Edward Hadas

Capitalism is the name people give to the way the modern economy is arranged. Now that Communism has been discredited as an economic system, there seems to be no real alternative. But the word is misleading.

A capitalist analysis of any economic issue starts with capital, both physical capital – factories and land – and financial – shares and bonds. It is associated with free and competitive markets for goods and labour.  And capitalism has come to designate a system where private property is the norm, with any exception needing some sort of justification. Capitalist analysis usually treats governments and unions as economic interlopers, and ignores the broader society.

That perspective is too narrow. Capital and markets are only two parts of the complex modern economic system. People don’t only matter because they bring their labour to the owners of capital – as in the original, 19^th century definition of capitalism. And governments over the years have become regulators and keepers of the monetary order. Moreover, the economy is so closely integrated with modern society that no clear border separates the two. Social forces – such as the thirst for technological innovation, the work ethic and other moral values – play a fundamental part and influence the workings of the purely “capitalist” system.

A limited analysis often leads to unnecessarily grim prognoses. Think back to the 1960s, when environmental pollution was first identified as a serious problem. Many observers, enthusiastic capitalists among them, thought that the capitalist system couldn’t deal simultaneously with environmental goals and the search for profits. Economic disruptions were predicted. But changes in the law, technology, corporate priorities and cultural values combined to bring about a remarkable success in reducing noxious emissions, without noticeable harm to prosperity or profits.  The system found a way to price externalities without endangering itself.

Half a century later, people, including enthusiastic capitalists, are again wondering whether the system can survive. Now they cite the long financial crisis, or issues such as the exorbitant privileges of the very rich. They are not wrong to be concerned. If the economy were simply or primarily capitalist, either of these problems could well be lethal. After all, neither factory nor financial capital can be expected to allocate income and wealth justly. And the financial system could be too wounded to heal itself.

But the separation of the rich from the rest in some countries isn’t basically a failure of either capitalism or free markets. At bottom, it is a sign of inadequate social solidarity. The more direct causes, from politicians and regulators’ complacency to society’s general indifference regarding corporate pay, are more social than economic problems. The solutions – new rules, taxes, and behavior – will have little to do with the functioning of the core capitalist system.

Similarly, the financial disorder may look like a crisis of capitalism, but its causes and cures are political and moral. Financial markets have failed because politicians tried to give citizens more wealth than they have earned, bankers forgot the common good, governments refused to live within their means and investors’ greed was celebrated rather than restrained. No solution limited to the technical operations of the financial system can work for long, unless it is a reflection of changed political and moral attitudes.

Words are not everything, but the unquestioned identification of the modern economy as “capitalist” tends to constrain economic arguments. The debate is almost completely stifled when hyper-capitalists assume that any impediments to free markets are regrettable signs of  “market failure”. That dismisses most of the economy – from the government’s 40 per cent share of GDP to the 90 percent of the workforce employed in meritocratic bureaucracies. But the capitalist obsession also limits the insight of economists friendlier to government intervention and more skeptical about free markets. They tend to downplay social values and ethical analysis.

A new name for the modern economy might encourage a broader approach. Something bland might work – the business, or the industrial economy. I prefer a title that has a bit of spin on it. Acronyms are fashionable; perhaps it is time to introduce the BCRINCF economy — bureaucratic, competitive, regulated, innovative, collaborative and financial. But that’s a mouthful.

I suggest the “social market economy”. The term was coined in Germany after the Second World War to show that capitalism could be combined with a strong government presence, workers participation in company boards and an extended social safety net. The combination is still apt, as each of the two words captures something essential. “Market” takes in capital, competition and the eager striving for improvement. “Social” pays tribute to the human element and the need for economic activity to serve the common, social good. It is appropriate that social comes first in the title, because the modern economy is a largely a construction by and for the whole community. If it had been merely capitalist, it would not have lasted this long.

The cruise industry demonstrates much of what works well in the industrial economy. The debacle of the Costa Concordia – 11 people confirmed dead and at least 23 missing, and a financial loss of as much as $1 billion – shows some of the ways that the economy can malfunction.

The loss of life from the accident off the Italian coast is tragic, and the loss of money is remarkably large for a business that has global annual revenues of around $34 billion, according to Cruise Market Watch. That is not a big business by global standards; airline revenues, as calculated by the International Air Transport Association, are 17 times larger.

Still, the cruise trade is large and familiar enough to provide an illuminating microcosm of the modern economy at work.

The industry started with a little entrepreneurial imagination – Ted Arison, who founded Concordia’s owner, Carnival Corporation, in 1972, believed that there was a mass market for cruises. He was right about this little corner of the consumer culture – cruises are now a popular luxury. Affluence is what now animates the industry – cruise customers must have ample amounts of both money and leisure time.

But the idea would not have borne fruit without technological ingenuity – ever larger ships with ever more luxurious features for customers. Investors willing to take risks were also necessary: Carnival and its rivals had to raise money to build ships that did not have a guaranteed market.

Finally, although it rings hollow right now, strong regulation has helped keep the list of cruising accidents short, with almost no deaths. Even taking the Concordia into account, this sort of sailing is much safer than flying. Put it all together, and you get an industry that has increased its passenger count at a fairly steady 8 percent annual rate for two decades.

That sounds good, but something went badly wrong with the Costa Concordia. On the surface, the problem was nothing more than human error. The captain seems to have sailed too close to land, breaking the rules and overruling the technology.

But basic rules are almost never broken in a well-designed industrial process, and when accidents do happen, there should be recovery systems to minimize the damage.

So look further. Engineers may eventually decide that giant cruise ships need more safety features or even that the whole design is faulty. If that’s the final judgement, it will be hard not to think that entrepreneurial enthusiasm got out of hand. Imagination and innovation are crucial ingredients of modern prosperity, but heedless expansion and experimentation are not.

The cruise industry may be right that its technological model is up to snuff. The failures in the human system are harder to deny. True, it’s too early to say the captain was definitely at fault, and if he was, to decide whether his flouting of the rules was typical or tolerated. But it is clear that the evacuation of the Concordia was poorly managed. Panic could have been avoided if the large crew – one crew member for every three passengers – had been calm and well-trained. A safety drill for passengers, which was supposedly mandatory but apparently skipped, would also have helped.

Look still further. The carelessness on one ship can be traced to the pressures on the whole of Carnival to perform. No, top management didn’t simply sacrifice safety for the sake of profits. Micky Arison, Ted’s son and Carnival’s current chief executive, knew perfectly well that a serious accident would cost much more than any penny-pinching on safety could gain.

The pressure is more subtle. It is built into the economic logic of this fast-growing and competitive industry. Any company that doesn’t build enough ships will soon have an old fleet and can quickly become an also-ran. Carnival, which has a market share of close to 50 percent, is particularly eager to stay on top. But it is easier and faster to build new ships, even ones that cost hundreds of millions of dollars, than to create the sort of instinctive reflexes in the personnel that can prevent stupid accidents and ensure intelligent responses in a crisis.

Once the expensive ships are built, it is punitively expensive not to put them out to sea filled with paying passengers, even if the quality of the staff leaves something to be desired. So unless something is done to alleviate the competitive pressure to run full speed ahead, the people will almost inevitably be the weakest link in the enterprise.

One remedy is for regulators to require more rigorous training. But it would be better if the companies themselves took on the moral responsibility. They could agree to slow expansion until the human capital can catch up with the physical. If bad publicity from the Concordia disaster sparks such a commitment to the common good, then the deaths and damage will not have been completely in vain.

PHOTO: A view of the Costa Concordia cruise ship that ran aground off the west coast of Italy, January 18, 2012. Italian divers suspended their search of the capsized cruise liner after the vessel shifted slightly on its resting place near the Tuscan island of Giglio, officials said on Wednesday. REUTERS/ Max Rossi

“It’s the economy, stupid.” The words date from Bill Clinton’s 1992 presidential campaign, but the basic idea that political shifts are the visible manifestations of hidden economic developments was first articulated by Karl Marx, who wrote before the word “economy” had its current meaning. When he declared, in 1848, that “The history of all hitherto existing society is the history of class struggles,” the notion was truly revolutionary. It has become a commonplace. Pundits ferret out economic causes for everything, politicians strive to present voters with economic good news, and careful studies show that economic trends influence elections.

Like most often-repeated generalizations (“Germans are orderly” or “an army marches on its stomach”) the claim that politics is fundamentally about economics has some truth to it. But I think pundits, politicians and voters would all benefit from a bit of revisionism. It’s not always the economy, and when it is, politicians cannot do much about it in a hurry.

Start with the expert commentators. I’m thinking of the people who confidently declare that the Arab Spring was caused by the increased cost of food. Or the ones who explain the poor performance of Vladimir Putin’s party in the recent Russian parliamentary election as a reflection of stagnating average incomes. The invasion of Iraq? It was the oil, stupid. The rise of anti-immigrant parties in Europe? Look no further than the job market.

Such claims cannot be disproved, since they concern motivations which are unknown to the actors themselves. I may “think” that I want to get rid of a kleptocratic government or that I’m uncomfortable with the president’s autocratic tendencies, but I’m just being, well, stupid. Idealism and xenophobia are mere covers for a calculation, possibly erroneous, of economic self-interest.

But it is the pundits who are being simple-minded, if not devious. Most of the leaders of the Arab revolts had prospered under the old regimes, and the recent elections in Tunisia and Egypt have been won by parties with a clear religious agenda but only vague economic plans. When protesters say they thirst for justice and when voters indicate they desire holiness, there is no good reason to think their stated views hide a more ignoble reality. An excessive focus on economic issues makes the pundits unreliable guides. They should remember that economic issues are sometimes crucial in people’s lives, but more often not.

Politicians do need to worry about the economy, if only because government spending in the G7 group of rich countries was equal to 45 percent of GDP in 2011, according to the OECD. The political decisions on how those sums will be extracted and spent – not to mentions the laws and regulations that shape the private economy – are crucial for the economy and important for the nation.

Politicians too often exercise their economic responsibilities in an irresponsible way. It takes years for policies that encourage investment, innovation and employment to bear fruit, but leaders often focus on creating enough good news to win the next election. That often leads them to increase fiscal deficits. These may seem painless for a while, but eventually politicians have to choose between fiscal austerity, which makes them unpopular right now, and continued fiscal recklessness, which will wreck the economy quite soon. Greek and Italian politicians were not up to making the choice. The best they could manage was an agreement to let non-political, technocratic governments introduce sensible but painful policies.

There is a better way. Politicians should stop trying to work economic magic. That means they should admit — publicly and loudly — that the only sustainable way to produce desirable statistics on incomes and unemployment in any month is to have made the right decisions many years ago. Consistent and sensible economic policy is the best support for durable prosperity.

Of course, politicians behave the way they do largely because voters seem to demand it. The American political debate is particularly disheartening to anyone with a minimal knowledge of economics. The nation’s combination of high fiscal deficits, stimulative monetary policy and a persistent trade deficit is an invitation for disaster, but neither Democrats nor Republicans are willing to admit it. They are following polls and focus groups, which tell them recklessness is all right.

The irony is great. If politicians were willing to teach and voters to learn, governments could put their economic houses in order. Of course, the transition would be much easier if politicians had not spent decades putting off virtuous behavior until after the next election, but in a rich country such as the United States the pain of getting policy right would still be modest, especially in comparison to the woes that will come whenever foreigners stop funding the government. Then it really will be the economy, thanks to some remarkable – and avoidable – stupidity.

PHOTO: Workers place construction chains at the Karl Marx sculpture of the Marx-Engels monument in Berlin, September 8, 2010. REUTERS/Tobias Schwarz

By Edward Hadas

The opinions expressed are his own.

Ah, the curse of materialism. The true spirit of Christmas has been obliterated by a landslide of gifts. The crass commercialism which surrounds the experience of holiday shopping, not to mention the returns and post-Christmas sales, has turned this joyous holiday into little more than an exaltation of the worst aspects of our modern consumerist economy.

Or so it is often said. But is the complaint fair? It’s certainly true that the exchange of gifts on a large scale is a relatively new feature of Christmas festivities. In the 1840s, Charles Dickens has the Spirit of Christmas Present take the miser Ebenezer Scrooge to witness joyous celebrations of the feast. Food, drink and good cheer are in abundant supply, but there are no presents.

In the 1880s, hand-made gifts were making the day special for many American children. By the 1920s, a more commercial spirit had triumphed in the land of mass production and the factory-made Christmas was already causing complaints about inappropriate gifts. According to historian William Waits, some businessmen felt a little queasy about advertisements for such supposedly ideal Christmas gifts as a can of paint, a cooperative apartment, potatoes and floor wax.

Waits notes that Santa Claus had starred in many seasonal advertisements. He plausibly interprets this as a sign of discomfort with the invasion of the cash nexus into a holiday which was then still considered predominantly religious. The desire to make people buy things and the search for profit seemed to fit poorly with the poor infant of Bethlehem. But the reworked Saint Nicolas took gifts out of the marketplace. In Waits’ words, Santa “did not use money and was not engaged in making profit…. His gargantuan giveaway was antithetical to pecuniary self-interest and its only reward was the satisfaction of making recipients happy.”

The jovial generosity in the North Pole workshop can certainly be interpreted as no more than a feeble attempt to escape the dark reality of “pecuniary self-interest” (aka greed). There is no question that Christmas is now a big business. Holiday presents account for about 0.6 percent of U.S. GDP, based on spending intentions reported in a Gallup survey. Producers and retailers alike cannot easily separate the spirit of the season from the call of the cash register.

Not that Christmas greed can always be measured in dollars and cents. Few people are as bold as the British girl who threatened Santa that a failure to deliver on her wish-list would drive her to “hunt down your reindeer, cook them and serve their meat to homeless people on Christmas day”. But parents and other gift-givers will recognise the sentiment. Recipients’ high expectations can turn the exchange of presents into something like extortion.

Some families have been so repulsed by the grasping and the commercial spirit that they have vowed to boycott the holiday completely. Others try to simplify. I know one which has reduced the exchange of gifts to the barest minimum — each family member gives $100 in cash to every other.

Such Scrooge-like approaches miss the good side of Christmas giving. The holiday can be considered the annual highlight of an industrial version of what anthropologists call a gift-culture. Gifts are useful and easily understood tokens of emotional and social life. The obligatory nature of many gifts (“I have to get something nice for auntie”) does not necessarily make the offering insincere (“That’s so kind of you to think of me”). On the contrary, when the gift-culture works well, love and duty reinforce one another.

At its best, the contemporary Christmas gift-culture does have something of a Santa-effect. The harsh logic of prices and markets gives way to the generous logic of love and the anonymous products of mass assembly lines are transformed into personalised tokens of affection and esteem. Even the seasonal excesses spring from good intentions. Christmas presents can show that there is a spirit more powerful than the mean techniques of monetary calculation.

The Christmas culture deserves neither condemnation nor enthusiastic endorsement, for it is both a generous celebration of abundance and a distasteful materialist greed-fest. The noble and the base are inextricably mixed. Christmas makes shopping close to something like holiness, but it also brings out some of the worst aspects of consumerism — the blind desire for ever more stuff, the desperate search for bargains and the restless ambition to show status through nice things.

The best aspects of Christmas are undermined–and the worst are amplified — by the weakness of any gift-culture, the limited ability of material things to represent the immaterial. No quantity of generosity can prove that the gift-giver is truly socially superior to the recipient. And nothing found in a shopping mall or on a retailer’s website will truly show the extent of our love.

Photo: A visitor lights a candle at the Church of the Nativity, the site revered as the birthplace of Jesus, in the West Bank town of Bethlehem December 19, 2011, ahead of Christmas. REUTERS/Darren Whiteside

Something has gone wrong with global warming. It’s not that the world has stopped heating up. It’s that the anti-warming political movement, which seemed almost unstoppable when the Intergovernmental Panel on Climate Change won the 2007 Nobel Peace Prize, has stalled.

Last week’s United Nations climate change conference in Durban ended with little more than an agreement to talk some more about what to do next. Even that was too much for Canada, which has just said no to emission-reduction targets. The activists blame recalcitrant governments and many commentators blame economic distractions. They are probably both right, but I think the activists’ own approach bears much of the responsibility.

While only experts can judge the strength of the scientific evidence for man-made climate change, no technical knowledge is required to be troubled by the way the activists present their case. The willingness to describe knowledgeable opponents as “deniers,” a word previously used only for fantasists about Nazi atrocities, suggests a very unscientific attitude.

The “Climategate” emails show scientists so passionate about their beliefs that they are unwilling to brook opposition. Fervor seems to have led to overconfidence. The status of the claim that recent years have been by far the warmest in a millennium has been downgraded from certain in 2001 to likely or mistaken (depending on the expert consulted).

The activists’ excess of passion and certainly has led them to a dogmatic conviction that a radical policy — rapid and sharp reductions in carbon dioxide emissions — is required to save the world. Since industrial economies cannot yet function without using large amounts of energy generated by burning carbon, the anti-carbon prescription equates to a campaign against prosperity — tough on rich countries (too tough for Canada to bear) and practically a sentence of economic stagnation for poor ones.

Such draconian measures only make sense if global warming is exactly what devout affirmers say it is — hazardous, accelerating, man-made and about to go non-linear (science-talk for catastrophic). Otherwise, a more moderate strategy makes sense. We should work on energy conservation (good in any case), increase research on carbon-neutral technologies and build up industrial production and prosperity in poor countries so they will be better able to marshal technological forces against the problems which global warming may eventually cause.

Why do activists show so little interest in such a sensible compromise? I blame the sorcerer’s apprentice. In the 1797 poem by J W Goethe (familiar from in the Walt Disney film Fantasia), this clever student is able to invoke — but not control — the magical-technological ability to turn a broom into a water-carrying machine. The man-made global warming activists tell a less poetic version of the same story. It goes like this: we have learned how to use the energy stored in the earth to serve our purposes, but do not know the spell which keeps the unleashed energy from destroying us — and we have no equivalent to the poem’s old master to rescue us from our carbon folly. Halfway countermeasures are likely to replicate the apprentice’s effort to stop the broom by splitting it with an axe — he ended up with two brooms and twice the trouble. Under the circumstance, moderation would be madness.

Durban is history, but the debate on global warming can still be calmed down. Activists need to admit that both their scientific analyses and their policy recommendations have been under the spell of this sorcerer’s apprentice-model. Rather than telling a simple tale of good (themselves) and evil (unresponsive industry and anyone who disagrees with them), they should accept that possible man-made climate change is a complex topic which deserves dispassionate study. True, delay might prove dangerous, but so too might hasty action. Besides, in practice, the activists’ current approach has been tried and found wanting.

A call for more careful study is not a counsel of despair. Rather, it is a call for aid from one of the most effective power-groups in the contemporary economy: scientists and engineers working together with politically sensitive regulators. Consider the dark arts of aviation, mobile phone technology and nuclear power (now there’s something with a sorcerer’s apprentice-feel). In all these domains, knowledge has been advancing steadily, accidents are rare and well grounded criticism has helped to make the technologies safer and more acceptable.

Indeed, in the modern economy this technical-regulatory complex — undramatic committees meeting in unbeautiful offices — plays the heroic role of the master sorcerer. It does not permit wild experiments and it eventually changes old practices when new evidence comes along. If climate change is to be taken seriously, the IPCC and UN conferences need to have less madness and more method.

By Edward Hadas
The opinions expressed are his own.

Americans are both the fattest people in the world and the biggest spenders on health care. Both those facts can be traced, at least in part, to a common attitude.

First a few numbers. The latest global handbook from the Organization for Economic Co-operation and Development (OECD) shows that 34 percent of Americans are obese by the criteria of the World Health Organization. In health care spending, the United States leads with 17 percent of GDP. In both categories, U.S. numbers are almost twice as high as the average numbers of OECD members.

The extra fat accounts for only a small portion of the extra American spending on health care. Researchers recently estimated that the medical expenses caused by obesity, which is connected to problems such as high blood pressure, heart disease and diabetes, amounted to $147 billion in 2008. That number suggests that even if Americans were no fatter than the OECD average, they would only spend 3 percent less on health care than they do now.

I believe there is a more significant connection between the obesity problem and the amount Americans spend on health care than these numbers suggest. Both the choice to eat too much and the choice to pay up for almost everything labelled “medical expense” are spawned by an attitude which can be called health willfulness. The United States leads the world in this attitude, but it, along with obesity and health care spending, is probably on the rise almost everywhere. It helps explain why spending on health care increased from 4 to 10 percent of GDP since 1960 for the entire OECD.

Health willfulness is the belief that it is my right to decide what to do with my body. If I want to eat without concern for my health, so be it. When it comes to health care, I expect the modern medical system to satisfy my desires, whether for help in getting slim again or for heroic efforts to prolong my life. Money should not matter.

The attitude fits with the modern culture’s enthusiasm for individualism and consumer choice, but it has some unattractive consequences. The damage caused by a willful approach to eating is plain to see. The damage caused by willful health care is harder to see because it can be obscured by the sensitivity of life and death matters. Is it not better to favor life, whatever the cost? But the willful approach to medical care has made the American system sickly. Too much is spent on care that pleases vain or desperate patients and family members, without doing much for health. As much as one-third of total spending is dedicated to care during the last year of life.

There would be less to complain about if the high cost of these willful choices were born only by those who make them. But direct payments from patients account for only 12 percent of the total medical spending in the United States. The rest of the funding comes from society as a whole, through plans run either by governments or by heavily regulated insurers. In effect, health willfulness is usually an individual’s decision about how to spend everyone’s money.

The socialization of medical costs has much going for it. Both the mixed American and European systems and the more monolithic British arrangement provide the poor with care they could not otherwise afford. Socialization also spreads the burden of expensive treatments over a lifetime and the costs of sickness over well and sick alike. But the combination of medical socialization with health care individualism has increased total health spending and created involuntary subsidies from those who chose fewer interventions to those who choose more. In most rich countries, both the economy and justice would now be served by a partial de-socialization of health care.

How to do it? One approach is already standard practice in many American and European arrangements — make patients pay part of the cost. These plans would be more effective and just if the fees were calibrated to incomes, so rich and poor people felt the same economic pain. (Speeding fines are set this way in Finland.) Another approach is to allow people to opt out of the socialization of costs for selected treatments. They could choose an insurance plan which excludes, for example, serious operations for people over 80 or treatments for cancer which add less than one year to life expectancy. The frugal would pay less and get less. Alternatively, the standard health insurance policy could cover less than it currently does. Higher priced policies would be available so the most willful could still satisfy their health care desires.

The practical details of medical de-socialization — setting prices and dealing with late changes of mind — are tricky. But it’s worth a try. We’re more careful about expensive things when we have to pay for them out of our own pocket.

Photos, top to bottom: A cheeseburger is pictured at a Five Guys restaurant in Washington May 26, 2010. REUTERS/Yuri Gripas; A passenger waits for a delayed flight at Heathrow airport’s terminal four in London August 12, 2006. As healthcare costs in such heavyweight nations as the United States and heavy-smoking locations as Dundee keep rising, and as governments move to cut huge budget deficits, hundreds of local authorities, employers and health insurers – even the occasional former investment banker – are dabbling with health incentive schemes. REUTERS/Toby Melville

Once upon a time there were 11 prosperous merchants who lived in a land of peace and plenty. They decided to form a league that would work together for everyone’s greater good. But then a charming man in a fine suit came around with a tempting speech: “I love your project and trust your businesses. I will lend you money at a very attractive interest rate”. How nice, thought the merchants. Our customers will love us if we use the money we borrow to give them better deals.

All went so well that six other merchants were proud to join the league. Mr. Fine Suit seemed pleased. He reduced the already low interest rate on the loans. The merchants all planned to repay, but today was never quite right. Today, in fact, was always a good day to borrow more, while tomorrow always looked like a better day to raise prices.

Then one day Mr. Fine Suit changed his tune. “You know, you have a mighty nice little enterprise going here. But business is business, my friends. Interest rates are going to rise for some of you.” The merchants were angry, but what could they do? They promised to be more frugal, but still had to pay up. As the months went by, Mr. Fine Suit became more hostile. Just last week he came to the G-store, the most prosperous and prudent of all the merchants, with a really nasty threat. “You know, between us, I’ve never liked your stupid league. You’re much smarter than the rest. Leave the league and I’ll keep on lending you money at a low rate. If not, well, here’s a little reminder of what I can do.” He increased the interest rate by two notches before leaving the room with a menacing smirk.

The story is a parable of the euro zone debt crisis. The merchants are the member governments, the customers are the taxpayers and Mr. Fine Suit represents the banks, fund managers and individuals who lend to governments. These investors in government debt tend to think and act alike; just about two years ago their message to the euro zone changed from “We’re behind you all the way” to “Nice little monetary system you have here. It would really be a shame if something happened to it”.

The euro zone’s weaker members and the EU as a whole have responded to the threat with tougher budgets than were ever contemplated while investors were still friendly. But the investors have started to behave like an extortionist, demanding ever higher interest rates and threatening to withdraw funding totally. Even fiscally healthy Germany (the G-store) is now under threat. Of course, investors do not think of themselves as extortionists or even as malicious. They think of themselves as merely law-abiding professionals trying to protect the value of their investments, either by making sure the governments will be able to pay up or by selling before the governments default. But many sensible individual fears — “I don’t want to be caught out” — can add up to group menace– “You must meet our ever harsher demands – or else”.

The fable of Mr. Fine Suit could be elaborated to include the European Central Bank as policeman, but the addition would not change the moral: the mix of governments and financiers can easily become toxic. It has always been thus, at least as far back as the English King Edward III’s 1343 default bankrupted the lenders of Florence. The political-economic logic behind these recurrent crises is straightforward. On the one hand, governments which are too weak to cover current expenses with tax revenues are bad credit risks. On the other hand, when previously supportive lenders suddenly turn against profligate governments, they look arbitrary and rapacious.

In recent years, these basic truths have been obscured by the widespread acceptance of a principle associated with the British economist John Maynard Keynes — governments should sometimes spend a little more than they take in to keep the real economy humming along. Even if the Keynesian principle is right, it justifies neither the imprudent deficits which Greece ran up after it entered the euro zone nor the ease with which it was able to borrow to fund those deficits.

In the euro zone, Mr. Fine Suit is now on the rampage. In the United States, he is still very friendly. But the stubbornly large American deficits – currently more than twice as high as the euro zone’s as a share of GDP – are a sign of political inadequacy. Like Edward III and the government of Greece, the U.S. government has consistently decided to spend significantly more money than it is willing to demand from taxpayers. Unless Congress finds a way to balance revenues and expenditures, sooner or later America’s Mr. Fine Suit will be coming around with a baseball bat.

Photo: An employee at the National Bank of Belgium holds a new 500 Belgian Franc note (front) and two small reproductions of paintings by Belgian famous surrealist Rene Magritte. REUTERS/Nathalie Koulischer

Around 100 BC, a Roman nobleman calculated that it took about 100,000 sesterces a year to live comfortably. That was roughly 200 times the amount of money a poor city dweller needed to eke out a living. If an American needed the same multiple of the subsistence income to join the upper middle class today, the threshold would be $3.5 million. The United States economy has become less equal lately, but it remains much more egalitarian than the ancient Roman Republic.

The modern news on economic inequality is much more good than bad. The good news is very good. The greatest moral problem caused by inequality – the unequal access to the most basic economic goods, those which support life – has become less severe. The portion of the total population that suffers from this bottom-inequality is probably the lowest ever in history.

True, we do not know how many ancient Romans were on the wrong side of the bottom-inequality, but statistics for the most recent decades are encouraging. In 1970, 26 percent of the world’s population suffered from hunger, according to the UN’s Food and Agriculture Organisation. The proportion is now 13 percent – still scandalously high, but the gain in food-equality is clear. Nor is food an isolated example. Electricity is a relative new development, but the Soviet dream of universal electrification has already nearly become a reality; more than 80 percent of the world’s population can plug in, according to the International Energy Agency. Health care and sanitary living conditions are now considered basic goods – and access to them has become more equal. The average life expectancy at birth is 65 or above in countries accounting for roughly 80 percent of the world’s population.

The bad news is on the other end of the income spectrum. There has been an increase in top-inequality – a widening gap between the elite and the rest – in the United States, the UK and a few other countries. The bottom 90 percent in the United States are not exactly suffering; they have been getting richer on average for the last few decades. But the rich, especially the very rich, have been getting richer much faster. The top 10 percent of earners took in 32 percent of the nation’s total income three decades ago. That has risen to 46 percent. The share taken by the top 1 percent has more than doubled, from 8 to 18 percent, according to the World Top Incomes Database. In the UK, the newly published report from the High Pay Commission points out that the top 0.1 percent’s portion has multiplied from 1.3 to 6.5 percent.

The increase in top-inequality is bad in principle. People are not different enough in their abilities or in their dedication to work to justify the recent increases in the gap between rich and relatively poor. The damage can be seen in practice. The commission makes a good case that top-inequality reduces social solidarity, making companies less efficient and slowing GDP growth. It also points out, along with the book The Spirit Level, that greater top-inequality is associated with societies which have more health and behavior problems.

Still, there are four mitigating factors:

First, the allocation of wealth within a society is usually best left to the collective judgement of that society. The people have not, not yet at least, definitively rejected the widening gap between rich and poor. That suggests the problem is not widely perceived as grave.

Second, the elite just might be able to do some good with their extra resources. The ancient Romans offered bread and circuses and renaissance princes sponsored artists. In modern industrial societies, the financially secure elite could be a helpful alternative to governments for cultural, social and economic initiatives.

Third, whatever the evil caused by top-inequality in rich societies, it is much less significant than the good news on bottom-equality. As the American and British masses get richer, it becomes harder to argue that they lose out in a morally significant way when the elite gain. Even the poverty which causes the social problems identified by The Spirit Level is arguably more spiritual and social than strictly material.

Finally, if the people do decide that the recent increase in top-inequality is unjust, the trend can be reversed with much less trouble than bottom-inequality. Major social changes are required to increase crop yields or trade in the remaining deprived parts of the world, but the rich can be curbed fairly easily in developed economies. Choose from the following list: shame, taxes, limits on the range of pay inside companies or income caps in the particularly lucrative financial sector. Even for the very rich, the sacrifices needed to reduce inequality would be mild. As Bill Gates pointed out, more money stops meaning much after the first few millions. In his words, “it’s the same hamburger”.

“The Owl of Minerva takes flight only as the dusk begins to fall.” Or, to speak more directly than G W F Hegel, we can only become wise about the direction of history late in the day. The aphorism is pertinent to the euro crisis. Is this the twilight hour for the single currency or are the clouds over the euro no more than an early morning mist in pan-European history? The euro’s fate will look inevitable in retrospect (that is Hegel’s point), but for now the balance of historical forces is far from clear.

The technicalities of the euro crisis are bewildering, even to financial professionals. There are rescue funds constructed with baroque techniques of financial engineering, arcane details of labor market reforms and political feuds that have festered for decades. But something much bigger is at stake – whether or not there should be, in the words of Angela Merkel, “more Europe.” If so, the crisis can be resolved relatively simply: lenders would accept the losses caused by their past mistakes and errant governments would promise to play by the fiscal rules henceforth.

But should there be more Europe? Most British politicians think not and most mainstream continental politicians are in favor, if only warily. The reasons on both sides are fundamentally Hegelian. It is a question of which historical forces should prevail.

The anti-euro case is based on one of the strongest forces of the last few centuries – nationalism. The sentiment is sometimes expressed in economic terms, as when the previous British government rejected membership of the monetary union. A multinational currency always goes directly against the nationalist flow, even where the economic case for it is strong. In order for the euro to succeed, Germans must abandon hopes of duplicating their super-strong national currency and Greeks and Italians must either abandon longstanding traditions of loose fiscal behavior or learn to tolerate interference from EU authorities.

On the pro-euro side, two grand historical forces have provided most of the support for both the European Union and its currency. Both are faltering.

The first is a peculiarly modern force, the fear of war (Hegel thought war was a major spur of historical progress). While Europeans still dread another conflagration, nearly seven decades of peace, including the non-violent fall of the Communist bloc, have been enough to render the threat of war largely theoretical, and irrelevant to the European monetary system.

The second force is the desire for ever greater prosperity. This force, which has come into prominence during the last two centuries, influenced the European leaders who wanted to bring Europe together after the Second World War. They thought the economy was the most promising domain for cooperation, and they were right. European politicians and voters alike have proved willing to sacrifice national traditions and rivalries for the sake of European prosperity. The EU now has free trade, standardized regulation and almost unconstrained mobility across borders. The single currency was supposed to be the culmination of economic integration.

The bitterness surrounding the euro crisis shows that the lure of prosperity is now, at best, barely enough to inspire European governments to change their ways. While most politicians still believe that the euro will eventually bring their nations more wealth and economic stability, they and their voters are seriously in doubt whether those goods are worth more than national self-determination.

Philosophers of history might speculate that the desire for prosperity is a waning force today because it no longer has the same power to inspire the comfortable citizens of the EU as it once inspired the impoverished men and women scraping a living amidst the rubble of post-war Europe. Whatever the reason, the euro will not survive the next crisis (even if it scrapes though this one) unless European leaders make a stronger effort to identify their project with historical forces more politically compelling than ever more material gain.

The stakes are high. If the member nations retreat on the euro, further disintegration is likely. That owl of wisdom will probably look down on the movement towards European unity as no more than a wrong turn on history’s path.

But the euro and indeed the entire European project could draw on stronger forces. You don’t have to be a Hegelian to see that Europe as a whole, rather than individual jurisdictions, has been shaped and guided by such great ideas as Christianity and the philosophies of Greece and the Enlightenment. More recently, the entire region has striven to realise the dreams of democracy, honest government, economic security and educational opportunity.

Supporters of the euro and of “more Europe” might look to the French revolutionary call for liberty, equality and fraternity. These are ideals which erase neither national borders nor local customs, and so they can co-exist peacefully, if somewhat delicately, with nationalism. But the euro does indeed have the power to enhance the liberty that comes with effective economic management: the equality of citizens protected by fiscally sound governments and the fraternity that binds the strong and weak.

PHOTO: German Chancellor and leader of Germany’s conservative Christian Democratic Union (CDU), Angela Merkel gives her closing speech of the party convention at the fairground in Leipzig, November 15, 2011. REUTERS/Tobias Schwarz

“Our culture must be one where the interests of customers and clients are at the very heart of every decision we make; where we all act with trust and integrity.” The words are from a recent speech by Bob Diamond, chief executive of British bank Barclays. In a way, this is just the usual corporate guff. No boss will tell the world about untrustworthy workers who try to harm customers. But Diamond’s aspirations are a particular challenge for the financial industry.

Not that finance itself is an ignoble activity like drug dealing or contract killing. On the contrary, finance has a noble goal, the support of a just and effective economic community. Banks, fund managers and the like collect funds that is surplus to the owners’ current requirements. The funds are then made available to organizations and individuals which can make good use of them. The gains from that good use are justly shared between provider and user, with the intermediary taking a small fee for its valuable services.

That is a pretty picture, but in the pre-crisis finance world, the intermediaries often lost sight of their economic purpose. Customers came third, after employees and shareholders. Bankers, banks and other institutions were misled by a particular form of greed, the belief that finance is more about gaining than sharing.

These days bankers are often called greedy. The opprobrium is basically merited, but financiers are not that different from other players in the financial game. Investors are greedy whenever they try too hard to outperform the economy, especially when they don’t invest in new projects but only trade financial instruments. Homeowners are greedy when they expect to become richer by doing nothing more useful than borrowing money. Governments, and the voters they try to please, are greedy when they borrow to offer more services than taxpayers are willing to pay for. And shareholders are greedy when they ask for profits which cannot be earned without taking advantage of customers.

Financial greed permeated the economy before the crisis – and it has hardly diminished since. Of course, like lust or pride, greed lurks wherever people are found. But in most parts of the economy, higher aims keep greed in check. Yes, airlines are run to maximize profits and passengers try to minimize fares, but the planes would not stay in the air if safety were not everyone’s first priority. Yes, workers rarely say, “I don’t deserve or need that raise,” but the economy would grind to a halt if workers did not mostly try to do a good job, whatever the level of pay.

Finance really is different. Financial greed is not merely tolerated; it is lauded. Star investors are treated as heroes. Politicians, fund managers and homeowners all welcome sharp increases in the prices of stocks or houses, even though the gains are unearned and asset price inflation benefits the rich and leaves the poor behind. Financial regulation provides little help. It generally aims at making the game fair, not encouraging moderation among the players.

Barclays’ Diamond is on the right track; financial institutions should promote a new attitude. But bank employees do not work in a vacuum. Unless most of their clients also accept that greed is really not good – and regulators stand ready to take a firm moral stance – memories of the last debacle will fade and regulations will be circumvented. The lure of excessive financial gain will soon lead to excess in the markets – followed by collapse and new calls for moral introspection.

There is a better way, and it does not require the exercise of superhuman virtues. Ethical finance demands no more trust, integrity or respect for clients than is already found among airlines. What it does require is a clear understanding of the purpose of the trade: the mutual benefit of all.

That understanding is hardly new. It was accepted by most local banks (think of the community support offered by Bailey Savings and Loan in It’s a Wonderful Life) and it inspired mutually owned financial institutions, which were common – and mostly successful – until a generation or two ago. The mutual structure (banks owned by their customers) makes economic sense, since bank depositors and borrowers are basically the same people and institutions, just in different phases of their economic life.

Demutualization, which turned careful depositors into greedy shareholders, was a theme during the decades of financial excess. A return to the practice and culture of mutuality should be at the top of an anti-greed financial agenda. The rest of the agenda is a topic for future columns, but Diamond does not go far enough. Nothing will work unless all of us – not just bankers – are committed to trust and integrity. In the words of George Bailey: “We can get through this thing all right. We’ve got to stick together, though.”