Finance is the brain of the market economy. Alas, like the brains of individual human beings, it can shift in an instant from greed to fear. Sometimes, as now, the brain behaves as if indifferent to risks and uncertainties. At other times, it is consumed by anxiety. Today, moreover, as I argued last week, the brain has become active, global and self-confident. Is it also creating huge dangers for the world economy? Critics would levy three big charges against modern financial capitalism: it is unjust; it is inefficient; and it is unstable. This charge sheet is as old as capitalism itself. Two objections are made to the rewards gained by financiers. The large one is that making large sums out of speculation, rather than production, is distasteful. But this distinction is arbitrary. What matters far more is whether the activities are economically helpful. A narrower objection is to the fiscal regimes under which successful financiers operate. Yet this, again, raises general questions about fiscal policy, not ones limited to the financial sector. Thus, the charge that there are injustices associated only with financial capitalism is hard to justify. The remainder of Martin Wolf’s column can be read here (FT.com subscription required). Discussion from our guest economists is free.

By Lawrence Summers When I studied economics in graduate school a generation ago we were taught that it was a “stylised fact” that the US income distribution was very stable. We were shown that the fraction of the population in poverty tracked almost perfectly the performance of median family income over time and that productivity growth and average real wage growth moved together, with both declining sharply after the oil shocks of the 1970s. These observations led naturally to the conclusion that the main way of reducing poverty or increasing the incomes of middle income families was raising the rate of economic growth. Today, we have another generation’s worth of data including the experience of the information technology-driven re-acceleration of productivity growth in the 1990s. This experience forces a reassessment of the earlier economic orthodoxy. It can no longer plausibly be asserted that the income distribution is relatively static or that average wage growth tracks productivity growth. Indeed, in a recent paper on tax policy prepared for the Hamilton project, my collaborators and I concluded from Congressional Budget Office data that, since 1979, changes in income distribution had raised the pre-tax incomes of the top 1 per cent of the population by $664bn or $600,000 per family – an increase of 43 per cent. The remainder of this column can be read here (FT.com subscription required). Discussion from our guest economists is free.

“Wouldn’t it be easier to dissolve the people and elect another in their place?” This satirical comment from Bertolt Brecht, the German poet, playwright and communist, is gloriously apposite to the proposed resuscitation of a rejected European Union constitution in Berlin this week. It is ironic that Angela Merkel, Germany’s chancellor and a former citizen of East Germany, should have entered this trap. For it was of this regime that Brecht complained in the poem, written in response to the workers’ uprising of June 1953. Brecht’s suggestion was preceded by a remark even more apposite to today’s situation: “The people had forfeited the confidence of the government and could win it back only by redoubled efforts.” Indeed, the European or, more precisely, Dutch and French peoples have done just that. They rejected a treaty designed by Valéry Giscard d’Estaing, grandest of European grandees. How dare they! The remainder of Martin Wolf’s column can be read here (FT.com subscription required). Discussion from our guest economists is free.

“In Rome everything is for sale.” – Prince Jugurtha in Sallust’s ­Bellum Jugurthinum “Yes to market economy, no to market society.” – Lionel Jospin, French Socialist ex-prime minister It is capitalism, not communism, that generates what the communist Leon Trotsky once called “permanent revolution”. It is the only economic system of which that is true. Joseph Schumpeter called it “creative destruction”. Now, after the fall of its adversary, has come another revolutionary period. Capitalism is mutating once again. Much of the institutional scenery of two decades ago – distinct national business elites, stable managerial control over companies and long-term relationships with financial institutions – is disappearing into economic history. We have, instead the triumph of the global over the local, of the speculator over the manager and of the financier over the producer. We are witnessing the transformation of mid-20th century managerial capitalism into global financial capitalism.

The remainder of Martin Wolf’s article can be read here (FT.com subscription required). Discussion from our guest economists is free.

Fast growth, huge current account “imbalances”, low real interest rates and risk spreads, subdued inflation and easy access to finance characterise the world economy. Is this party about to end? Probably not. But to identify the risks we must first decide what drives the strange world economy we see around us.

The two interesting alternative explanations are the “savings glut” and the “money glut”. Both share common themes: globalisation; the revolution in finance; the rise of China; low inflation; and macroeconomic stability. Beyond this, however, they diverge. In particular, they reverse the role of victim and villain: in the savings-glut story, the thrifty are the villains and profligate the victims; in the money-glut story, it is the other way round. This is a contemporary version of the old Keynesian versus monetarist dispute.

The “savings glut” hypothesis is associated with Ben Bernanke, now chairman of the Federal Reserve. But the idea was floated earlier by others. Brian Reading, of Lombard Street Research, lays out the line of argument in a recent note*. A substantial excess of savings over investment has emerged, he says, predominantly in China and Japan and the oil exporters (see chart). This has led to low global real interest rates and huge capital flows towards the world’s most creditworthy and willing borrowers, above all, US households. The short-term effect is an appreciation of real exchange rates and soaring current account deficits in destination countries. To sustain output in line with potential, domestic demand in those countries must also be substantially higher than gross domestic product. A country must choose fiscal and monetary policies that bring this result about.

The remainder of Martin Wolf’s column can be read here (FT.com subscription required). Discussion from our guest economists is free.

Happiness is fashionable these days. Yet should we accept the common view that the new “science” of happiness has cemented the superiority of Scandinavian social democracy over Anglo-Saxon liberalism? The answer is: No. The results are just as destructive to the pious certainties of “progressives” as to those of their opponents. Richard Layard of the London School of Economics and the UK’s House of Lords produced an elegant, brief and influential exposition of the new doctrine two years ago. That doctrine itself, as he explains, is a modern reincarnation of Jeremy Bentham’s utilitarianism*. What is Professor Layard arguing? First, happiness is the sole goal of human activity. Second, happiness is measurable. Third, we know what makes people happy and unhappy. Finally, policy should aim at achieving the greatest happiness. We will then realise that “there is more to life than prosperity and freedom”. Happiness is the right goal, he argues, “because it is our overall motivational device”. Moreover, “unlike all other goods, it is self-evidently good”. Yet if aggregate happiness could be maximised at the expense of a minority, should we do it?

The remainder of Martin Wolf’s column can be read here (FT.com subscription required). Discussion from our guest economists is free.