The British debate on membership of the euro is being superseded by another debate on the new European Constitutional Treaty being drafted by a convention presided over by M. Valéry Giscard d'Estaing, to present to EU leaders. This is before the ink is even dry on the Treasury analysis of the famous five economic tests governing policy on the euro.

The UK referendum debate is being distorted by two ridiculous and extreme positions. Some of the opponents of the Giscard convention are presenting a hysterical picture of their fellow countrymen losing all their traditional freedoms and becoming subject to overseas rule in a way not seen since the departure of the Romans 1,700 years ago. But the British prime minister's response that there simply will not be a referendum, so "you can put your placards away" is dictatorial and unacceptable, and richly ironic when channelled through a minister, Peter Hain, who ought to know all about placards. It is therefore a good time to stand back from the details of current EU controversies and ask about the place of referenda in a liberal democracy.

Signed up free market economists will have no difficulty in responding. The commercial market is a continuous referendum in which voters make decisions every day. It has the great advantage over the political market place that, minority tastes can be taken into account, and different citizens can buy different combinations to suit their individual preferences. Moreover, any tendencies for the markets to produce unacceptable income differences can best be treated by cash redistribution via the tax and social security system. This doctrine is sometimes known as redistributive market liberalism.

It has enough validity to establish a presumption in favour of market rather than state provision. But admirable though it is, the doctrine leaves some big questions unanswered even if one excludes the charge that consumers are brainwashed into buying products they do not need. Messages which are literally subliminal, that is below the threshold of consciousness, should be, and I hope are, legally banned. But otherwise adult citizens should be free to make their own mistakes. However foolish some people look in the shopping mall, there are few who can be entrusted to make better decisions on their behalf.

The limitations of the markets are different. Certain public services such as health and education have special characteristics which result in collective intervention - although not necessarily state supply - in nearly all countries. Most important of all, markets cannot function and people cannot run their private lives, without police and law courts and a security apparatus to prevent citizens' lives from being disrupted by enemies within and without.

Some collective decisions are thus inescapable, as are metadecisions on the best means of reaching them. In most western countries people elect representatives, or rulers, who make decisions on their behalf. But with modern electronics, it would certainly be possible to have frequent direct citizen voting, as was usual in the Assembly of Ancient Athens where the word "democracy" was first coined.

The frank reason for being suspicious of frequent referenda is that people lack the knowledge to decide on complex issues. Even if one holds that the object of government is to pursue people's welfare in the way they themselves define it, most voters will not know how it should go about this job. Indeed many of them are well aware of their lack and tend to reply to pollsters' questions by saying "Aren't our politicians paid to decide these matters?"

There is another more subtle consideration. Citizens voting on each issue separately will be tempted to vote for expensive government services without necessarily being willing to pay the taxes required to finance them. The voter does not face the same budget constraint in the ballot box as he does in running his own household. The first and greatest American Secretary of the Treasury, Alexander Hamilton, declared that the people were fickle and seldom judged well. The Austrian-American economist Joseph Schumpeter wrote some 60 years ago, that even for a highly educated professional person political issues were a "sub hobby" to which he paid less concentrated attention than to his weekly game of bridge; and rationally so because the chance of his vote being decisive was negligible.

The Swiss referenda, which are so often invoked, occur in a small country with it own unique and frugal traditions, and for the most part concern limited local issues. Schumpeter's own escape route was to say that the job of voters was to choose between teams of leaders who made the policy decisions; and in this limited way he restored the analogy with commercial competition.

By and large I am with this hard-boiled Austrian professor. But his competitive model comes up against its own limitations. Before rival teams can compete for our votes we have to decide the geographical area in which this competition should take place and the rules of the competition. If some big change in the whole arrangements by which they are governed is afoot, it is reasonable that citizens should be given a direct say.
This brings us back to M. Giscard d'Estaing. He would like to be remembered for drafting a constitution which, however much it is amended at summit meetings, will govern the European Union for a long time to come. Tony Blair on the other hand claims that all that is happening is a tidying up operation to make the rules of the European Union more transparent.

This leads to a paradoxical situation. To the extent that the former French president, and the integrationists urging him on, get their way, the case for a referendum is strengthened. To the extent that national governments succeed in limiting any changes, we are in the realm of detailed tidying up amendments of an arrangement which British voters have previously accepted in Harold Wilson's 1975 EU referendum. For this view to be plausible, there have to be real concessions in subsequent drafts, and not just the symbolic gestures of which Tony Blair is overfond, such as the elimination of the word "federal" from the document.

But we cannot just leave the matter here. Suppose we end up with a tidying up operation plus a few extra elements? The fact is that each successive EU treaty has added new and little noticed powers to Brussels institutions, often involving majority voting. This was true of the Single Market Act signed by Margaret Thatcher herself as well as the Maastricht, Amsterdam and Nice treaties signed by her successors. It is arguable that the European Union now emerging is sufficiently different from anything approved in 1975 as to justify a fresh appeal to the voter. A referendum has already been promised in several European countries and is supported by M Giscard d'Estaing himself and by the British ex-Minister Frank Field, neither of whom is a creature of the eurosceptic Tory press.

There are of course numerous further questions. What exactly should be the question put in front of voters? And how is the summary, which is all that most voters will read, to be written to be fair to all sides? There is finally the vexed question of where the European Union will be if most countries approve the new treaty but a few do not. I will return to these questions on another occasion.