Economics must be part of moral philosophy

At the height of the euro crisis, Mr Mario Monti, the former Italian prime minister, liked to remark that part of the problem was that "for Germans, economics is still part of moral philosophy". The suggestion was that the German instinct was to assign blame rather than to fix the problem - and was followed up with a reminder that the German words for guilt and debt are the same.

But the real punchline is that the Germans are right. Economics is - or should be - part of moral philosophy.

Successful politicians have to do more than just deliver economic growth. They also need to offer voters a vision of the economy that makes moral sense - in which virtue is rewarded and vice is punished.

Ever since the financial crisis 10 years ago, mainstream politicians in the West have lost that vital ability. The belief that the economic system is unjust has stoked the rise of right-and left-wing populism across the West.

As Mr Monti implied, the idea that economics needs to be rooted in a moral system is nothing new. Adam Smith, arguably the most important economic thinker ever, was a professor of moral philosophy at Glasgow University. His famous observation that individuals working on their own behalf would contribute to the general good is underpinned by a theory of moral sentiments.

Karl Marx's followers went to the barricades because they believed that communism was morally superior to capitalism - not because they were inspired by Marxist economics.

Friedrich Hayek was a passionate anti-Marxist who won the Nobel Prize for economics. He was also a moral philosopher whose The Road To Serfdom made an ethical case against state control of the economy.

Until the shocks of 2008, centrist politicians in the West were able to offer a morally coherent view of the economy that delivered them electoral success. A free-market economy was held to reward effort and success, and to spread opportunity. Globalisation - the creation of a global market system - was defended as a moral project, since it involved reducing inequality and poverty across the world.

After the financial crisis, however, the "globalists" (to use a Trumpian term) began to lose the moral arguments. The fact that banks were bailed out as living standards stagnated offended many voters' idea of natural justice. When nobody at the apex of a failed system was sent to jail, the door was opened for a politician, such as Mr Trump, who argued that "the system is rigged".

The success or failure of Mr Trump's tax reforms, which are likely to go through this week, will depend to a great extent on whether he can convince voters that he is helping to make the system fairer.

The Republican argument is that the new taxation system will reward hard work and reduce the burden of the state. The Democrats' response is that the new tax reforms further rig the system in favour of the rich.

At the moment, a majority of Americans seem to agree with the proposition that the Trump tax reforms largely favour the wealthy. If that interpretation takes hold, voters may drift away from the right-wing populism of Mr Trump, towards the left-wing populism of Mr Bernie Sanders and Ms Elizabeth Warren.

The Sanders and Warren campaigns have also capitalised on the sense that America's economic system is rigged. They have focused in particular on generational injustice - which leaves many young voters burdened with student debt and insecure jobs.

These arguments resonate not just in the United States but right across the West. In Britain, Mr Nigel Farage's UK Independence Party and the Brexiters seized the banner of right-wing populism, while the left-wing populism of Mr Jeremy Corbyn took control of the Labour Party. In France, the right-wing and left-wing populism of Ms Marine Le Pen and Mr Jean-Luc Melenchon respectively captured more than 40 per cent of the vote in the first round of this year's presidential election. Add in other fringe parties and some 50 per cent of the French, British and American electorates are now clearly tempted by populist, anti-system politicians.

In Germany, however, the right-and left-wing variants of populism are still getting well under 25 per cent of the vote - despite the radicalising effect of the refugee crisis. In part, that is down to the success of the German economy. But it is also because Chancellor Angela Merkel realised that, in handling the euro crisis, she had to take account of ordinary voters' sense of right and wrong.

Many economists in the US and southern Europe argued that the crisis could be solved only by formally writing off a lot of Greek debt. They also made the case that German bankers were more to blame for the crisis than Greek pensioners.

But Dr Merkel knew that, inside Germany, the argument that hard-working Germans should not be asked to write off the debts of wasteful Greeks was too powerful to tackle head-on. She could make progress in tackling the euro crisis only by respecting basic ideas about effort and reward.

A whole generation of Western politicians has grown up with the Clintonian slogan, "It's the economy, stupid", ringing in their heads.

But in today's politics, "the economy" is not just about growth. It is also about justice.

FINANCIAL TIMES

A version of this article appeared in the print edition of The Straits Times on December 20, 2017, with the headline 'Economics must be part of moral philosophy'. Print Edition | Subscribe