Edward Hadas

In one corner of the intellectual boxing ring is Stimulo. His fighting words: more economic stimulus. History and theory, he declaims, teach that governments should run much larger fiscal deficits in a downturn. In the other corner is the Cutback Kid, who delivers the opposite message: more austerity. He asserts that history and theory teach that governments should reduce their deficits. The two contestants for the Economic Policy Prize are in the midst of a long fight. Amazingly, they are both losing.

Stimulo has the open-hearted enthusiasm often associated with residents of the United States, for three decades known as the land of big fiscal deficits and small worries. His favourite example is the 1930s Great Depression, which only government spending could end. Now, almost four years after the collapse of Lehman Brothers, GDP growth remains slow and the unemployment rate high. The government deficit, he says, should be increased by as much as necessary to push the economy out of its current stagnation.

The Cutback Kid has a more restrained charm, the sort sometimes associated with suave European intellectuals. He praises the virtue of balanced government budgets: sound finances keep inflation far away, support the value of the currency and promote a strong economy by not stealing savings from the private sector, the source of durable growth. After four years of extraordinarily high government deficits, he says, it’s time to cut back.

There have been no knock-out blows. Neither stimulus nor austerity seems to work as predicted. The United States has tried stimulus and the UK austerity, but the results in both countries have been disappointing. The euro zone, which has tried less stimulus and more promises of austerity than either, has not done any better. Japan has been stimulating for years, without either recovery or inflationary disaster.

Here is a summary of the most recent round: Cutback Kid opens with a one-two punch – first Latvia, where punitive austerity is turning the suffering economy around, and then history, which shows that fiscal contractions often help restore economic growth, while large fiscal deficits usually have bad consequences. Stimulo is not deterred. He ducks Latvia – austerity isn’t really working there – and he punches back with examples of successful borrow-and-grow polices. Then he strikes hard with Greece, where austerity is crushing the economy.

And so it goes on. Stimulo responds to his failures with cries for more of the same, while Cutback Kid demands more policy finesse and more patience, because hard work cures slowly. As they argue, the economic news from almost every rich country does not get better. It’s hard to believe either side really has what it takes to win.

The boxing image fits the pugilistic tone of the stimulus-austerity argument. The protagonists often sound less like calm economists than politicians trying to “diss” their opponents. Indeed, the fervour reflects strongly held political views: the trust in governments and distrust of finance on one side and wariness of government and enthusiasm for fair markets on the other. However, the debate is emotional, not rational. The economic theory on both sides is flimsy and the historical evidence is ambiguous.

The intellectual obscurity is so great that even basic definitions are controversial. Does any fiscal deficit count as “stimulus”, or only increasing deficits? Or is stimulus limited to deficits that go beyond those created by the higher spending and lower revenue that inevitably arrive with an economic slowdown? Do virtuous intentions to reduce deficits count as “austerity”, or only actual reductions? Where does monetary stimulus – low policy interest rates, central bank purchases of debt and support for financial institutions – fit into the picture?

Despite the wild claims from the intellectual boxing ring, no one really knows how to restore financial order and economic health after a financial meltdown in countries which account for half of the world’s GDP. The best that can be said is that policymakers should restore confidence, strengthen institutions, avoid unnecessary financial pressure and reduce debts without destroying the financial infrastructure. The translation of those platitudes into policy is, to put it mildly, not obvious.

History’s lessons are hard to read, but there is one relevant – and frightening – precedent for the current problems: the discrediting of the orthodox 19th century model of laissez-faire capitalism and hard money. The failure started to become clear about a century ago; it then took 40 years – with depressions, great inflations and two world wars – to develop a more stable arrangement.

The post-war system evolved over the subsequent decades into one based on much debt, little regulation, free capital movements and narrowly focussed central banks. The Lesser Depression has discredited this model, and it will take time and imagination to find a replacement. The fight between Stimulo and the Cutback Kid is a pointless diversion from the task.

“Where all good things are bought and sold,” says Michael Sandel, “having money makes all the difference in the world”. And judging by the success of the book he has written based on the premise, the assertion is seductive.

In “What Money Can’t Buy: the Moral Limits of Markets”, the Harvard philosophy professor rails against “market reasoning” and its impact on modern societies. He says that justice suffers because money has become the predominant measure of social as well as economic value. He provides examples such as corporate life insurance policies on employees, advertising in bathrooms and payments for children’s academic success.

Sandel’s reading of contemporary society is wrong, and the examples he deploys are atypical. Overall, morals have been displacing markets, not the other way around. Considerations such as justice and the common good increasingly shape economic arrangements. Even where market reasoning does flourish, for example in the production of cars or food, the standards of social responsibility have steadily risen. Whether or not they are profitable, companies are expected to be good employers and good corporate citizens.

Consider the evolution of marriage. A century ago in most Western countries, spouses were chosen at least as much on economic grounds – dowries and future income – as on romantic ones. Love now rules, to the point that couples often choose impoverishment in divorce over wealth in a loveless marriage.

Marriage is not the only domain where Sandel’s “market reasoning” – the best way to allocate anything is by selling it to the highest bidder – is in retreat. In rich countries, most healthcare is made available at no or low costs to almost everyone, and is allocated on the basis of need, not income. The United States is, admittedly, a partial exception and the high ideals are rarely perfected in practice, but the market’s reasons are never considered the last word.

Education is similar. Students do not have to pay for primary and secondary school, while admission to the best establishments is determined, in theory at least, on the basis of academic merit – not the ability to pay.

According to market reasoning, everything should have a price. If that reasoning were in the ascendant in modern society, then surely everything about the internet, arguably the most impressive technological development in many generations, would be for sale. In fact, while the internet is a big business, the most important applications – search engines, social networks, email and Wikipedia – are made available at no direct cost.

A third claim of market reasoning is that prices are best set at the point where supply is perfectly balanced with demand. That principle is not followed in large parts of what might be the most important market of all, the job market. Supply and demand have only an indirect influence on the pay and career paths of most workers. Seniority and skills matter much more.

Given the evidence, it is puzzling that Sandel’s book, recently reviewed by my Breakingviews colleague Martin Langfield, has made such an impact. Sandel’s judgements about the triumph of crude materialist calculations over higher values should have at least been received more sceptically.

I blame the influence of Karl Marx, not as the founder of communism but as the great prophet of economic alienation. He warned that society would be torn apart by capitalism’s “cash nexus”, which used money to express values, and its “commodity fetish”, which treats all things as being up for sale as long as a price can be agreed.

Marxist claims still resonate, in part for good reasons. The expression of any human relationship in monetary terms is potentially dehumanising. Money really cannot buy love, should not buy sex and may damage the creative efforts of artists. Market reasoning adds selfishness to the picture – in the world of supply and demand it is each man for himself.

However, money and markets also have a good side, which Marx grudgingly admitted and Sandel blithely ignores. Buying, selling and the assignment of prices are effective and reasonably just tools for tying together the economic activity of strangers. The monetary system does not always create the best bond – unpaid voluntary efforts and compulsory arrangements can sometimes be better – but the global economy could not work without it.

The retreat of market reasoning shows that Marx underestimated the popular ability and desire to resist the commodity fetish. Marx also underestimated the future accomplishments of the industrial prosperity which the cash nexus helps create. These gains – modern societies feed the hungry, house the poor, spread knowledge and provide much interesting labour – far outweigh any losses from monetary alienation.

Sandel and other social critics may be right to think that society is damaged, even “broken”, as British politicians sometimes say. But markets and money are not to blame.

Sometimes big news stories seem unbearably dull. The euro crisis is often presented as an apparently endless stream of technical titbits that only a financial geek could love: alchemical recapitalisations of possibly insolvent banks, and the subtle differences between the European Financial Stability Facility and the European Stability Mechanism. But the mind-numbing details hide an exciting drama about the dysfunctional European family of nations.

Think of Greece as the wayward uncle who never seems to settle down and who keeps asking for a little money to tide him over. Spain is a younger sibling, finally interested in school but still reluctant to admit that she needs to change her ways. Italy is a voluble middle child, talented but with a taste for mischief. Germany is the slightly priggish older brother, who has trouble sympathising with his relatives’ weaknesses – although he usually relents in the end.

As in some tribes, the European family has appointed various councils of elders to guide group decisions. For the most part, the central authorities have worked well, but they have to be careful not to anger big brother Germany. Then there is the European Central Bank. When it was set up, most family members thought it would be just another elder-group, but the monetary authority is increasingly behaving like a sort of powerful Godfather to the whole clan.

If those stereotypes don’t please, others are available. The point is that the current debt crisis is a chapter in a story that started more than 2,000 years ago, with the ancient Roman conquest of Gaul and Britain. The European Union is the latest effort to create harmony within a group of diverse personalities, who are tied together by history and location and separated by history and character.

Will this chapter of European history end like that of Romulus and his twin brother Remus, who vied to found Rome? Their family struggle led to fratricide. Murder and war are not on the agenda now. Neither is the traditional technique for papering over European disputes – royal marriages. Instead, the members of the euro zone have to find a modern solution to the mess.

This is a family fight about right and wrong, because debts always raise moral issues. If nothing more prickly were involved than practical issues of regulations or money, as European leaders like to suggest, then there would be no crisis. After all, rules can be changed and the likely losses on the debts are not large by the standard of the euro zone – no more than 1 trillion euros in an economy with an annual GDP about 10 times larger. But behind each disputed detail of the euro crisis lurks an argument about the fair allocation of pain and blame.

This family fight is, naturally, bitter. It’s harder to accept betrayal from a relative than a blow from a stranger. Indeed, the acrimony and mistrust are far more dangerous than the actual bad debts. For the euro zone to survive, the European family must summon up large quantities of mutual goodwill. Their imperfect offerings of support and detailed commitments to fiscal virtue constitute what negotiators call trust-building exercises.

The intervention of an outsider, in the form of the financial markets, has worsened the crisis. European governments don’t only have to deal their internal debts and resentments; they must also persuade investors to continue to provide financial support. Politicians complain that these investors don’t understand how Europe works. That’s right – outsiders can’t really grasp the complexities of family relations. But then again, the politicians should never have thought that outsiders would have stayed faithful.

And the markets interloper is increasingly demanding. Last week, he dismissed the European bailout of Spanish banks, even though the 100 billion euros involved was twice as much as expected just a few weeks earlier. European politicians have been scrambling to create a more unified family front. Indeed, the external threat has provoked them to make more progress towards financial and fiscal unity in the last few months than in the preceding decade. But they have not managed to pacify those pesky investors.

Something more powerful is needed to keep the euro, the most tangible sign of family harmony, from ending in discord. Only the ECB Godfather has what it takes. The central bank might have to abandon some principles, but it has the ability to create enough money to keep governments and the financial system afloat for as long as necessary.

This chapter of the European story still has many tedious details to get through, but it has gone on so long that the only question that still matters is whether or not the ECB stands up for the family.

Stability has been one of the most elusive economic goods. Despite more than a century of effort, economies remain prone to downturns, which often come after booms that proved unsustainable. Rich countries are currently stuck in one of the down periods, a seemingly endless Lesser Depression.

Economists argue about the details of what went wrong, but they often miss something basic: persistent instability is surprising. Surely, societies which summon enough economic ingenuity and organisation to develop smart phones, manage global supply chains and pay for a dozen years of universal education can manage to maintain a steady pace of overall economic activity? All that is required is the identification and early correction of imbalances, in both the real economy and the financial system.

In the pre-industrial age, good macroeconomic management was all but impossible. As long as agricultural activity was the economic mainstay, a poor harvest led not only to less food but to less spending by farmers. Their purchases of ploughs and shoe leather declined, even though a temporary spell of bad weather had no effect on production capacity.

Governments had neither the information nor the resources required to compensate. In any case, monetary counter-moves were impractical when the only reliable money was coins struck from a strictly limited supply of precious metals. Governments and banks could theoretically give farmers paper money to buy readily available goods, but the currency would not be trusted.

More recently, economic instability could be blamed on ignorance and immature institutions. In particular, the mechanisms of financial excess, the cause of most of the crises of the last century, were poorly understood. While economists knew that speculation was dangerous, their analysis was primitive. In addition, governments were slow to put detailed regulation of the financial system on their list of responsibilities.

Now, though, booms and declines are inexcusable. Farming plays a minimal role in advance economies, and no significant sector is subject to large natural variations of output. On the contrary, far more than half of GDP is spent on services, which tend to be purchased very steadily. Statistics are ample, so economists can easily identify anomalies. Governments are well informed, dominate the economy and have full monetary flexibility.

Twice in the last half-century, experts thought they had found the secret to good macroeconomic management. In the 1960s they put their faith in the “fine-tuning” of monetary and fiscal policy. In the 2000s, they saw a “great moderation” come from inflation targeting, relaxed central banks and unencumbered financial institutions. After the latest failure, the professionals have mostly fallen back to their previous belief in unavoidable cycles of exuberance and depression. Like mood swings in love affairs, economic ups and downs are considered unfortunate facts of life.

The defeatism is unnecessary. Motor vehicle fatalities provide a good precedent. Starting in the 1960s, a coordinated campaign, including both behaviour modification and improved engineering, has succeeded in reducing the death rate in the United States (as a fraction of the total population) by more than half. Economic deviations can be reduced by much more.

Drivers were cajoled to change their behaviour: stop drinking, wear seat belts and reduce speeds. Economic actors can also learn that excessive enthusiasm, like reckless driving, eventually leads to trouble. Anti-greed education can teach that immoderate financial gains are bad for society and are likely to be followed by even larger losses.

The lessons should be backed by corrective policies. The authorities must be committed to use regulation, taxes and fiscal and monetary policy to stomp hard whenever any significant financial and economic indicator moves in a dangerous direction. The short current watch-list of consumer inflation, GDP growth and unemployment should be lengthened to include the prices of property, debt, shares and commodities. Rates of change in lending and financial activity are also important.

The engineering of the financial and economic system needs the same sort of upgrade that car and road design got when safety became a higher priority. Errors, of both drivers and investors, are less dangerous on safer roads. The economic authorities should develop automatic stabilisers to limit herd behaviour. They have the tools. They can both create and destroy money and credit. In the face of mob gloom, they can create new jobs, either directly or indirectly.

Defeatism should be replaced by a firm commitment to economic safety. Sadly, there are few signs of such a change. For all the talk about “macro-prudential regulation”, economists and politicians are still reluctant to restrain financial dreams. Monetary authorities balk at taking full advantage of their powers.

Ultimately, something like moral cowardice lies behind this unnecessary restraint, and behind the recurrence of financial crisis. The pattern cannot be broken until the authorities decide to identify and attack reckless financial behaviour wherever it occurs. The failure is discouraging, but there’s no need to abandon hope. Like driver safety, and like the legal protection of workers and the restriction of pollution, economic stability is an idea whose time will come.

Debt, a little like sex, is a two-sided relationship which, when used appropriately, pleases the partners and is good for society. But both are also intoxicating and can easily become excessive and anti-social.

The financial bubble of the 2000s was the financial equivalent of the 1960s enthusiasm for “free love”. The delights of nearly free debt set pulses racing. Since the financial collapse, the dangers of uncontrolled borrowing have been recognised, but the bad habits have hardly changed.

When debt is used as it should be, lenders receive a just return on their assets and borrowers pay a just price for the use of the fruits of other people’s labour. Loans finance helpful investments and assist governments and individuals to manage periods of adverse fortune. But debt can also be used for promiscuous pleasure-seeking, unaffordable consumption, unjustified corporate investments and excessive government spending.

In the recent debt party, the United States led the world. The ratio of total U.S. debt (private, corporate and government) to GDP increased from 256 to 373 percent between 1997 and 2008, according to Federal Reserve calculations. The whole country borrowed from foreigners to fund its trade deficit. The financial sector borrowed cheaply and invested dangerously to increase returns and remuneration. Homeowners borrowed more and more to buy more expensive houses.

At first, all this indulgence appeared to be beneficial. GDP growth was strong, consumption was high, unemployment was low and higher asset values – the other side of higher debts – made borrowers feel richer. But when Lehman Brothers failed in 2008, the dangers of frequent debt relations with multiple financial partners became clear. With everyone borrowing from each other, losses on bad loans, and the fear of further losses, spread rapidly around the world. A Lesser Depression set in, and there is no end in sight.

Despite much talk about the end of an era of hedonistic borrowing, financial rectitude remains a distant prospect. Governments have stepped up borrowing just about as much as the private sector has cut back. In the United States, debt remains an alarmingly high 359 percent of GDP.

What can be done to restore financial order? For irresponsible borrowing, a sudden outbreak of prudence would probably aggravate the economic problem. The economist John Maynard Keynes called it the paradox of thrift. If everyone tries to save more and spend less, the result will be a decline in total consumption, which leads to higher unemployment and then to more saving against rainy days. The desire to prevent such a spiral of decline lies behind the today’s low official interest rates, high government borrowing and generous support for banks.

These policies are supposed to spur enough GDP growth to reduce debts without economic pain. That sound like wishful thinking. As long as debts remain high overall, the whole financial structure will remain vulnerable and full recovery elusive. The euro zone crisis shows just how little it takes – a few small weak governments and some political wavering – to frighten lenders and deeply disrupt developed economies. With so much leverage about, other crises will be almost unavoidable.

What is needed is a large and fast decline in borrowing – a systemic deleveraging – to give over-indebted rich nations a fresh start. Sadly, there is no easy way to proceed. A gigantic debt write-down would do the trick, but creditors would be furious. Think of how the Chinese government would feel about being told that its $2 trillion dollars of U.S. government debt is now worth half as much, or how current and future pensioners would react to big losses in portfolios they thought were safe.

Mandatory inflation – say a law which doubled all wages tomorrow – would also reduce the ratio of debt to GDP, and would also infuriate savers and creditors. Alternatively, newly minted money could be used to stimulate economic activity through the creation of new jobs and the repayment of old debts. However, when governments feel free to create rather than to borrow money, they rarely stop before the rate of inflation rises dangerously high.

All of these techniques for deleveraging are risky. But I believe a clever and internationally coordinated combination of debt write-downs, inflation and controlled money creation is the best way to engineer a durable decline in leverage without destroying financial trust. Such radical techniques could work, given enough political support and sufficiently imaginative regulation.

The alternative to daring action along these lines is the continuation of something like the current policies. That amounts to persisting with the “nearly free debt” experiment, which will only lead to years of depressed economic activity and outbreaks of unpredictable financial losses. It’s worth trying something new and different to put debt back in its rightful place.

In the labour market, there is a fine line between inefficiency and wastefulness. “This place is so inefficient,” it is said, often with justification, especially in rich economies. “We could do everything we’re supposed to with a third fewer people.” Factories can be streamlined, high quality new equipment can save on labour, and offices are prone to the incubation of worthless bureaucracy.

It also said, sometimes by the same people, that “The unemployment situation is terrible. My young friends can’t get jobs and lots of not-so-old people I know are retiring early.” Such statements are also accurate. In many countries, the Lesser Depression has sharply worsened a longstanding problem of inadequate job creation. Spain’s official unemployment rate is 24 percent. Almost half of the young adults in Greece are jobless. And the employed portion of the working age population in the United States has fallen by three percentage points over the last four years.

Politicians and other leaders have watched the job destruction with something like horror. They shouldn’t have been surprised. The unending fight against inefficiency leads to a natural employment asymmetry. As technology advances, businesses and governments usually find it easier to cut than to add jobs. Some businesses can progressively expand headcount, but in tough times there are more employers looking for ways to use less labour.

Most politicians and economists believe that GDP growth is the cure. It is considered not only the highest economic good but also the best way to create jobs. In search of higher output, governments run huge deficits, while central banks pass out money for free. The policymakers often invoke the name of John Maynard Keynes. But they twist the great economist’s ideas. As Pavlina Tcherneva points out in a recent article in the Review of Social Economy, Keynes thought “the real problem” governments should address during the Great Depression was “to provide employment for everyone”. In Keynes’s view, output follows jobs, not the other way around.

Keynes’s own preferred solution was for governments to organise projects with a high “elasticity of employment”. “There are things to be done; there are men to do them,” he said. “Why not put the two together? Why not put the men to work?” The best way for governments to create jobs quickly is still to hire people directly. A look at the dilapidated infrastructure of the United States suggests that Keynes’ prescription is still relevant.

Enthusiasts for small government might want to privatise such programmes, but they should still agree with the true Keynesian principle: it is better to pay people to work than to pay them not to. Programmes which protect the unemployed and disabled serve a valuable social purpose and payments for early retirement may be defensible, but programmes which create jobs are far preferable to either.

This Keynesian message has largely been lost in the current official policy mix, which aims at growth and hopes for jobs. Policies which support the financial system, put money in consumers’ hands and cut bloated government bureaucracies may eventually encourage job creation. Four years into the Lesser Depression, however, these highly indirect methods are at best working slowly.

Employment asymmetry should be attacked more directly. Governments are even better placed to lead the charge than in Keynes’s day because their economic role has expanded so much. An eight-year experiment in Germany shows the power of relatively minor tweaks to the rules on jobs and benefits. Little more than tougher conditions for unemployment benefits and more helpful employment agencies have cut the number of people unemployed for more than a year from 1.7 million, about 4 percent of the potential workforce, to 800,000.

The precise German recipe is not applicable everywhere, but the principle is. The prime goal of government economic policy should be to fight the natural employment asymmetry of industrial economies. Lower taxes on workers’ income would make new jobs cheaper for employers and more lucrative for employees. In many countries, more stringent limitations on benefits would also help. Almost everywhere, the desire to establish and expand enterprises should be encouraged. In the United States, it would be helpful to find a way to give the rich a smaller share of the nation’s income. The money they don’t receive could be paid out to workers in newly created jobs.

The employment problems of the Lesser Depression are not grave enough to require a major reconsideration of the economy’s goals. A combination of short-term programmes and more gradual shifts in regulation and taxation should do the trick. But as the economy becomes more efficient, the surplus of labour is likely to become a more pressing social challenge. Keynes wondered “how to organise material abundance to yield up the fruits of a good life.” The answer is certainly not found in frequent periods of wastefully high unemployment.

On September 15, 2008 Lehman Brothers collapsed in a heap, a bankruptcy that was followed by a recession in most rich countries. As time goes on, the severity of the disruption becomes both more apparent and more puzzling.

When Lehman failed, it was reasonable to expect the pain to be brief and concentrated. While too many houses had been built in the United States, most of the world’s real economy (comprising factories, offices, retail outlets, construction projects) was doing well. The global financial sector was more distorted, even before investors took fright at the decision to let Lehman go under. But by the middle of 2009, governments and central bankers had agreed to provide bankers and brokers with anything needed to keep them healthy.

Optimism was not justified. Although the countermeasures stopped the deterioration, the rich world now seems stuck in a Lesser Depression – many years of poor economic results and a series of financial crises. In the United States, the euro zone, Japan and the UK, real GDP per person is still lower now than it was four years ago. In all of them, GDP growth is currently either slow or non-existent.

The consumption setback shouldn’t cause too much concern – it wasn’t so bad five or six years ago, when real GDP was last at today’s level. But the enduring recession in the labour market is another matter.

In April 2008 the unemployment rates in the United States, euro zone and UK were respectively 5, 7.3 and 5.3 percent. In April 2012, the corresponding percentages were 8.1, 10.9 and 8.4. More refined indicators – youth unemployment, involuntary part time work and disaffected ex-workers – are even more discouraging. The post-Lehman economy is failing a significant number of people in a fundamental way.

Some economists argue that this real suffering is the necessary price to pay to bring order to the financial world. That’s a dubious argument, since people are more important than money and credit. But the ethical debate isn’t necessary. Despite the real economic pain and the official aid, the financial world looks as ill as ever. On the monetary side, policy remains in shock territory – buyers of safe government debt receive negative real returns. Fiscal positions are equally alarming. Deficits everywhere remain at levels more suitable for wartime mobilisation than for a sputtering economy.

The puzzle is why a relatively small problem in the real economy has led to this Lesser Depression, especially when the authorities have followed expert advice throughout. Surely, if the counsel were sound, the depression would have lifted by now.

The experts offer several excuses. One is that the euro zone’s special problems have delayed recovery. That’s probably true, but European politicians and central bankers are following the best advice on how to compensate. Another is that the authorities should have been even more aggressive in their support for the financial system. Maybe, but even larger fiscal deficits and even easier money would create other distortions. Yet another claim is that governments should have cut back their spending faster. Possibly, but that would hit consumption harder and further increased unemployment.

The problem is actually the experts. Recent history provides a good reason to doubt their competence. Five years ago, economic gurus saw no end to the pre-Lehman “Great Moderation” – steady GDP growth, shrinking unemployment and rising asset prices. They were wrong about that, and they are still making two basic mistakes.

The first concerns the real economy, in particular the highly productive modern economy. Economists underestimate the difficulty of keeping unemployment down. It is much easier to destroy jobs, with labour-saving devices and more efficient procedures, than to create them by starting up enterprises, finding customers for new services or creating new bureaucracies. The employment asymmetry accounts for the persistent pain in the labour market. The jobs shed at the beginning of the Lesser Depression are not easily replaced, nor are the jobs currently being cut by governments searching for austerity.

The second mistake is financial. Economists underestimate the danger of debt. Whether the money is owed by companies, households or governments, the disadvantages of debt financing increase as the ratio of liabilities to income rises. Heavily indebted borrowers are less eager to take economic risks and more likely to default. In a highly leveraged and financially interconnected economy, one default often leads to other bigger collapses. In short, massive debts almost invite economic paralysis. It’s hardly surprising that the increase of debt-financed government spending has done so little good.

So what should be done? New ideas are required – and I’ll offer my contributions over the next few weeks. Without a fundamental change in the thinking, the global economy won’t reach its goal of steady growth and low unemployment.

From a narrow economic perspective, the art world is working brilliantly. But the success shows just how narrow that perspective really is.  

Start at the very top end of the art market: last week’s sale of Edvard Munch’s “The Scream” for $120 million, a record for any artwork sold at auction. It may seem bizarre for an icon of cultural despair to become a token of financial exuberance, but the transaction reinforced the social meaning of art among the elite.  

Sociologists talk of positional goods: possessions and activities which express social standing. A normal skiing holiday is like a sign saying, “I’m solidly middle class”. A mansion states, “I’m rich.” A multi-million dollar painting tells the story of money to burn. And a $120 million pastel screams out, “I’m at the top of the heap, and cultured besides.”  

The industrial economy has changed and developed, but it has consistently supported the positional value of artworks and other so-called collectibles. Demand has expanded along with the number of wealthy people. Prices have risen along with the quantity of money available for ostentatious spending. The recent increase in the share of global income and wealth taken by the very rich has accelerated that trend.  

Prices would be even higher if the supply of positional art had not also expanded. That growth is puzzling. The number of worthy artworks from the past available for purchase is actually decreasing, as museums expand their collections. Contemporary art isn’t an obvious substitute, because there’s no scarcity and no way to know what’s really good. The possession of something of uncertain quality that is readily available should bring little social status.  

But collectors have overcome this supply problem with a tacit agreement to assign high values to just enough stuff to keep prices up. I can’t explain how this arrangement is made – the formation of social consensus is always a mysterious business – but for some reason a preserved shark by Damien Hirst is deemed worthy of a high price, while a stuffed tuna signed by his cousin probably would not be.  

High priced art gets most of the headlines, but the industrial economy has also successfully turned artistic production into a mass product, much like food, clothing and medicine. From the normal economic perspective, art looks like another consumer success story.  

Sure, paintings aren’t really suitable to modern economic treatment (although high-quality digital photographs of Munch’s works can be sent anywhere for about $200). But other art forms, both new and old, do fit in. The technology needed for mass production does no harm to the quality of books, recordings, photographs, cinema and anything on the Internet. Copies are identical to the original.  

The result of mixing art with industrial production is much like applying industrial techniques to agriculture or sewing: finished products that are readily available in a wide variety at reasonable prices. The gains are impressive. The pre-industrial peasant who might never read a book or see a professional work of visual art has been replaced by a jaded internet surfer who can choose among millions of books and images. Mass production has been complimented by mass distribution, so even people with unpopular tastes can find the art they like.  

Most economists would stop the discussion there, but I think something more needs to be said. Art should be different from food and clothing. Works of art are supposed to offer something more valuable than social status or pleasing entertainment. They are supposed to strive for the beautiful, to make manifest something greater than the petty comforts and regrets of everyday life. For all its cleverness, efficiency and popularity, the modern art market does not serve this higher master well.  

That claim is controversial; contemporary art, both elite and popular, has articulate defenders. Still, even champions of the new rarely claim that the modern search for greater material prosperity has been accompanied by an equally intense search for beauty.  

The failure is not precisely economic. The social decision to make art either exclusive or popular, but not necessarily beautiful, is not motivated by any sort of economic shortage.  There’s certainly enough wealth around to fund another Renaissance. If the production of beautiful works of art were deemed an important social goal – like education or sexual equality – who knows what masterpieces could be produced?  

The money is available, but the will is missing. For that, the industrial economy might bear some blame. Perhaps a culture which is dedicated to efficient mass production cannot also give beautiful art its due.  

In 1802, William Wordsworth complained about the coarsening effect of the Industrial Revolution: “getting and spending, we lay waste our powers”. “The Scream”, painted almost a century later, is almost a picture of that despair over the modern world. Perhaps it is fitting that after another century the work should attract such a high price.

The debate on executive pay is often just a shouting match, in part because there’s no agreement on what bosses are actually paid to do. The “shareholder value” approach provides a simple answer, but one that it is both practically and morally wrong. Aristotle had better ideas.

Citigroup’s shareholders recently voted against the pay package of Vikram Pandit, the bank’s chief executive. In Europe, the boards of Barclays, Credit Suisse, Aviva, Man Group and Xstrata are in similarly hot water. Many think the key is to link rewards to success. But what exactly does corporate success mean? What is Pandit being paid to do?

In the standard view of the modern company, Pandit ultimately serves only the shareholders who voted against his remuneration. Companies’ legal owners choose a board of directors to represent their interests. The board hires a chief executive to create “shareholder value” – that is, dividends and a higher share price. Shareholders have every right to be angry if managers serve themselves rather than their ultimate bosses.

The shareholder value perspective provides a simple way to think about corporations, but it’s neither true nor just. In practice, modern corporations aren’t run for the benefit of shareholders. Nor should they be.

Etymology provides a helpful hint. The term ‘corporation’ comes from ‘corpus’, the Latin for body. Shareholders are a vital organ necessary to sustain corporate life. But just as the physical body cannot survive without many healthy organs, corporations rely on many groups. Excessive attention to shareholders will lead to atrophy or disease in other corporate organs – employees, machinery, offices – and the inability to cope with the corporate environment – suppliers, customers, governments and the broader community.

In the case of Citi, the $181 billion of shareholders’ capital is indeed vital, but so is the other $1.8 trillion or so on the balance sheet. So are the 260,000 employees, the millions of customers, the legal systems in which the bank operates and – as the recent financial crisis made clear – politicians and regulators. And while corporations are often described in impersonal terms, but they are run by and for people. All of them deserve just treatment.

The promotion of justice, then, is an important part of Pandit’s job. But what is justice? For corporations, it is helpful to learn from Aristotelian approach. The Greek philosopher argued that an organisation is just when each involved person receives rewards that are in proportion to his or her merit. In corporations, shareholders have the merit of providing capital, chief executives give leadership expertise, employees’ merits are time and skills, and so forth.

Aristotelian corporate justice will always be fairly crude, because it is impossible to trace with complete accuracy the effects of particular contributions. Besides, today’s success can become tomorrow’s failure. In this fog of ignorance, it may be better to rely on another Aristotelian principle – moderation. It is unjust to give shareholders, bosses or any other group rewards which are either extremely high or extremely low.

Yet neither justice nor moderation feature in the standard view of corporations. Cheerleaders of shareholder value claim that in corporate life, only one thing matters: profits for equity investors from here to eternity. But that judgment relies on two assumptions that are obviously false. First, that the future can be anticipated accurately and, second, that shareholders will never sacrifice their long term good for the sake of short term gains.

Until about 1980, the shareholder value theory was pretty much ignored in practice. Managers mostly engaged in what is often called stakeholder capitalism. They balanced the needs, desires and capabilities of the various organs of the corporate body. They recognised that corporate success has many dimensions. Profit is on the list, along with improved products and services, environmental responsibility, service to the community and employees’ welfare.

In the last few decades, though, shareholders’ interests have become pre-eminent. The result is a morally impoverished view of corporate success. Shareholder value is invoked in debates over high executive pay and low worker pay. It is used to excuse reckless financial structures and to dodge criticism of deceptive advertising and harmful products.

Pandit, in common with most top executives, probably deserve less – no matter what the share price has done or what shareholders think.  Moreover, a wider and more ethical definition of corporate purpose is a prerequisite to better corporate governance. Stakeholder capitalism, now recognised in UK corporate law, should certainly replace shareholder value. But boards and bosses still need to think more about the complexities of keeping the corporate body in good health. Corporate justice is dynamic; different groups merit more or less at different times.

As for shareholders, their capital is vital and their profit is like the food that keeps the corporate organism alive. However, corporations should have other, higher goals than making shareholders fat. In the words of a recent document from the Catholic Pontifical Council for Justice and Peace, “An organism must eat, but that is not the overriding purpose of its existence. Profit is a good servant, but it makes a poor master.”

Thomas Carlyle’s fulminations against the spiritual damage wrought by factories are almost two centuries old, but the sentiment is current wherever industrialisation is rampant. “The huge demon of Mechanism,” he wrote, “smokes and thunders, panting at his great task, oversetting whole multitudes of workmen … so that the wisest no longer knows his whereabout.”

In China, today, government leaders and dissidents alike worry that, as one commentator put it, “frenzied competition for a better life [has] lobotomized the people of inherent values like common decency, compassion and feelings of fellowship”.

A century ago, Max Weber described the process as “disenchantment”. The German sociologist thought the transition from a culture of faith and farming to the narrow-minded and bureaucratic “iron cage” of modern civilisation required the destruction of a spiritual worldview. He saw a modern society made up of “specialists without spirit, sensualists without heart”.

Weber was certainly on to something: industrialisation does break down old religious ways. In pre-industrial societies, the transcendental and the everyday were closely woven together. Social rituals couldn’t be separated from ethical expectations. Such unity is impossible in a world of material plenty, big cities, and high technology.

Vast increases in wealth, consumption and education create opportunities for personal expression and eliminate the economic rationale for many socio-religious restrictions. Urbanisation brings people physically closer, but often as anonymous neighbours rather than in communities with shared values. Omnipresent media, telecommunications and transport erode the borders between the ‘us’ of family or village and the ‘them’ of the outside world. The old religious and spiritual ways cannot survive this transition.

But Carlyle, Weber and many modern social observers make bolder claims: common religious belief and shared moral values are gone forever; modern society has no room for old-fashioned certainties; there is no exit from what the philosopher Charles Taylor calls “A Secular Age”.

Are they right? In a rich economy, the grim fight for survival is eased and there is more time for emotional and religious exploration. Modern scientific knowledge invites speculation and wonder. As Weber noted, spiritual discipline is required for the “worldly asceticism” which makes modern economies so productive. Prosperity and urbanisation might engender greater spirituality.

Karl Marx condemned religion and shared morality as “illusory happiness of the people”. His case is weakened by the failure of his alternative. Marxists in opposition were often idealistic, but in power their rule was both inefficient and cruel. Their promise of an economic justice which would make life satisfying now sounds like a bad joke.

While Marxism has been an outstanding failure, its more successful modern counterparts have failed to convert everyone to secularism. Democracy is desired, but is hardly inspirational, and there’s no need to travel to China to hear complaints about excessive materialism, selfishness and shallowness. In less restrictive nations, praise for freedom is often matched with complaints about the tyranny of the media, the government and society in general.

Relatively few people seem to make prosperity serve spiritual ends. Industrialisation and secularisation have come together, mostly, as inseparable elements of the turn from the transcendental to the worldly. The modern package of high consumption and individual freedom appears irresistible, even if the loss of old ways is sometimes regretted.

But the facts do not support the case for permanent radical secularity. While religion is down in many parts of the world, it is hardly out. In many countries, industrialisation and prosperity seem to nourish Islam. Even Christianity, the religion first threatened by industrialisation and urbanisation, is not doing badly outside of increasingly atheistic Europe. In China, the lamentations over the loss of a moral compass should be set against the rapid growth of indigenous and imported spiritual teachings. The new middle class there seems to be particularly enthusiastic.

More fundamentally, questions of religion and morality are questions of human nature. How strong and how universal is the desire to find something that is higher and more certain than anything offered by the physical world?

The answers are not changed by the onset of industrialisation. Religious practices organised around old economic patterns, social relations and folk beliefs will wither away, but that decline could be followed by the growth of spiritual organisations and the development of moral standards which fit with urbanised, industrialised, societies. In the words of a Chinese investment banker, “The desire to make sense of life doesn’t go away just because I’m rich”. He has been spending more time at a Buddhist temple.