The time has come to ensure the next generation has as much as the last, to change social norms that destroyed the financial system, and to make greed and excess socially unacceptable once more, writes DIANE COYLE

ALTHOUGH MANY people share the sense of malaise about politics and the kind of society we have, they are unlikely to embrace some of the changes needed. It’s hardly going to be popular when governments cut public spending and jobs or start to reduce entitlements to pensions or old-age healthcare. In many Western countries, the people don’t think much of the politicians, but the politicians have a pretty low opinion of electors too, given the reluctance to face up to the need for difficult changes.

For this reason, the proposals below emphasise the importance of the mechanisms for generating public debate and consent.

Even in a context of crisis, a change of direction in terms of behaviour and policy by hundreds of millions of people is difficult to achieve. The last time the framework for governance and policymaking changed as much as it needs to now was in the decade after the second World War. Today’s Crisis of Enough is a slower burn than the massive trauma of a global war – thank goodness. There is enough of a breathing space that there’s time to adapt. But this also means there’s a huge challenge in engaging the public debate and winning consent for change.

There are some clear areas for reform and also some clear principles. The first of these principles is stewardship, the need to ensure future generations will have at least as much as our own. Lengthening the time horizon for policymaking, whether thinking about carbon emissions or government debt, is an urgent priority.

The second is admitting that a market economy operates within a framework of values. We need to strengthen the leg representing the moral dimension of capitalism.

The third principle is decentralisation, in the sense that the impact of massively cheaper information costs and the availability of information in the advanced economies make it highly unlikely that top-down decisions by governments will be the optimal way for solutions to the challenges to emerge.

The implication of technology for governance structures will affect politics and the wider institutional shape of Western economies – a point picked up below.

How might these principles work in practice? Just in case anybody is underestimating the challenge, there’s a cautionary tale in the lesson of the financial crisis for the prospects of achieving changes in the policy framework. Every commentator agreed that it has been the most serious crisis and recession since the 1930s, and that policy reform is essential. But that reform has moved at a snail’s pace, given the need to achieve international agreement on both the principles and the practical details of implementation.

Three years from the collapse of Lehman Brothers, as I write, very little financial reform has yet been achieved. It will be another three or four years before relatively minor reforms are implemented.

With such difficulty on reforms about which there is such a consensus, but a powerful opposition lobby in the banking industry, how much harder will it be when it comes to far more divisive or political challenges? The extremes of inequality prevailing today offend our innate moral sense of fairness and will not prove politically tolerable.

Yet it is too pessimistic to conclude that nothing can be done to reduce inequality, as a great deal could be done to change the prevailing social norms about income. And it’s linked to the essential reforms of the financial system that are slowly underway. Organised crime aside (a boom industry since 1989), the most ostentatious flaunting of wealth has emanated from the banking sector.

As it turns out, these vast earnings and bonuses were undeserved. The bankers ran up large losses, ruined their shareholders and left taxpayers with the bill. It will be extraordinary if they turn out to have fooled, scared, or bullied politicians around the world into stepping back from fundamental reform of the banking sector.

There is as close to consensus as I’ve ever experienced in the economics profession that the financial sector should not be allowed to retain the structure and behaviours that caused the crisis.

The banks are too big, too connected to each other, so that when one failed the whole system came tumbling down, and too similar so that each went awry in the same way. They have served low-income customers very poorly indeed. Plenty of reforms have been suggested. Through breakups enforced by anti-trust agencies and through regulations such as higher capital requirements, banks should be made smaller, for the most part.

More effective competition is needed to ensure banks serve customers better. For example, the authorities need to encourage the entry of new competitors. These could be community banks. They could be completely new entrants using new technologies such as mobile phones, with low costs allowing them to offer a better deal to customers. The power of the big banks in the developed world means poorer people living in the US and Europe now have less access to financial services than people in developing countries who can transact by mobile phone or access microfinance if their incomes are low.

However, the key point about the reform of big finance for my current argument is the impact such high incomes in banking have had on the rest of society. The bonuses far in excess of salaries, and the spending on big houses, fast cars, and designer clothes they funded, did create a climate of greed.

Governments could do a lot more to change the social norms that helped destroy the Western financial system. For example, they could halt bonus payments in the public sector altogether, or introduce a general additional tax on non-fixed parts of people’s pay packages.

I am not opposed to people making more money if they studied hard, worked hard for it, or took the risk of setting up a successful new business – on the contrary, effort and entrepreneurship must be rewarded amply. Nevertheless, governments have to give a lead in restoring the sense of moral propriety and social connection between those people who are part of the extraordinarily wealthy global elite and the great majority of those with whom they share their own nation.

Senior bankers should also contribute to this task of making greed and excess socially unacceptable once again. I know from personal conversations that many eminent bankers are ashamed of their industry, but they’ve been much lower profile (not least because they’d be accused of hypocrisy) than their colleagues who are completely unrepentant about what’s happened in banking.

The financial sector is a good place to start when it comes to ensuring social values have their proper place in the management of the economy. But it also demonstrates the intractability of some challenges. Achieving change will require a combination of policy changes introduced by governments, new regulations, tax changes, and so on, and changed social norms.

The formal rules set by governments interact with informal ones to shape the economy. The effect of the informal, the social norms, shouldn’t be underestimated, as the example of the spread of greed in finance and big corporations and from there to the rest of society so clearly shows. Indeed economists have shown there is a social contagion in many dimensions of life, such as obesity, crime or suicide.

Governments can influence social norms – examples of successful anti-smoking campaigns show how powerful government action can be. However, our own behaviour as individuals, and our own social relationships, are important too. We can and should change our own patterns of spending.

There is a need for the future to weigh more heavily in choices made now, choices by governments, companies, organisations and individual consumers. In several ways, the past generation or two have been running down capital so much that the economy inherited by future generations will be poorer-perhaps catastrophically so, if climate change does indeed occur on the large scale of some predictions. Giving the future its due weight requires the current generation to invest more now.

This is an extract from The Economics of Enough: How to Run the Economyas if the Future Matters by economist Diane Coyle, due to be published by Princeton University Press on March 7th