In reflecting on the recent and ongoing financial meltdown, Harold James cautions against applying stop-gap measures without having a proper understanding of the underlying causes of the failures, and he traces some of these to the breakdown of various ways of achieving and maintaining trust.

What he writes about the importance of ethics in the conduct of business and about the development of pre-modern and modern ideas about virtue and justice are very much to the point; as are his observations regarding the role of law in shaping ideas of corporate responsibility. Rather than comment or elaborate on these points, however, I should like to focus on two further aspects of the issues raised by the recent credit collapse. The first of these has to do with how it is to be explained; the second concerns its possible long-term effects.

In popular history and commentary it is common to focus on events and individuals rather than on conditions and processes. This is understandable, for it helps in telling a clear and gripping story to single out moments, episodes or characters. In reality, however, significant and consequential changes in human affairs are almost always ‘multi-factorial’.

This is the general pattern of change. Suppose a window breaks and someone asks ‘why?’ It is then explained that a branch was blown against it. What could be simpler? Well, had the branch been smaller, or lighter, or differently shaped, or blown with less force, or had there been a countervailing gust, or had the glass been denser, or less rigid, and so on, then the window might not have broken. Likewise, suppose you are diagnosed with blocked arteries and the doctor says it is because of the fat in your diet. But had the arteries been more elastic, or had the blood pressure been different, or had you not also had diabetes, or had you had a different metabolism, and so on, then the arteries might not have become blocked.

Two points arise. First, we should be wary of simple, single-factor explanations: they may omit other relevant causes, but also what they choose to highlight may not be that important in the larger scheme. Second, since change is due to many factors, including longstanding conditions and ongoing processes, its effects often reach back to alter these. It may be important to know this in order to understand both what has happened and what is likely to follow.

The simple story of the ‘credit crunch’ is that this is the effect of money market dealers waking up to the fact that a vast amount of risky debt was circulating through the system, as mortgages were packaged and sold in the expectation of a continuously rising property market.

Unsecured lending is certainly a factor but so too is the willingness to engage risk. Another cause is under-capitalisation of banks. Add to these the discounting of future pains over present pleasures, failures of trust, expectations of government action, a habit of living on credit developed by governments themselves, i.e. public borrowing, and so on. Had some of these factors been different then who knows what?

Generations of economists will think and write about the events of 2008 and still there will be disagreement about their causes. Let me, therefore, now shift attention to future effects as these may feedback into some of the conditions that have brought us to where we are.

We face a period of some austerity intensifying in the course of what may prove to be a long and deep economic recession. Building, manufacturing and sales are already declining; but more alarming is the prior long-term trend in personal indebtedness. Harold James observes that “eighteenth century Enlightenment thinkers made ethical conduct a central feature of their political economy”. I imagine he has principally in mind members of the Scottish School: David Hume, Adam Smith, Adam Ferguson, and others who related commerce to cultural improvement via morality and prudence. It is embarrassing to note, therefore, that in Great Britain the current ratio of total household debt to national gross domestic product stands at 109%, having risen by 40% over the last decade.

The trajectory of the debt ratio in the US is also rising steadily upwards, raising similar questions about the loss of traditional American habits of prudence and good management. The growth of UK and US household debt is principally a result of ballooning credit, which resulted in easy and large mortgages, as well as personal consumer borrowing. The decade has seen more and easier ways to borrow money, or charge expenditure against general and retailer credit cards. That in turn is both consequence and a cause of changed expectations.

The two-income household has developed as a norm for a large part of society, and singles devote a good deal of their income to clothes, electronics, leisure and entertainment, as indeed do many families. This trend has been compounded by the acceleration of children into adolescence and by the efforts of aging adults to maintain young lifestyles.

The economy has also been affected by declining indigenous birth-rates and growing pensioner populations. Smaller households, working parents, divided families, and childless homes are all transferring domestic care and provision onto the state, or for those who can afford them, onto private providers. Thus we see the pressure on schools to open earlier, close later and run additional services. The same is true at the other end of life, as the UK has also witnessed new demand for state-provided care of the elderly.

One might be tempted to think that this new situation expresses a communitarian outlook of shared responsibilities and common provision. In truth it is a consequence of individualism: turning to institutions to provide what in other times was given within the most immediate and most natural of communities: the family.

Whatever borrowing and spending packages are devised in the coming months and years, the fact is that the state does not have the resources to provide services at the currently expanding rate, and it faces further declines in tax receipts as well as additional unemployment and recession-related expenditure. Thus far it has been banks and other lenders collapsing, but the prospect is now in view of public institutions being ‘restructured’ as treasuries drain lower.

While the near future may be very difficult, with innocents hurt along the way, it may also be brighter. Though recovery of the existing arrangements may not be possible, there is some hope of refashioning older ones. Talk of austerity casts the mind back to poorer days, but those were also days when families and neighbours rallied around the suffering, enabling civil society to flourish.

The credit collapse had many interrelated causes. Similarly it will have multiple interconnected effects including, I suspect, something of a turn against the individualism, materialism and hedonism of recent decades. This may not be in immediate prospect, but the financial collapse was a very long time in the making, and some of its most significant effects may also take a generation to resolve themselves.

As those of one generation watch their parents and grandparents struggle and worry about themselves and their children, it will not be surprising if they start to extol the virtues of settled domesticity, life-long partnership and family life. In praising and seeking that end, however, they will also need to produce it, and that means living out the recommended life.

When windows break or arteries block, the prudent take steps to repair the damage and prevent it recurring. Looking at the condition of the economy and society and recognising the complicity of the state in this decline, the prudent can be expected to begin building stronger and larger families and supportive communities. Meanwhile businesses and corporations might also think about how to contribute to the building up of a culture of trust.

John Haldane is a Professor in the Department of Moral Philosophy at the University of St. Andrews, Scotland, where he is also the Director of the Centre for Ethics, Philosophy, and Public Affairs. He sits on the Editorial Board of Public Discourse.

Copyright 2008 The Witherspoon Institute. All rights reserved.