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.

The Tories are agonising over Brexit. They should be more worried about housing.

The true test of leadership is strategic focus – trying to work their organisations into a favourable position over the long term, and then making tactical (short-term) choices accordingly. British politicians of all parties are very bad at this. Advisers who tout themselves as “political strategists” offer no more than tactical advice, on messaging or the use of social media, for example. Strategically the Conservatives have dug themselves into a hole. And I’m not talking about Brexit.

The current Tory predicament arises from their poor showing in June’s general election. This was despite what they thought was an unassailable tactical advantage – Labour appeared weak, and this was amply demonstrated in local election results. And yet that tactical strength covered a strategic weakness, which Labour was able to exploit. While Tories like to blame tactical ineptitude for their failure (and there was plenty on offer), those tactical failings were born of that strategic weakness.

What on earth am I talking about? The land, and who owns it – a theme that has dominated British politics for centuries. The Conservatives have a well-crafted appeal to people who own their own homes, and other assets too. This is what Mrs Thatcher grasped in the 1980s. She extended home ownership through the sale of council houses and loosening restrictions on mortgages. The latter had an important side-benefit: it pushed house prices up, and made home-owners feel wealthier, and more inclined to think that all was well with the world.

All Labour could do was copy the Tories. This Tony Blair did this brilliantly. But this was a triumph of tactics; Labour won three elections, but had nowhere to go after that. Collapse beckoned in 2015 as the party found that a vaguely left of centre appeal was neither fish nor foul. But, in 2017, the worm turned.

By now the scale of property prices has put ownership beyond the reach of most people who neither have property already, nor have an inheritance based on property wealth. There are two types of reason for this. First is that the building of houses where people want to live has not kept pace with demand. Politicians have guarded greenbelts ferociously, following the wishes of local electors. Little new social or public sector housing has been built. Commercial builders seem more anxious to profit from the purchase and sale of land than satisfy demand. Some economists look no further – but the ease with which people can borrow money must also have contributed. When I bought my first property in the 1980s, lenders restricted loans to 2.5 times salary and covered only 80% of the value. Restrictions are fewer now. Interest rates are also much lower. This has surely pushed prices up.

But whether or not you think that loose money or low house-building is the problem, there is an ever growing body of people who are forced to rent their homes, and are pessimistic about ever being able to buy them. The Conservatives, in the meantime, continue to lavish their attention on those who already own property. They were heading for a backlash, and this arrived in June. The Tories did especially badly in London and the South East, where property prices are highest.

Most Tories simply ignored this trend: David Cameron, their leader until last year, was especially bad at this. His only response was to try and subsidise first-time buyers, which just inflated property prices some more. He made no serious moves on social housing or on easing the lot of those forced to rent. But some Conservatives seem to have recognised the issue. One person who seemed to was George Osborne, Mr Cameron’s Chancellor of the Exchequer. His answer was to to see if he could stoke up property prices outside the south east, by strengthening the economy of north England in particular.

Mr Cameron’s successor, Theresa May, also has a sense of the problem. She proved stern on inherited wealth, and on tax-funded handouts to older people during the election. Whatever the strategic virtues of this, she made no attempt to woo younger voters with any real hope that she was on their side. She was simply attacking the Tory base. Meanwhile she has diluted Mr Osborne’s “Northern Powerhouse” strategy. It was an attempt to cover the party’s strategic weakness that led to the tactical error in the Conservative manifesto.

Meanwhile, Labour’s more stridently left wing appeal under Jeremy Corbyn has turned out to be a good place from which to woo those forced to rent. Tory attacks on Labour were designed to motivate older voters, who have bad memories of left-wing politics – and they have passed younger voters by.

It will not be easy for the Conservatives to dig themselves out of this hole. They have started to grasp that more house building is needed, and that they can’t rely on private sector developers to accomplish this. But there is a problem. If houses are to become more affordable, then house prices will have to come down. The alternative prospect, of strong wage inflation alongside stable house prices looks implausible. But falling property prices will hurt their base, for whom the value of their property is a cornerstone of their wellbeing. This looks fatal – though if the party can find a way of boosting regional economies and drawing growth away from the south east, the evil day will be postponed.

It is much easier for Labour to take on what the country actually needs: more building of houses. The public sector will have to do the heavy lifting here – anathema to Tories. A large chunk of this new housing should surely be social housing, directly alleviating the worst social pressures. But public sector housing doesn’t have to be social housing – the government could take on strategic projects the private sector is unwilling to – and perhaps address builders’ abysmal productivity while they are at it. If it works, such building will reduce rents, and then the capital value of land.

At the moment most political commentary centres on Brexit, and the pressures this is creating within both major parties. That is important enough – but housing may turn out to be more important still in the long run.

The most important Brexit negotiation will be amongst the British people

There is very little decent media coverage of Brexit here in Britain. Mainly it is two groups of opinionated people trying to annoy each other, or at least to keep up their own side’s annoyance levels with the other side. Actually I have more time for the British negotiating effort than most Remainers, and more optimism that something sensible will emerge in the immediate aftermath. But Britain’s long-term destination remains unclear. And that is only right in the circumstances.

Right from the start I predicted that the key would be a transitional arrangement whereby elements of the Single Market and the Customs Union (not the same thing) would continue for long after the formal exit date of 29 March 2019. The British government is inching towards this conclusion, as a series of position papers published over the summer makes clear. Over the weekend Labour backed this idea too. The logic is overwhelming.

The British way is often said to favour gradual evolution over revolution. British democracy emerged step by step, without a revolution like France or Russia. Britain’s engagement with the European Union was similarly gradual. So gradual, in fact, that many Britons did not realise how much they had become attached to it until the Brexit referendum was lost. Of course this is exactly what opponents of Britain’s participation had predicted all along – the takeover would be incremental until a federal United States of Europe emerged by stealth. It follows that Britain’s disengagement is going to need to be equally gradual – or else we will have that destructive chaos that revolutions bring with them. The more so as there is no consensus vision on what a disengaged Britain should look like. Democracy takes time.

If Britons are coming to appreciate this, the other EU governments, and EU institutions, are being inscrutable. They insist that the arrangements for separation must be agreed before the terms of any future relationship are even discussed. The British government’s position papers were an attempt to get the conversation about the medium-term moving in spite of this arbitrary approach. They may well have succeeded. EU leaders may dismiss these position papers, and in some cases deride them – but the agenda has moved on. That was all that was intended.

The EU side will never admit it, but this is because logic is overwhelmingly with the British government on this. The exit negotiations are focusing on three critical subjects: financial obligations, EU citizens living in the UK, and the Northern Ireland border. In each of these Britain’s future relationship has an important bearing. This is most obvious in the case of Northern Ireland. This depends heavily on on future customs and migration arrangements. But the rights of EU citizens are tangled with the issue of the future role of the European Court of Justice and future arbitration arrangements. And even the financial obligations (the so-called “divorce bill”) can be finessed if some parts of British membership effectively continue beyond March 2019, along with the sort of financial contributions made by Norway and Switzerland for access to the EU market. The EU negotiators will be forced to talk about these things.

The EU needs a deal on Brexit for at least two reasons. First is that commercial disruption could threaten jobs within member states – thought the Brexiteer claim that the other EU countries need Britain more than the other way round is nonsense. Second is the situation of EU citizens who are living in Britain, and the status of Britons living in other EU countries. A legal limbo would be a major headache for everybody. On the other hand the EU governments do not want Britain to continue with all the rights of EU membership and not the obligations. That will make them wary of a transitional deal. But given the precedents set by Norway (in the Single Market and European Economic area), Switzerland (who have similar rights based on a number of separate agreements) and Turkey (in the Customs Union but not the Single Market), it should not be hard to finesse this. Indeed people may ask what the point of Brexit was, and that will suit the EU governments – in fact the point of Brexit, if there is one, will take time to emerge.

And meanwhile Britain must slowly decide what it actually wants. There are three main competing visions, which I will name after their role models: Singapore, Switzerland and Japan.

The Singapore idea is favoured by quite a few of the Brexit-supporting elite – those businessmen who came out in favour of Brexit, supported by a number Conservative MPs, and one or two theoretical economists, like Patrick Minford. This is that Britain becomes a global trading entrepot, with a regulatory light touch, and a strong national focus on competitiveness and low taxes. But this is a fantasy, partly because of Britain’s physical location and industrial hinterland – but mainly because there is no sign of democratic consent for this way forward. It would require an authoritarian state to implement (as it does in Singapore, after all) – and Britons do not like being dictated too – as the Brexit referendum showed very clearly.

Much of the rest of Britain’s elite favour something of a Swiss solution. This combines a strong tradition of independence and democracy with a free trading relationship with the Union, established on an issue by issue basis, and not by a bulk package arrangement like the EEA. The relationship between Switzerland and the EU is not a smooth one, but by and large it works, and Switzerland prospers. But the Swiss do have to abide a whole raft of EU rules, not least over freedom of movement. It would also be a platform from which the UK may re-enter the EU in future – which is why so many Leave supporters dislike it. Personally, this is what I favour.

But most British voters who supported Brexit probably have something in mind that is much more Japanese, as do many Conservatives, probably including the Prime Minister, Theresa May. Japan is fiercely independent and conservative in its outlook. It maintains a strong separation from the countries on its neighbouring continent – China and Korea, in particular, with whom it has tense relations (though Japanese imperial expansion in the 20th Century accounts for much of that). Controls over inward migration are tight, even in the face of challenging demographics, and social cohesion is highly prized. Multiculturalism is not an idea that they take to. Governing institutions are paternalistic, and democracy is flawed, though not as badly as in Singapore. The Japanese may grumble at this, but not enough to change the system. How very British.

Britain is not Japan, and any Japanese path will have to have some very British characteristics. The first is that Britons may grumble about it, but the country has a strong multicultural dimension. This is a legacy of its Empire, much more than the EU. There is no turning back – but immigration can be slowed, and assimilation of minorities might be more muscular – though this will hardly lead to community cohesion. A further issue is economic. Japan has built up national powerhouses of manufacturing industry, notably in cars and electronics. They have levered their way into export surpluses, notwithstanding reluctant attitudes to free trade. This is a very different approach to Britain’s, which has an open economy, even by European standards. Our manufacturing powerhouses have been sold off or run business models that are so globally integrated that the companies can hardly be called British (consider British Aerospace, at once part of European Airbus and trying to persuade the US armed forces that it is really American). Building something more closed and self-sufficient, in the style of Japan, will be slow and painful. Most people would not give much for Britain’s chances – but with technology rapidly changing the way economies work, that may be excessively pessimistic – in the long run anyway.

So should Britain continue to be a part of an integrated European economy, albeit keeping more of it at arms length than now? Or should Britain stand alone and focus more on social cohesion? In London we, by and large, favour the former. In many other parts of England, and Wales, there is strong preference for the latter. That is what we will have to negotiate amongst ourselves, piece by piece. It will be a long journey. Britain’s negotiation with the EU on Brexit is but a small part of it – and its main purpose is to buy us more time.

Universal Basic Income is a problem dressed as a solution

Slowly but surely Universal Basic Income (UBI) is becoming a totem policy on the left. Longer standing readers of this blog will know that I am sceptic. But should I be reluctantly reconciling myself to the idea in some form?

Recent impetus for UBI has come from the US, where it is favoured by high tech businessmen worried about the implications of progressive automation. They worry that there is a great hollowing out going on, with mid-skilled jobs disappearing, and the workforce being divided between a very well paid elite of professionals and business owners, and a majority of low skilled proletariat in ill paid and insecure jobs. If the latter can have their income topped up by some form of UBI, then they will be able to afford a higher standard of living, and they will be less beholden to the elite. Many businessmen think that the latest advances in artificial intelligence are about to make the problem much worse – hence the need for such an intervention.

The left is worried by similar issues. The more thoughtful are concerned by a breakdown of consent for the welfare state, where state aid is doled out based on need. If everybody is entitled to the same level of state aid (with allowances for age and disability, perhaps), then there will be less resentment by the slightly better off members of the working class against those receiving aid. Since the left is generally bereft of ideas that are not simply reinventing the 1970s, this one is getting a lot of support. The Green Party in Britain has adopted it; many in Labour (and the Lib Dems) are sympathetic.

Various small-scale pilots are being set up in America and Europe. In fact something like it has been in operation in various places in the US for some time. Alaska pays all its citizens a dividend from its natural resources wealth (the Alaska Permanent Fund). The amount is modest and variable: since 2010 it has ranged from $878 to $2,072 a year – but it is popular. Meanwhile a number of Native American reserves pay a fixed income from gambling concessions. The social effects of this are not so benign, which is no doubt why so few UBI never mention them. The money does not make up for a lack of decent jobs and social infrastructure, and the money is spent on things that do not engender long-term well-being, though enriching unscrupulous salesmen.

One thing should be very clear from any but the most superficial analysis. If the level of UBI is to be set high enough to deal with basic human needs, so that it can replace the bulk of state benefits, then taxation will have to be unfeasibly high. So high that instead of fostering consent it is just as likely to breed resentment as the current system, and a massive drive by businesses and rich people to smuggle their profits abroad to evade payment. That is before recipients of UBI start complaining that the system is unfair because their circumstances (living in a high-cost area, educational needs, health problems, disabilities) create greater need. The idea that UBI can replace a whole series of benefits with a massively simplified system is for the birds. I also think such a system would lead to alienation which would exacerbate social ills. Alienation results unless people are engaged in genuine dialogue resulting in some form of contract; the idea behind UBI is to reduce the need for dialogue and contract.

If UBI-max – the replacement of most state benefits -is ruled out, what we are left with is much more modest. It might replace the personal tax allowance and extend it to those who aren’t working, and re-badge the basic state pension, removing it from the contributory principle (something that the Coalition advanced in the UK in 2010 to 2015). This would effect a modest level of redistribution and ease life slightly for some groups of hard-pressed. No doubt it would mean higher taxes, though some benefits might be clipped to help pay for it. I’m not sure that this is worth it – and it is hardly very radical. The tax free allowance is only worth a couple of thousand pounds a year.

But there is another approach that is worth mentioning – suggested by the former Greek Finance Minister Yanis Varoufakis. This goes back to the Alaska Permanent Fund. The state acquires stakes in major businesses, and especially the big monopolistic businesses that are increasingly dominating our daily lives. A dividend would be distributed annually from the income generated by this fund. Over time this fund would grow and start to produce respectable sums.

Mr Varoufakis is a socialist; the idea of states taking over chunks of privately held capital will not bother him. Others might be nervous; the state has not proved to be an effective shareholder on the whole, the less so the more management is politicised. It might also create public acquiescence with monopoly profits, compared to more efficient models. But it is an intriguing idea. It does go to the heart of the problem – the excessive accumulation of capital in the hands of relatively few people, and its control by corporations that funnel disproportionate rewards to a few. It also starts to tackle another often-overlooked problem: how hard it is for people on modest incomes to accumulate savings without them being eaten up by transaction costs. This is why so many private sector pension plans are so ineffective, and why a state-funded basic pension is such a good idea.

How would the state fund its capital acquisitions? There are broadly three ways: appropriation, taxation or borrowing. Appropriation is simply tax by another name – maybe businesses could be forced to offer shares to the state instead of corporation tax; and by the same process a minimum distribution might also be forced. There a couple of problems with this, though. First of all it would confine the fund to domestic assets, when so much of the surplus capital is held by international businesses. Second, businesses come in all sorts of legal structures, some of which are more conducive to income distribution than others. Any attempt to appropriate shares could cause businesses to evade by changing legal structures.

But a sovereign wealth fund funded by taxation or borrowing gets around the need for direct appropriation. The problem is that it would take an awful lot of money before it reached a size that it could generate an income that the public would notice. Take the UK. One thousand pounds for 60 million people is £60 billion. At a 2% yield that is £3 trillion capital value – getting on for twice the level of the national debt. Even a New Monetarist might that feel state borrowing on this level carries risks. Of course the idea is that capital growth will help to fund this over time, and if built up slowly, it would be easier to accommodate – but cash distributions would also be tiny for a long time.

All this leaves me thinking that UBI is a symptom of the problem, and not the solution. The world is becoming too dominated by big institutions, such as companies like Google or governments and state agencies. These try to simplify processes in order to make them manageable – and this leads to excessive accumulation of power by elites, in government and business – and the alienation of the majority. UBI is just another simplified solution designed to fit this general pattern. It is advocated by people that support such one-size-fits-all approaches – be the monopolist businessmen or advocates of a mighty central state (such as socialists) .What we actually have to do is tackle those excessive concentrations of power. And that is much harder.

Neoliberalism’s three blind spots and how we move on

In my last proper post I examined the idea of neoliberalism, a set of ideas that is at the heart of modern economic policy. I concluded by saying that most people think it has failed. But how can we move on?

The first point to make is that the two central insights of neoliberalism seem as valid as ever. The first is that markets provide the best way of processing information on complex human needs and how to meet them – and they do this far better than bureaucracy. The second is that governments and regulators are beset by dysfunctional incentives – and tend to serve the interests of elites and client groups, rather than the people as a whole.

This is the starting point for those that continue to defend the philosophy, though rarely by that name. They suggest that the problems that have arisen since the 1990s have much more to do with the advance of technology and globalisation than anything else. This is a rather pessimistic view. It suggests that society in the 1990s was faced with the choice of embracing technological change, with the benefits to health and wellbeing that resulted, or a futile attempt to keep change at bay for the sake of social stability. It is hard to think of any society that has successfully followed the latter path. The collapse of blue-collar and white-collar middle-income jobs was pretty much inevitable. And countries that seem to be more successful in embracing this change, like Germany, have done so by adopting policies that have undermined their global neighbours’ attempts to do the same thing. Germany preserves swathes of middle-ranking jobs only by exporting large quantities of manufactured goods to other countries compared to what it imports. By this pessimistic view, the world is being swept forward by technological change and governing elites are powerless to stop it. We may be alarmed at the political backlash, but any new leadership that this sweeps into power will most likely make things worse than better.

There is doubtless some truth to this. It is very striking how the political backlash seems bereft of new economic thinking. The right wants to create higher national boundaries and limit free trade between countries. This thinking recalls policies that deepened and prolonged the Great Depression in the 1930s. The left wants to expand state control. The Labour manifesto in Britain in the recent general election recalls to me the failed development policies in places like India in the 1950s and 1960s before a turn to neoliberalism unleashed massive growth. That isn’t entirely fair, of course, as both left and right also indulge in some new thinking. But it is really quite worrying that the only new idea on the left that has any currency is universal basic income – an idea that has no chance of meeting the huge expectations being placed on it.

But there are clear problems with neoliberal thinking. I think the three key blindspots are capital markets, Baumol’s disease and human organisational capacity. Add these together and you get pointers to what a post-neoliberal economic philosophy might look like.

First: capital markets. Hayek’s insights on the efficiency of markets does not to apply to assets, as distinct from goods and services. The market value of assets does not reflect their future economic worth. Bubbles build and burst, creating ruin in their wake. The problem is as old as the capital markets themselves – but that does not stop these markets from causing society’s resources from being allocated inefficiently. Another problem is that asset price inflation reinforces a gap between the haves and have-nots, and, in Britain, between the young and the old. Neoliberals (like the Economist newspaper) often say that the sky-high prices of land in popular cities simply reflect the laws of supply and demand, and that we should build more homes where people want to live. Whatever the truth of this, it is surely clear that excessive levels of personal debt are a large part of the problem – as well as the issue of human organisational capacity that I will come to. This causes the prices at which supply and demand balance to be much higher than they would be otherwise.

To cut a long story short, modern developed economies (especially the Anglo-Saxon ones) place far too much reliance on private debt, and this leads to instability and inequality. The risks associated with state debt, by comparison, look easier to manage. One leg of the neoliberal system of economic management, monetary policy, is broken.

The second issue is what economists call Baumol’s disease. This idea has been in circulation for decades, and is taught to economics undergraduates. It is amazing how little its implications seem to be understood. Baumol pointed out that as productive sectors of the economy develop in efficiency, the less productive sectors bulk up in proportion. Agriculture used to account for the bulk of the British economy; but as it became more efficient it eventually sunk to a small fraction of it. The same is now happening to manufacturing. As we become more efficient the bulk of jobs will be in sectors where high productivity is impossible or undesirable. And in the current situation they will increasingly be in sectors where market solutions have been found wanting. These include healthcare, education and law enforcement. These sectors are dominated by government and the public sector. We must expect the public sector to grow, and we must learn how to manage this, rather than trying to push the boundaries of the state back.

My third issue is what I have rather clumsily called human organisational capacity. The human brain can only handle a limited number of connections efficiently. And humans are at the centre of human organisations. Artificial intelligence won’t change that; it will simple extend the reach of what individual humans can do. This human capacity sets limits to the size and scope of human organisations. Organisations that grow eventually face a stark choice. They either become staggeringly inefficient, or their operating systems have to be very lean, requiring few people to operate them. Commercial organisations are forced into the latter category by competition. Dealing with a large corporation now, like Google, Amazon or PayPal is extremely frustrating for ordinary human beings, unless you manage to stick to the automated procedures that they prescribe – which are unable to handle any degree of complexity. Modern technology is allowing these commercial organisations to extend their reach by cherry-picking things that are simple to deal with, and leaving behind the difficult ones. This is creating a hollowing-out effect that is one of the big drivers of inequality.

Governments, meanwhile, are left to pick up the pieces. But they are subject to similar limitations. They have to choose between monstrous inefficiency or simplification. As tight finances force them into the latter course, power accretes to an elite in geographically concentrated centres of power. Neoliberals tend to shrug at this, and simply say that this is price we pay for a more efficient society. But I think it points in a different direction: to towards the decentralisation of political power, and the development of local democracy. One country has taken this idea further than any other: Switzerland. But if you go there you do not find grinding poverty as people are forced to choose between local control and drawing the benefits of modern society. You find one of the most prosperous societies in the world, with economic activity geographically spread out. One key thing to note: the Swiss have not just found ways to devolve political power to relatively small units, but they have also found ways to involve their citizens in taking responsibility for the society that they live in.

All this raises many, many questions. But the overall direction of travel is clear. We need to expand the scope of the public sphere (I am being careful not to use the word “state”), but also to shrink it geographically and allow people to take more ownership of it. Markets are useful, but we need democracy too.

Vince Cable and economics – what he says in Newswire

No time for a proper post from me this week. But I was intrigued by an article in Mark Pack’s Newswire (a Lib Dem newsletter), with an extensive quote from Vince Cable.

This shows how hard he is to pin down into conventional categories of economic thinking. But that’s for the best possible reason – he has studied and thought about the issues for a long time, and observed economic policy in practice in many different situations.

Here it is:

The roots of Vince Cable’s political beliefs

Placing Vince Cable on the left-right political spectrum never quite works because he combines both a passion for intervention to deal with market failures with a suspicion of the failings of big government. The roots of that combination are well illustrated in his excellent memoirs, Free Radical. They highlight how his work on development issues in Africa helped give him both those passions – seeing both the need for action and the consequences of government failure. Writing here exclusively for Lib Dem Newswire, Vince Cable sets out the roots of his political views in more detail.

My earliest political views were a reaction to the extremes I encountered growing up. My father was an upwardly mobile, working class, Tory who sought to inculcate some good values (hard work, thrift, respect for the law) and some bad ones (racism, which split the family when I married an East African Asian, my late wife Olympia). He died after contracting pneumonia delivering leaflets for Mrs Thatcher in the snow. My mother secretly voted Liberal, defying his instructions to vote Tory.

My best teenage friend was a card-carrying Communist like his father, a shop steward at York carriage works. His revolutionary zeal got him expelled from college, allegedly for arson. He tried to re-educate me in sound ideological principles but concluded that I was a ‘bourgeois liberal’ with Menshevik tendencies.

When I went to university I sampled both the Liberals, becoming their President, and also a student branch of the social democratic wing of the Labour party. Sensing that they were saying the same thing but using different language, I tried to achieve a merger. Both sides were outraged and the merger collapsed ignominiously, 20 years ahead of its time. I joined Labour, beguiled by Harold Wilson’s white-hot technological revolution.

As a young economist, educated by the disciples of Keynes, I was then exposed to real world economics as a Treasury official in Kenya. Experience of African development quickly taught me that textbook ideas of ‘planning’ – or Keynes for that matter – had little relevance. The state was usually a vehicle for predation and patronage. Wealth was created by farmers, especially by entrepreneurial African small-holders; by mainly Asian businessmen; and by professionally run multinationals. And then looted by politicians and civil servants

I moved on to Latin America where the fashionable nationalistic ideology of ‘self-reliance’ merely entrenched vested interests and reinforced extreme and often appalling inequalities. Much of my development writing would now be described as ‘neo-liberal’ but I think is right in that context.

The country which most influenced my thinking was India which I have visited many times over 50 years for family and professional reasons. I have seen India’s remarkable transformation, much of it based on the adage that ‘the economy grows at night, when the government goes to sleep’. I have always been torn between torn between my admiration for India’s democratic and dynamic ‘anarchy that works’ and my admiration for the technocratic revolution in modern China which has produced an economic, poverty reducing, miracle, albeit seriously illiberal.

Between the travelling I got involved in British politics and became a Labour councillor, helping to run Glasgow. The establishment was pure Tammany Hall, so I moved to the Left where the idealistic and capable people were. I marched proudly down Sauchiehall Street alongside the charismatic Communist leader of the shipyard workers, Jimmy Reid and Tony Benn, and contributed to Gordon Brown’s Red Papers on Scotland.

I led a somewhat schizophrenic existence teaching students Adam Smith’s economics in the morning and practising municipal socialism in the afternoon. I found a more comfortable place campaigning for Britain to join the EU alongside Labour figures like John Smith, for whom I later worked as a Special Adviser, and Liberals like David Steel.

My Fabian, centre-left, eclectic, version of social democracy didn’t long survive a move to London where the Militant Tendency and assorted Trots, including today’s leadership, were in control of the Labour Party. In the civil war which followed, I joined the SDP, albeit after some heart-searching, unsuccessfully contesting my home town of York in the 1983, and then the dispiriting 1987, election.

In the long period in the political wilderness before becoming MP in Twickenham I had two other formative political experiences. One was spending several years working on global environmental issues in the late 1980’s: helping to write the Brundtland Report on Sustainable Development and then one of the first intergovernmental reports on climate change. The other was when Shell recruited me into their long-term scenario planning team, later to be Chief Economist. I found the management culture admirably professional and honest, albeit conservative, and I like to think I helped to steer them towards a future in emerging economies and to a greater sense of social and environmental responsibility.

For the rest, my record as a Lib Dem MP after 1997 is reasonably well known. As an economic spokesman, my approach initially reflected the social liberal consensus of the time. The financial crisis changed everything. My intellectually eclectic background in economics helped me to see ahead and better understand the nature of the crisis, to write coherently about it – in The Storm – and to advocate correct but controversial measures like nationalisation of the banks and the taxation of property wealth.

The Coalition was a classic head-heart dilemma. My head told me that joining the Coalition was right and that we had no alternative but to address the massive budget deficit which was the legacy of a crisis of financial capitalism. My heart was definitely not with the Tories. But I found a useful role as an interventionist Business Secretary promoting industrial strategy and state-led banking, German-style innovation and training policies and applying a pragmatic, problem solving, approach to government. In a sequel to The Storm – After the Storm – I set out where I think we should be going as a country, now, in terms of economic policy.

There is one more important strand in my approach to politics. I have long been interested in, and worried about, the politics of identity. Bringing up a multiracial family and fighting racism; experience of the tangled web of religious sectarianism and incipient nationalism in the west of Scotland; immersed for over 50 years in the movement to anchor Britain in Europe: these have been major, often dominant, concerns. I wrote the first of two pamphlets for Demos in the mid-1990’s on identity politics and have seen its growing influence, culminating in the Brexit vote.

My first venture into fiction, the novel Open Arms – due out in a few weeks – involves the interplay of identity politics and personal relationships. And in the real world, I anticipate that the future of the UK and our party will be determined by whether national identity or a broader, more outward-looking, more European, view of the world dominate politics.

The rise and fall of neoliberalsim

The left loves to frame politics in terms of abstract nouns. And as is the human way, they are happier talking about what they are against rather than what they are for. Two abstract nouns in particular are top of the left’s hate list: “austerity” and “neoliberalism”. For the left’s challengers, it is usually best ignore this war on the abstract. It convinces few, after all – the left is much more effective when it campaigns on the concrete: food banks and bedroom tax, for example. Yet abstract ideas have their place, and it is worth exploring them more deeply sometimes. Austerity I will leave for now; I want to look a little more deeply at neoliberalism.

To most on the left “neoliberalism” is a scattergun term to brand all right and centre economic thinking that prevailed from the 1980s, after the collapse in confidence in the system known as “Keynesianism”, though Maynard Keynes would have disapproved of much of it. But if we are to understand what was actually going on we need to distinguish it from neoclassical economics, which was an important strand of thinking in this period. As its name suggests, neoclassical thinking harks back to classical economics, that evolved in the late 19th and early 20th century, before Maynard Keynes revolutionised economic thinking. This saw economies as self-correcting systems that did not need state interventions. At any point an economy is in an equilibrium, and any attempt to shift it would be self-defeating. Attempts to kick against this system would simply lead to such ills as inflation and unemployment.

Keynesianism fell out of favour in the stagflation of the 1970s, following the collapse of the Bretton Woods system of managed exchange rates and the an explosion in the price of oil. Some economists used this to go back to classical ideas, saying that Keynesianism was a big mistake. In America these economists were often based in Chicago and the Midwest – and were known as “freshwater” economists in contrast to the “saltwater” sort on the American east and west coasts. They turned to the idea of “real business cycles”, which proposes that the fluctuations from boom to recession are driven by changes to the “real” economy in equilibrium – and not a process of disequilibrium, as Keynes had suggested. So, for example, in pre-industrial societies the cycle might reflect the effect of weather and plague. In the modern age economists call this changes to technology. The true heroes of a neoclassical economy are the entrepreneurs who advance the productivity that make us all wealthier – the American author Ayn Rand was something of a hero. The state and taxes were loathed.

In spite of some rather superficial empirical studies which provided some evidence to support it, real business cycle theory is almost self-evident nonsense. Modern economies are almost never in equilibrium; state interventions are frequently helpful. Neoclassicism kept going because it was politically convenient to a certain class of wealthy American, who funded supportive institutions – and it was, and remains, politically influential amongst US Republicans. It lost all credibility to everybody else in the aftermath of the financial crash of 2008-2009, when the neoclassicists had nothing helpful to say. It was also clear by then that their advice in such places as Russia (post the fall of communism) and Iraq (post the US invasion) had been disastrous – they had advised the Republican US government to stand back and let things take their course – it was the economic wing of neoconservatism. Still, almost no idea is completely without merit. Technology has important implications for the workings of macroeconomics, and yet it is almost universally ignored by macroeconomists, who think that the economy worked much the same way in 1900, 1950 and 2000, and that all changes are explained by decisions in fiscal and monetary policy. In fact if you want to understand why Keynesianism worked so well in the 1950s and so badly in the 1970s, technology provides the most convincing explanation.

So, what is neoliberalism? It is an altogether more subtle economic analysis that sought to built on the insights of Maynard Keynes rather than throw them out. Indeed their ideas evolved into something referred to as “neokeynesianism”. At its heart are two ideas. First is that markets function as processors of information, and are the most efficient way that information about supply and demand can communicate and coordinate in our highly complex society. This is an idea developed by the Austrian economist (and sparring partner of Keynes) Friedrich Hayek, and who is the patron saint of neoliberalism (and much more pragmatic than his leftist critics pain him – he formed a common front with Keynes during the war). The second is that the incentives of people who manage institutions that are not subject to market forces, such as regulators and governments, are generally not aligned to the public good. These insights lead to the conclusion that even well intentioned state interventions often do more harm than good – and that it is best to try and design such interventions so that they work closely with market forces, aligning incentives and making better use of information.

Neoliberals sought to repair the tattered state of the Keynesian conventional wisdom with the idea of “equilibrium unemployment” – a state of the economy at which any increase in demand would simply lead to inflation – with the insight that the level of this equilibrium could be much higher than what was conventionally regarded as full employment. It depended on the state of labour markets and technology – best addressed through “supply-side” policies, which often meant deregulation. In the 1970s, they said, the trouble arose from over-managed labour markets (the effect on trade unions in particular) and technological disruption (especially the relative rise of energy prices) that rendered much of the industrial economy obsolete.

In terms of economic management, neoliberals liked free capital markets, including floating exchange rates (in contrast to Keynes’s preference for managed international capital flows, exemplified by the Bretton Woods system). They disliked the use of fiscal policy (i.e. the deliberate management of government budgets to regulate deficiencies in demand), as it was rendered useless by misaligned incentives – there would be a tendency to let booms run too long. They did like the idea of “automatic stabilisers”, being tax and benefit policies that tended to increase or reduce demand according to the state of the business cycle – and as such accepted a large state sector – unlike the neoclassicists. Instead they preferred to regulate demand through government intervention in interest rates, delegated to arms-length central banks (an idea which neoclassicists hated, incidentally – they want to leave interest rates to the market). Like their Keynesian predecessors, they thought that inflation was the critical sign of whether or not supply and demand in an economy were in balance – though they developed the idea that inflation could be built on expectations, as well as simply mis-matched supply and demand (i.e. if people expected inflation to be high, they would demand extra wages, turning this into a self-fulfilling prophecy). For all their scepticism of government, they still saw it as playing a central role in the management of the economy – and searched for optimal levels and designs of intervention.

Neo-liberalism became the conventional economic wisdom in the 1990s, all the way through to the great financial crash. This period saw an unprecedented advance in living standards across our globe. So why do most people think it has failed? Because the picture in developed economies in that period is much more mixed. In the US in particular, the economic gains have been concentrated amongst the wealthy, with large companies amassing unprecedented levels of profit. The destruction of many industries through technological obsolescence and globalisation left a huge legacy in ruined lives and failing local communities. And finally there was the crash itself, which most neoliberals had failed to see coming and to head off – and whose fall-out they proved ill-equipped to deal with.

And yet. The main advance in human well-being in the neoliberal ascendancy came in the developing world – and the adoption of neoliberal insights was clearly responsible for this – in China, India, and many other countries. And the failure of attempts to defy neoliberalism, in France under Francois Hollande and, more dramatically, by the Kirchners in Argentina, has led to local revivals of neoliberal ideas. Something has clearly gone wrong, but is the whole system really rubbish?

I will examine that question in a future post.

Can Vince Cable broaden the Lib Dems appeal?

Last week Vince Cable was elected unopposed as leader of the Liberal Democrats, following Tim Farron’s resignation. This is not a situation many Lib Dems expected to be in a month or so ago. I don’t think I would have voted for him if the selection had been contested. Yet I dare to hope.

Let’s start with my reservations. The first is his age at 74. This is the least serious. Age has different effects on all of us, and Vince has clearly been looking after himself, physically and mentally. He will have bitter memories of 2007, when he was advised not to run for the leadership vacated by Ming Campbell, who was only slightly older. Ming was widely bullied for being too old – I remember some vicious cartoons. And yet the reasons for his failure were clearly something else – age was just a convenient proxy, reflecting the prejudices of the time. By picking the relatively youthful Nick Clegg, it is far from clear that the party was better off. Meanwhile there have been a number of successful older politicians – including Jeremy Corbyn and Donald Trump. Age does mean that Vince’s tenure is likely to be less than a decade. But that may not be a bad thing.

My next reservation is more serious. It is that Vince is not known for grassroots campaigning. His constituency organisation in his Twickenham seat was notoriously weak between elections – and that ultimately lost him his seat in 2015. In the jargon, Vince is a man of the air war, not the ground war. That is a worry because the Lib Dems weakness in ground organisation is one of the bigger issues that the party has to face. Tim Farron, by contrast, was much stronger on the ground activity. But am I worrying too much? Vince’s constituency campaign this year was one of the better organised – and the result was spectacular. Tim came within a hair’s breadth of losing his seat, which had been the “safest” in the country (there’s no such thing as a safe Lib Dem seat). For all Tim’s enthusiasm for grassroots campaigning, he did not strike me as a gifted organiser. We may be no worse off.

And finally there is policy. I have advocated fresh thinking on economic policy for the party, in particular to unlock under-used potential in poorer areas. I am also deeply suspicious of monetary policy as a method of managing aggregate demand. Vince is much more of a traditional economist – he seems more interested in using neoliberal ideas more effectively than looking for the next revolution in economic thinkin. Again, I am probably making too much of this. He has a lot of common sense, and does not strike me as a man that pushes policies that aren’t working because he thinks they work in theory. And innovation needs to be small-scale at first if it is to win public confidence.

Against my reservations, though, I am finding quite a lot to like. He is very impressive when being interviewed on the radio. He answers the questions being asked, and confidently, displaying a great deal of expertise and honesty. He has enormous credibility, built up over many years – not least his five years as a senior cabinet minister. He can overdo the honesty and get himself into trouble – but this is a net benefit. Former London Mayors Ken Livingstone and Boris Johnson have learnt to pull this trick – being a bit too honest – off very successfully (though Mr Johnson’s shine has now worn off), as has the Labour leader Jeremy Corbyn. When it works it is a priceless gift. Vince has much more impact on the media scene than did Tim Farron. He makes headlines effortlessly – and not by making gaffes.

And Vince’s evident experience and expertise puts him ahead of almost every other front bench politician in the country – especially since Labour have been forced to promote inexperienced MPs into front line roles. This makes the Lib Dems look like a player in the grown-up game of politics, which hasn’t been the case since the party’s catastrophic defeat at the 2015 general election. Especially since there is now a back up team of experienced politicians in Norman Lamb, Ed Davey and Jo Swinson. This is important, because if the major parties do start to break up under the pressure of divisions over Brexit, the Lib Dems are starting to look like a credible alternative for refugees – or at least a vital alliance partner for any new grouping.

So that is why I dare to hope. But meanwhile the party is very weak. Many of the sixty or so parliamentary seats where the party used to be in close contention now look gone for good. It is not clear how the party is to replace them with new ones. The party might have some success in tapping angry Conservatives, but it is remains pretty hopeless against Labour in the pitch for younger voters. I am seeing quite a lot of manufactured kerfuffle about how Labour is supposedly breaking promises on student debt. Any Lib Dem who thinks that the party is going to make traction with that line of attack should think again. It’s best hope against Labour remains its firm position against Brexit – but as yet Labour remains coated with Teflon on the topic.

Recently I read an article in the Guardian by Deborah Orr that lambasted the party as a waste of time. What is striking is that this liberal, well-informed journalist only ever thought the party stood for electoral reform – and so the party’s failure on that in coalition leads her to claim that it “lost all it stood for”. That shows how much work the party has to do. Most people think that the party stands for very little – they associate it with a single policy, like electoral reform, or, before 2010, free university tuition. When the party fails to deliver on this policy, it is reduced to emptiness in their eyes and it has start all over again. Meanwhile the Conservatives and Labour can chop and change policies at will, because they are seen to stand for something much broader. At the moment the big policy for the Lib Dems is opposing Brexit, with legalising marijuana as a second string. This is far too narrow.

So the Lib Dems need to be seen as standing for a broader range of ideas, and not tied to a single headline policy. There may be an opportunity for this. Most left-inclined liberals still think Labour stands for them – but Mr Corbyn and his allies want to take their party somewhere different. And many Conservative supporters think that their party stands for pragmatic liberal economics – but Brexit ideologues in cabinet don’t seem to care what happens next as long as it is Brexit. If anybody can convince these people to look, or to look again, at the Lib Dems, it is Vince Cable.

The British are bowing out. Now the EU is a battle between the French and German visions.

The European Union dominates British politics at the moment – but in a rather superficial way. It is focused on the short-term implications of the country’s relationship with it, and not on the institution itself. And that is true especially of continuing Remainers. They concentrate so much on stopping or diluting Brexit that they avoid tackling questions about what the Union is, and what it is turning into. More thoughtful Leavers will no doubt suggest that the focus on Brexit is a displacement activity from more uncomfortable questions about the EU. So it is worth taking a step back from the kerfuffle about Brexit to think about the Union itself.

I think it is helpful to view the debate over the EU as a conflict of three visions. I will characterise (or caricature) these as the British, the German and the French visions. The British vision is of the union as a free trade area; its fundamental purpose is economic, and to bring to its members the manifold benefits of free trade. The British are divided on whether this necessarily includes the free movement people, or, rather, labour (as opposed to temporary visitors, which most people are happy with). Many older people (and probably a majority) think emphatically that it doesn’t, and that goods are fundamentally separate from labour. Younger voters tend to say that it does – seeing free movement as a way to expand their personal horizons. Some are muddled – wanting all the benefits of retiring to Spain and using its health service for free, while stopping people from moving into Britain. But all sides treat this as a fundamentally economic question. and think of it individualistically – how does it benefit me?

The Germans feel that the fundamental point of the EU is to create transnational order. This affects trade, so that manufactures and services are based on common rules, and that countries don’t get an unfair trading advantage through lax labour or environmental laws. But it goes deeper; they see nothing wrong with rules that secure fundamental political principles, such as human rights and the democratic order. Britons tend to resent this as an unnecessary intrusion, feeling secure in their own country’s institutions – different histories do much to explain the different attitudes. Britons have learnt to trust domestic institutions; Germans (right up to 1990 in the East) have learnt that trust can be abused. The Germans’ outlook is more collective than the Britons’ – but they share Britons’ distaste for political meddling from EU institutions.

But the French, on the other hand, emphasise the political union. To them it is a joint political project, in which their country must take a leading role. They tend to see the EU as a counter to the giants that stalk the world stage, and in particular to the US – but also to Russia and China. Internally they advocate a greater use of political mechanisms to resolve the problems and conflicts within the Union itself. This is the most collectivist view. If Europe as a whole advances, the logic goes, then we all do as individuals. The British tend to view it the other way round.

It is tempting to suggest that these three visions are all right, and that some form of reconciliation or compromise must be found. But I find it more helpful to see the three visions as varying stages of understanding of what the European project implies. A free trade area cannot reach its potential without transnational rules, including some form of transnational arbitration. And you cannot have such a transnational system of rules in the long run without common political processes to manage them. The North American Free Trade Area (NAFTA) was often held up as an example of what “just” a free trade area might look like – but it first lost momentum and is now in imminent danger of collapse, as it has been unable to handle the political tensions it has created. The French understand the implications of the EU the best, the British the least – which, of course, is the main reason why Britain is leaving. Most of the British public do not want to accept the political implications of the EU; many of those that voted Remain were in denial, and voted that way to maintain their own short-term economic prospects. The whole Remain campaign last year was based on little more – one reason that the more thoughtful Leavers feel that it is they that hold the high ground.

With Britain on the way out, the driving tension will now between the German and French visions. The British view was shared by other members, especially the Scandinavians (as a matter of principle) and the eastern members (as a matter of political convenience). Brexit not only removes the British view’s biggest advocate, but also it points to the ultimate destination of countries that follow it.

The Franco-German tension could ultimately destroy the union. The Germans are easily the union’s most powerful member; but the French are ultimately right – the Germans are simply postponing an inevitable reckoning. This tension is most easily seen in the management of the Eurozone. The EU’s treatment of Greece, for example, was brutal and surely misguided – even if I find most of the pleadings by Greek politicians such as Yanis Varoufakis to be self-serving and evasive. To the Germans, the Greeks simply broke the rules. They lied about their economy to get it into the Euro, and then milked the Union for all they could get with no attempt to make their economy more productive or less corrupt. The crisis was a reckoning, and it must be played out according to the rules. That Greek voters approved of gobbling up their neighbours’ resources as an easier alternative to fixing deeper problems at home did not make what they were doing democratic. But this view is also self-serving and evasive. German banks contributed mightily to the Greek bubble, and German businesses where happy to sell things to people who could not afford them. There must be a principle of caveat emptor. Instead the German taxpayer bailed out their banks, and their government is trying to blame the Greeks. It is a political mess that requires a political solution, and that means some of the rules must be changed. It is clear, for example, that much of the Greek government debt must be forgiven. The country also needs financial aid to help its economy to grow on a financially sustainable path. But that implies accountability from the Greek government.

And yet the French view, which is now being vigorously pursued by its new president, Emmanuel Macron, leaves hard questions at its core. It requires stronger and deeper transnational institutions, whether at the EU or Eurozone level. But are the democratic institutions up to the job? And is there democratic consent for them? And how deep must these central institutions go? The type of problem posed by Greece persists: member states trying to take the rest of the union for a ride – to take the money, but without any any serious attempt to develop an open and efficient economy, buttressed by democratic institutions, based on the rule of law applied without corruption. Challenges aren’t just being presented by such countries as Hungary and Poland, but by countries closer to the heart of the picture, like Italy. And France. And even Germany with its destabilising surplus savings. Mr Macron’s strategy is to boost France’s credibility by reforming its economic institutions. But what will make other countries follow this path?

What will happen next will be the usual European muddle and fudge. That muddle and fudge will either lead to disintegration, or to something that looks much more like a federal state. Or both – if more countries leave but a more integrated core remains.

And that poses a challenge to British Remainers, who either want to reverse Brexit, or to rejoin the union at some later stage. If Britons remain wedded to what I have called the British view, this will end badly. Britons must accept that they are signing up to a political project that reduces the sovereignty of the British state. Liberal Democrats, in particular, need to understand when there will be too much European centralisation, and when they would say no. After all their other rallying cry is the decentralisation of political power.

And me? Fundamentally I am a Frenchman on this. Proud though I am of my British and English identity, I also have a strong sense of European history and identity. I long to be part of a joint European political project. But not even I have thought through the full implications – and I am in what looks like a small minority. For that minority to grow, more persuasive arguments must be made.

Can Britain afford to abandon austerity? Maybe

Perhaps only Brexit is a more important political issue in Britain than austerity – the policy of restraint in public spending that is causing acute stress in parts of the public sector. It might surprising, therefore, that the quality of debate is so low as to be nonsensical. But then again, when things get important, truth is the first casualty. So let me attempt a dispassionate overview.

First let’s look at the case made by government supporters in favour of continued austerity. This runs at the level of household accounting. The government is outspending the revenue it collects. This means it is piling up debts which future generations must pay. How irresponsible! “There is no magic money tree,” says the Prime Minister, Theresa May. But one of the first things you learn in economics is that running a government budget is nothing like a household one. And the government does have a magic money tree – it’s called the Bank of England. It is perfectly safe for a government to create money to pay its own bills, in the right economic circumstances. Japan has being doing this for a couple of decades. Plus spending government money in the right way may generate the means to pay it back – through bringing spare capacity into the economy, or through investing in projects that generate a return. Or even both at the same time. The case made by government ministers is simply irrelevant. But that doesn’t make them wrong.

The case made by the left has more economic sophistication – and it is even nominally supported by authoritative economists like Joe Stiglitz, an American Nobel Laureate (who wrote a useful textbook on public economics). The main argument they make is often referred to as “Keynesianism” after the great Liberal economist Maynard Keynes, who offered it a the time of the Great Depression in the 1930s. Keynes pointed out that if there is spare capacity in the economy, such as during a recession, extra public spending will not displace other activity, and it will (or should) therefore cause the economy to grow, and pay for itself. But this argument is made by left-wingers regardless of the economic climate. Find me a trade unionist that has ever, ever said that because the economy is overheating, government spending restraint is required. It’s like finding a businessman who says, in any given economic conditions, that interest rates should go up. They are like barristers making a case, no matter how ridiculous. What should judge and jury think?

Two pieces of evidence may be offered in favour of Keynesian expansion now. First is that economic growth since the great financial crisis of 2007-2009 has been lacklustre, and behind many of Britain’s peer economies. Surely it needs a kick up the backside? Second is that inflation is low and looks stuck. Actually, inflation has been creeping up a bit, but that is due to the pound falling. Pay inflation – surely the critical point in this case – remains low. In classical economics high inflation is the surest sign of an overheating economy.

But two pieces of evidence can be offered against Keynesian expansion. First is that unemployment is at near record lows for recent times, and overall employment is very high (unlike in the USA, there don’t appear to be a lot of people who have dropped out of the labour market and so not treated as unemployed). Second is that Britain has a high current account deficit – at 3.1% of income it is one of the highest in the developed world, though it has been coming down since the pound fell. That means that Britain needs foreigners to pay it in its own currency, or Britons need to acquire foreign currency to finance foreign debts. This means that the country depends on “the kindness of strangers” as the Chairman of the Bank of England put it. Among other things that takes some of the magic out of the money tree owned by the Bank – and is a contrast with money-plucking Japan, which tends to run big surpluses. Money trees need net savings (or current account surpluses) to nurture them, or else their fruit turns bad, as many a horror story from South America will attest.

So there should be public debate around what these pieces of contradictory evidence mean. Unemployment is low, but the quality of many jobs is low – so would people work more productively under the right pressure? Britain has a trade deficit, but most debt (including government debt) is still denominated in Sterling, reducing risks substantially. There is much to explore, but few take the trouble. Easing austerity could simply raise growth; it could cause us to borrow in currencies that the Bank of England can’t print; it could cause inflation; it could simply stimulate more low paid immigration; or nothing much might happen at all.

The important message, though, is that it matters how any extra government money is spent. This rather goes against the flow of the usual macroeconomic debate, which likes to deal in quantities rather than qualities. But if you read carefully you will see that trained economists brought into oppose austerity policies are quite careful about the type of extra spending they advocate. They want more investment. If the government invests in things that generate financial returns by making the economy more efficient and productive, then the question of whether or not the economy is running at full capacity is side-stepped. The Labour manifesto at the general election offered this line of reasoning, and that is doubtless why the likes of Mr Stiglitz felt able to endorse it. Labour also wanted to put taxes up albeit mainly on the rich – which, nominally, at least, should reduce excess demand.

Unfortunately this can lead simply to politicians labelling all public expenditure as “investment” – a favorite trick of former Labour Prime Minister Tony Blair. We need to look at matters case by case. What if the government gave NHS employees a pay rise, which some say they are due after years of pay restraint? Some of the extra money would come straight back in taxes; some would be spent creating demand which might help local economies to grow. But some might be spent in businesses that will just put their prices up; some might simply be saved (which has no short-term economic impact) or spent on things like foreign holidays that just add to the current account deficit. Unless balanced at least some extent by tax rises the economic case for this looks unconvincing (where those tax rises should fall is not a simple question either…). But there are other benefits to increasing pay. Would it make it easier to recruit and retain top quality staff that would make the service more efficient? That mean the service could run on fewer temporary staff and make cost savings by heading off medical complications? Well that’s the key, and it depends on strong management. These benefits don’t just happen.

But what of devoting more money to public health? If done properly, this will head off demand for health services, and reduce the costs of poor health elsewhere in the economy. The case for funding this from borrowing is much easier to make. A similar case can be made for schools funding – though again this depends on good management (though personally I am more confident of that in schools than in hospitals, if only because the former are much simpler to run).

There is a lot of extremely interesting debate to be had around the economic implications of different sorts of public spending. Would forgiving student debt be a financial catastrophe? Or might it provide an economic boost in exactly the right places? We need some dispassionate analysis.

Instead we have a Conservative Party that will not engage in arguments of any economic sophistication, and is allowing some of its cost savings to do lasting damage to society. And though the Labour Party understands this, it seems uninterested in the discipline that will be needed to ensure that extra government spending and borrowing does not drag the economy down, rather than boost it. Each party is sponsored by advocacy groups who think that the overall outcome for the country is somebody else’s problem. Such is modern British politics.