Edward Hadas

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.

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.

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 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.

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.

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.”  

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”.

What’s the goal of development? A standard answer is higher gross domestic product. A few specialists prefer to talk about building capabilities. I have another idea: development should be about suzhi, a Chinese word usually translated as quality.

China has been worrying about development for a long time. Reformers in the 19th century wrestled with how to overcome the people’s backwardness without losing what was truly great and distinctive about the Middle Kingdom. They saw that development, as it’s now called, involved a major reworking of culture and society. It encompassed the economy, education, law, politics, the military, the arts and medicine.

Today’s international community has adopted a much narrower understanding. Leaders of poor countries and experts in the field pay often think of development as being centred on economic growth. Social and cultural changes are treated as little more than tools to help increase GDP.

As a slogan, the Three Represents was puzzling. It was in 2000 that Jiang Zemin decided that the once revolutionary Chinese Communist Party would represent the private sector, which he called “advanced productive forces”; along with its traditional constituencies of intellectuals (“advanced culture”) and workers (“the overwhelming majority of the people”).

The 2000 strategy of Jiang, then the General Secretary of the CCP, did help bind the peculiarly Chinese political system into promoting the common good. The challenge was to ensure that the nation’s single political force did not lose touch with the country’s increasingly diversified economy. The inclusion of bourgeois businessmen and grasping capitalists has kept the Party credible and effective in a poor and ideologically scarred country. But as China leaves impoverishment behind, its leaders need to worry about more than mere material prosperity. The time has come to plan for a broader national agenda – a move from the Three Represents to the Five Responsibilities.

First, China must honour the responsibility to its past. For the past two centuries many Chinese leaders have seen their homeland as backward. They enthusiastically cast aside ideas and ideals which – until about 1700 – had made Chinese culture so sophisticated, its philosophy so profound and its government so impressive.

“Charity is a cold, grey, loveless thing. If a rich man wants to help the poor, he should pay his taxes gladly, not dole out money at whim.” Clement Attlee wrote that in 1920. As British prime minister after World War Two, Attlee turned thought into policy. The welfare state that he helped create has decimated private charities for the poor.

It’s much the same in all rich countries. Governments now take the prime responsibility for the care of the poor. Even in the United States, where the charitable (voluntary) sector is relatively large – twice as high a share of GDP as in the UK, according to the charity Philanthropy UK – the share of GDP taken by federal and state welfare programmes, as measured by the OECD, is 10 times higher.

But Attlee’s judgment has been proved wrong. If organised charity was cold, the carefully calibrated payments and entitlements of the welfare state are icy. The welfare state has many aspects but in terms of the alleviation of misery it has not worked as intended. The decline of hunger and voluntary homelessness – and the spread of electricity, telephones and the like – might suggest otherwise. But the increase in overall prosperity and the establishment of the principle of a “living wage”, rather than the mechanisms of government entitlements, have wrought these changes.