Edward Hadas

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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