Edward Hadas

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.

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.

A more sophisticated alternative is the “capabilities approach”. Amartya Sen, a philosophically minded economist, argues that the poor countries should develop whatever capabilities are needed for their residents to be free. His idea of freedom is multifaceted: it includes freedom from starvation, premature mortality, illiteracy, political disenfranchisement and censorship.

But the capabilities approach has some flaws. First, it assumes that the final goal of development is an individualistic, secular and democratic welfare state, as found in Europe and the United States.

That’s presumptuous; there could be other ways to be civilised in the modern world. Second, the emphasis on freedom misses the fact that it often takes a bit of coercion to overcome ignorance, superstition and squalor. Finally, it leaves no place to go once all of those capabilities have been reached.

That’s where Suzhi comes in, a word made up from characters meaning ’essential’ and ’nature’. Encompassing wealth, health, education, sophistication and nobility of character, it has become a key concept in Chinese discussions about society.

To have low suzhi is to be backwards – to think and behave like a peasant. The government has tried to raise China’s suzhi by limiting births and promoting breast feeding, healthy exercise and less exam-centred education. Individuals try to raise their own suzhi by doing well at exams, becoming modern consumers and seeking spiritual self-improvement. Having high suzhi is close to what Westerners would describe as “being a good person”.

The concept develops indefinitely as incomes increase and horizons broaden. Suzhi can always rise higher. In this fight against backwardness, prosperity is not the end goal, though it does provide the means to increase suzhi.

Andrew Kipnis of the Australian National University gives the example of Harvard Girl, Liu Yiting: A True Chronicle of Suzhi Cultivation. This Chinese best-seller – 2 million copies sold, according to the publisher – explains how one girl’s suzhi was so thoroughly cultivated that she was accepted as a Harvard undergraduate. Her suzhi-building exercises included memorising classic poems at age three, holding ice cubes for 15 minutes at a time and learning the right moral attitude.

Not everyone in China is keen on the quest for suzhi. Kipnis also mentions a book called I am Average but I am Happy. The government attempts to moderate the fanaticism of suzhi-seeking Chinese parents.

Meanwhile, some see the focus on suzhi as a Chinese trick for excusing authoritarianism. Popular blogger Han Han stirred up controversy with his argument that China’s suzhi is not yet high enough to support a successful and stable democracy.

Other observers complain that the emphasis on suzhi is shallow and materialist. It can be socially divisive if some people are thought to have higher suzhi by nature, or if the rich seem to have more opportunities to cultivate it.

But these aren’t really arguments against suzhi itself, more criticisms of how we measure it, or strive for it. And they don’t change the sense that suzhi is what China’s leaders and people want from development. It’s hard to think of another guiding principle that takes in material and social ambition, governmental guidance and individualistic spirit, confidence in self-improvement and a complex relationship with traditional values.

While suzhi has been specifically Chinese up to now, the basic idea – becoming a better person – is universally applicable. Each poor country should find its own suzhi. And even rich countries could do with a debate about values and aspirations. An Asian word seems appropriate for this global concept, as that region is likely to be centre of development for generations to come.

Economists might not be happy if suzhi were to became the centre of study. Their simple measure, GDP, would receive less attention. Besides, economists like to measure things, and suzhi is not a quantity but a changing collection of qualities. But then, development is far too important to be left to economists.

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.

A visit to the new “Road of Rejuvenation” exhibit at Beijing’s National Museum of China suggest that the naively Marxist narrative of class conflict and revolutionary heroism lives on. Of course, such propaganda should not be taken at face value, but a more honest and helpful view of the past is both possible and desirable. The government will struggle to maintain intellectual legitimacy if it relies on such a narrow vision of history.

Second, the government has the responsibility to develop a more consistent attitude to the West, as the Chinese often call everything that has emerged from European traditions. Having cast out so much of the Chinese past, the CCP often accepts the West as the standard-setter in technology, law, education and culture. As the country becomes more successful, it will need to copy less and develop more of its own version of modernity.

The most urgent aspect of this responsibility is to rethink a Western idea which has been abandoned in its homelands. Communists believed that an advanced State had no need to allow political opposition or organisations which are not closely aligned with the government. The Party need not remain enslaved to this bad idea. Even if the one-party government remains sacrosanct, the distrust of civil society, which makes it difficult for activists, artists and religious groups to flourish, deserves reconsideration.

Third, the CCP has a responsibility to develop its non-economic elite, Jiang’s “advanced culture”. While the CCP discarded most old ideas, it continued the pre-Communist Chinese belief that intellectuals and spiritual leaders should play an important role in setting the national agenda. But in the last decade, the Chinese elite seem to have decayed. Money-grubbing and technical thinking have triumphed, at the expense of imagination and moral example-setting.

Fourth is the responsibility to the common people, Jiang’s “overwhelming majority”. The CCP does a pretty good job for the people, especially on economic issues. Still, there is substantial work to be done, and not just in further increasing wealth. The government should make education less mechanical, step back from enforced family planning and enliven the mostly drab new urban expanses.

The final responsibility is to the environment. This has been largely neglected in the rush to increase living standards. Now, though, China is rich enough that cleaner air and water would do more for those standards than increased production. Care for the environment can be seen as the culmination of the other four Responsibilities. Respect for the natural world was crucial in traditional Chinese religion. Reinvigorating that legacy could help China improve on the West’s techniques for integrating production with environmental concern. It would require support from a committed and honest elite and a disciplined people.

The transition from Represents to Responsibilities can only be made by facing what a Marxist might call the internal contradiction of the CCP. It cannot develop much further without abandoning its founding principle, a narrowly materialist world view. ’Harmonious development’, the slogan of Jiang’s successor, Hu Jintao, has a vaguely spiritual ring to it, but doesn’t overcome the contradiction.

The CCP was clever enough lead the recovery from Maoism and avoid the decay of the former Soviet Union. Despite much corruption, it still garners levels of respect and trust from the people that would render any Western political party green with envy. Perhaps Xi Jinping, set to succeed Hu later this year, will define a Party which is responsible enough to give China not only more prosperity but also the better society its people deserve.

“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.

In any case, Attlee and his allies thought the welfare state could do much more than merely keep wolves from doors. They thought it could destroy what Oscar Lewis would later call the “culture of poverty”. The anthropologist talked of “a strong feeling of marginality, of helplessness, of dependency, of not belonging”.

But while the decline of proletariat and peasantry has reduced the proportion of the population of rich countries who live in that culture of poverty, the welfare state has tended to increase both the marginality and the dependency of those who do. They live in their own world, dependent on the government programmes and rewarded for irresponsibility.

I have heard the children in a welfare-dependent family talk about “getting paid”, as if their mother’s indolence were a sort of job. That family, like so many in the system of poverty-relief, had no father. The rise of such single-parent families cannot be attributed entirely to the availability of welfare, but such payments make antisocial behaviour that much easier.

Attlee accused charity of being loveless, but the recipient of government money experiences a profound alienation amid the welfare state’s bureaucratic structures. Care professionals have forms to fill, quotas to meet and regulations to obey. However good their intentions, they cannot avoid treating their clients as administrative ciphers. The two sides are not tied by charity, but separated by a cold wall of impersonality.

For society, the result is disastrous. Too many children of welfare families end up as welfare-dependent adults, or in prison. Too many people on benefits cannot emerge from semi-permanent unemployment, or from substance abuse.

It’s time to give voluntary help, the free spirit of charity, a new chance. If the state would withdraw, there would be fewer rules; more opportunities to develop personal relationships with the needy; and more space for organisations motivated by a higher calling, be it religious or philanthropic.

It won’t be easy to reduce the government’s role in what has been an age of expansion. But the collapse of state economic control after the fall of Communism can serve as a helpful precedent. The trauma and corruption of that transition need not be repeated. What is required is a slow and carefully planned privatisation of anti-poverty programmes.

The first step would be to make the various government agencies more like state-funded not-for-profit companies. A new legal and administrative status would make a full separation from the government easier.

A gradual withdrawal would follow. Donations would replace taxation over a decade or so. People would be generous; they would be paying less in taxes and could be persuaded that their gifts would help those in need. That is a much more attractive prospect than feeding a bureaucratic system. On the allocation side, the rules could be loosened in proportion with the advent of private funding. Competition should also play a role. As the state’s flow of money dwindled, outsiders might well take over from the former state agencies.

In the end, charitable arrangements might offer less money and less certainty than the State’s blanket coverage. But that would not necessarily be a bad thing. The culture of poverty will be less appealing if it is less comfortable. And while a modestly funded culture of charity will not be able to afford the carefully calibrated assistance of Attlee’s dreams, it can offer the poor more of what they really need: the burning fire of charity. And charity, after all, is another word for love.

The euro zone debt crisis shows that something is seriously wrong with Europe. But what is it?

Most financial professionals think the problem is economic. They have long considered continental Europe something of a mess – slow GDP growth, inept governments, smothering regulation and a culture that doesn’t “get” markets. European residents seem equally gloomy, especially about the economy. In the most recent Eurobarometer survey, 71 percent of respondents did not expect the crisis to be over two years hence.

The economic worries of both financiers and citizens are misplaced. Even if the slow patch does last a few more years, the European economy will continue to do what a modern economy is supposed to do. European consumers are basically as well off as Americans after adjusting for longer European holidays and different lifestyle choices. There is probably greater justice in the distribution of incomes and consumer goods in Europe than in the United States. The euro zone’s low trade deficits – less in total since 1990 than the United States ran in the last six months – suggest that Europe is globally competitive. Europe probably has a worse unemployment problem than the United States, but national governments are belatedly trying to remedy that.

Where Europe is really weak is not in economics but politics. A lack of political cohesion turned relatively minor financial problems – one small reprobate government (Greece) and two small careless ones (Portugal and Ireland) – into a disproportionately large struggle to avoid a devastating financial meltdown. Despite the risk, politicians and bureaucrats spent years bickering. They may have finally found the necessary toughness and solidarity, but there are enough unanswered questions to suggest that further crises are a lively possibility.

The indecision and discord needs to be kept in proportion. Politically, Europe is far more stable than it was a century ago, when a much smaller trigger set off the First World War. It is more unified – fiscally and financially – than it was in that war’s aftermath, when the anti-solidarity policy of reparations and the anti-flexibility of the gold standard wreaked havoc.

Still, Europe could do better. I suggest a three-pronged effort to make the region stronger.

The first is supposedly underway: balanced national budgets in normal economic times. An earlier effort to mandate this, the Stability and Growth Pact, failed, but the intervening crisis may have concentrated minds and strengthened resolve. If it hasn’t, then the euro project is liable to topple over as soon as economic challenges arrive.

Second, national politicians and the European Central Bank should agree – and state it publicly in no uncertain words – that the fiscal compact implies that the cost of future national fiscal failures will be shared between debtor and creditor nations. There will always be disputes about how to apportion the losses, but those can be resolved if everyone accepts the principle of shared responsibility. A bad loan is a sign that both sides messed up. A multi-country currency union cannot survive without solidarity among its members.

Third, Europe needs to make the economy the servant of something greater, something with more political resonance than a prosperity pact. A merely materialist agreement will always be vulnerable to economic downturns.

Half a century ago, when the predecessor to the European Union was founded, there was a good reason to emphasise economic unity: other sorts of multi-national convergence were much more challenging. Europe is not like the United States, which can boast of a single “American way of life” both culturally and politically. (U.S. states’ rights were effectively crushed 150 years ago in the Civil War.) Nor is Europe like China, which established a national language and culture three millennia ago.

On the contrary, European nations have basically been moving apart for centuries, developing their own national languages and cultures. The nations often behaved like teenage gang members, convinced of their own superiority and always up for a mutually destructive fight.

After the biggest fight, World War Two, the peacemakers followed their profession’s best practice: build trust by focusing on a common effort in the least controversial area – the economy. It has worked, although almost every step has been difficult. The last step, the merger of monetary and fiscal policies, proved traumatic.

But after 60 years of economic success, it should be clear that greater unity need not destroy national diversity. Italians may never be as much like Germans as New Yorkers are like Californians, or as Shanghainese are like Beijingers. But Europeans should be able to find enough common ground – if only as an entity able to hold its own against the United States and China – to give the EU stronger support than mere economic self-interest. If not, there really will be something wrong with Europe.