amongst students by promising to abolish tuition fees, including a dramatic pledge by almost all MPs not to vote for any increase. The party promptly ditched this in coalition, and Labour has exploited this ruthlessly ever since. Vince’s fingerprints were very much on the volte-face, unlike Tim. At the time he argued that the new policy was a graduate tax by another name, but to no avail. This demographic of younger voters will be vital to the party, and it fits well with its liberal-international outlook. It will hardly be easy to turn the corner and win them back, but at least Vince is tackling it head on.

Vince’s speech yesterday was quite remarkable in another way. We see a lot of dumbing-down in modern politics. This was evident in the deliberate obfuscations and lies in the campaign to leave the European Union (not really made better by claims that the Remain side were hardly better…), and above all by the triumph of Donald Trump in the United States. And yet Vince Cable persists in treating his audiences as if they are intelligent human beings. Surely the politics of misleading sound-bites, fake news stories and hyping victimhood must play itself out? Vince is betting that it will.

Still, the challenges for the Lib Dems remain huge. They need to rebuilt the party’s base in local government – but with a new membership who so far are showing little interest in such patient and painstaking politics. The party’s internal organisation remains weak, and it is not clear that the new leadership know how to address this. And, of course, the other political parties’ commanding position is based on the ruthless logic of Britain’s first past the post voting system.

I can offer sceptical observers no hard evidence that the Lib Dems can change their fortunes. But I do know that I will continue to work for it.

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Liberals must address the politics of information or sinister forces will prevail

In my last post I urged the Lib Dems to think beyond Brexit. I suggested that the party should develop radical new ideas on the politics of information and technology, following a recent essay by Paddy Ashdown. But that was all very abstract. What does this actually mean?

Information and technology are throwing up difficult issues that affect practically everything. And yet liberal politicians seem to be in various stages of denial – and that may let more sinister forces make the running. Let me touch on just four issues to illustrate my point: fighting crime; cyber security; making the NHS more efficient; and tackling the cyber monopolists.

According to popular myth, crime is always getting worse. Statistically that looks like nonsense (except cyber crime, which I will come to) – but the nature of threat is changing, and a lot of people worry about it. Top of the list is terrorism, and especially Islamic extremist terrorists. Increasingly police forces are using information technology to fight these crimes. And these largely depend on gathering banks of data (DNA profiles, mug shots, video camera footage, email records, and so on) in order to identify criminals and terrorists.  Liberals, fairly consistently push back. But it is far from clear that the public is against this banking of data. It looks like a good way of stopping the bad guys.

I am sure that the liberal position on this needs to be rethought. Society has changed, including attitudes to privacy, and old-fashioned techniques for fighting crime are losing effectiveness. But the threats of excessive state power are real enough. False positives happen, and that can lead to a quagmire of circular investigation procedures with nobody taking responsibility, and a potentially permanent stain on reputation, all for a completely random cause. Perhaps it is better to reform the management and oversight of security services so that false positives can be dismissed rapidly, rather than throwing sand into the wheels of justice? That’s a half-baked idea – but by simply pushing back and dismissing the danger, liberals are in danger of losing the argument. And if that happens the advocates of unchecked state control will win out.

Cyber crime is definitely growing, and we struggle even to recognise it. It seems to be invisible in the crime statistics. We don’t bother to report the attempts to defraud us that come to our email inboxes and telephones daily. Further, we depend increasingly on online databases, and yet there are sophisticated hackers out there who often get ahead of those charged with data security. Can we leave it to the market to keep up with the hackers and ensure our security? Or shouldn’t the state be more involved in establishing data standards that will make life much harder for criminals?  I hear no politicians, liberal or otherwise, who want to talk about this except the odd injunction that “somebody must do something”. But action for action’s sake will simply lead to regulators making life harder for the innocent while doing little to tackle the real criminals. And we can’t rely on state agencies to protect liberal values while dealing with the problem either – their solution is always to appropriate more arbitrary power to themselves. Liberals must get involved.

For a different angle, consider Britain’s National Health Service. The NHS is chronically inefficient. Large organisations are best dealing with simple problems; our health is infinitely complex. One aspect of this inefficiency is record-keeping. Our health records are fragmented, adding to medical risks and causing delays to treatment. And we can’t check whether patients are entitled to treatment without making everybody feel like foreigners in their own land. Technical solutions to this depend on creating a single central NHS file for everybody from birth. There have been attempts to develop this, but, quite apart from the difficulties that afflict all ambitious IT projects, there is a big problem. This central record will contain highly personal and confidential data. How on earth to stop it being stolen? If it is voluntary it will lose much of its power. We are back to the problem of hacking. Once again liberals shout about protecting privacy and individual choice without coming forward with constructive solutions. And the NHS is collapsing under the strain.

Another feature of the 21st Century world is the enormous power of a small group of businesses who are able to harness network effects to create a virtual monopoly. Google, Apple, Microsoft, Facebook and Amazon spring to mind immediately. Apart from Amazon, these businesses are starting to pile up enormous profits. And yet they are also innovative and constantly improving their offering – so unlike classic monopolies, especially state-owned ones. What should governments do? On the one hand excessive power is accumulating to people who are not properly accountable tot he public. On the other hand most types of intervention risk reducing the benefits of modern technology available to ordinary people. Liberals need a new angle on the problem.

And I could go on. Fake news; tax avoidance and evasion; automation and the destruction of stable, secure jobs for the majority. All these are 21st Century problems to which liberals have few new ideas. And there are opportunities too. Technology has the possibility to abolish poverty and allow everybody to achieve a more fulfilling life. It is very interesting that Germany’s Free Democrats (see the the FDP minimanifesto for the current general election) have chosen the more optimistic gloss. This party has rebranded itself, based on the idea that politics need to be rethought in the modern information age. Whether they are targeting the right things is another matter – to some it may simply look like re-badged neoliberalism. But keeping the message positive is probably the right tactic.

The liberal agenda should be an enabling one. We want people to benefit from the many things technology and information-sharing can offer. But we need to give individuals more control. And we need to prevent the state growing into something that suppresses freedom and democracy in the name of security – as is happening in China, Turkey and Russia, to name but three. Neither do we want the world turned into an open market for abuse and bullying, in the manner promoted by Breitbart News. Sinister forces will prevail unless liberals start to make the running.

This will need fresh thinking. Some newer technological developments – blockchains for example – may offer answers. But it will not be easy – there will be trade-offs. Privacy against security, for example. We need the intellectual framework to manage these trade-offs.

I will try to practice what I am preaching. I am not especially well-qualified to deal with the politics of information, but I will give it a try. I don’t know where this journey will end, but I hope to provoke further thought and discussion amongst my readers.

 

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The Lib Dems must look beyond Brexit towards 21st Century liberalism

Last week I wrote about the strategic cul-de-sac that Britain’s Conservatives find themselves in. I will write of Labour, whose strategic grasp is well ahead of all the other parties, later. But we are coming up to the Lib Dem annual conference. What of them?

Alas the Lib Dems seem no better at political strategy than anybody else. They (I could also write we, as I am a party activist) had some real momentum at the start of 2017, with the strange quiescence of Jeremy Cobyn’s Labour party. But the general election in June changed all that. The party organised itself around a clear message on the main issue of the day – Britain and the European Union – but to very little effect. While the party held up reasonably well against the Tories, it folded wherever it came under any pressure from Labour. Where I live, in Battersea, the Lib Dem message could have been tailor made to succeed, and yet it was Labour that reaped the reward of locals’ anger at the Tory Brexit strategy – they took the seat with a lightweight campaign and an unknown candidate. I did not receive a single piece of Labour literature.

But was the party’s weakness merely tactical? People who suggest this say that Labour made irreconcilable promises to different groups of voters and will be found out. And the party’s advocacy of a second referendum on Europe was simply an idea ahead of its time. As Brexit rage rises (and pretty much anything that goes wrong can be blamed on Brexit), the public will look again at the party’s consistent line on the matter.

For a different perspective read former leader Paddy Ashdown. This is a pair of articles (I link directly to the second) moaning about the lack of direction in the party. Paddy is not particularly coherent (he doesn’t pretend to be), but I do think he is on to something. Here is the penultimate paragraph:

I have concluded that all this is so, not because we have really lost our intellectual curiosity, but because of the dead hand of Brexit. I admit second place to no-one when it comes to fighting for the best Brexit we can, and preferably no Brexit at all. I am proud of our Party’s clear position on this defining issue. But is our obsession with Brexit in danger of distracting us from what kind of country we want Britain to be, whether in the EU or out of it? For me the heart of liberalism is our crusade for the empowered citizen, not the powerful state. This is a radical disruptive and insurgent idea. But where is it? When did you last – at Conference or outside it – hear us arguing that case, debating new ideas to make it happen or proselytising it before the court of public opinion?

Liberal Democrats are united by an open view of people and cultures, and a suspicion of nationalism and strong state power. These values point to sympathy with the European Union, if you view it as a restraint on state power rather than an extension of it. But the EU is a pragmatic solution to the problem of European states needing to cooperate more closely. It is not an ideology – or a new nationalism. While I do feel a certain pride in European identity, it developed long before the UK joined the union, and it is not a nationalistic pride, that seeks to diminish Americans, Russians or Chinese. Campaigning over EU membership is a tactic and not a strategy – and this is something that Labour, whether by accident or design, have grasped more clearly than either the Conservatives or the Lib Dems.

So what is the point of the Lib Dems strategically? Are the party’s values best promoted by a separate political party, or by factions within larger political groupings, i.e. the Conservatives, Labour or the SNP in Scotland? Few liberals can see a future in the Conservatives these days. One Lib Dem I knew who moved to them a couple of years ago has dropped out, unable to take the strain. I don’t know the SNP well enough to comment on them – they have tempered their nationalistic defining theme with inclusiveness. The real problem for Lib Dems is Labour – because that is where most political active liberals are now going, especially the younger ones.

The critical issue here is the question of state power. The point that unites almost all successful Labour politicians, from Tony Blair to Jeremy Corbyn, is that they view a centralised state, under democratic control, as the solution to most problems. This is one of the critical debates of our time. And liberals are not pulling their weight.

One the one side we have advocates of a strong state. The most important of these worldwide is the Chinese Communist Party – and they are picking up a substantial following throughout the world. Democracy is viewed with suspicion at best. On the other you have nationalists, who seek to create culturally homogeneous nations where individuals suffer minimal state interference – and the state’s main role is to keep the rest of the world at bay. Established political parties in the developed world, such as Britain’s Labour and the Lib Dems, belong to neither camp, but they are struggling to put forward a coherent alternative.

Paddy Ashdown does point towards the sort of places where liberals should be looking to develop a compelling vision for the 21st Century – centring on information and technology.  While I struggle to make sense of his “four dangerous ideas”, they are all attempts to push the debate on in this direction.

And there is an opportunity for the Lib Dems here. While Labour is picking up some of the 21st Century agenda (not least in the way it organises itself, especially its party-within-a-party Momentum), much of it either has a statist mindset, like the Chinese Communists, or harks back to the 20th Century and its swathe of secure jobs in manufacturing and administration.  I have not heard much from Labour on critical issues of privacy, ownership of data and ways that state power might be restrained.

If the Lib Dems can win the race to develop ideas for a 21st Century state that is truly liberal and democratic, then the party will have a clear purpose. But if all it does is bang on about Europe, it will, eventually, vanish.

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