Jean-Paul Fitoussi
email: fitoussi@sciences-po.fr

Francesco Saraceno
email: francesco.saraceno@sciences-po.fr

Philippe Aghion

Alberto Alesina

Pierfederico Asdrubali

Giorgio Basevi

James Forder

Anton Granik

Roberto Perotti

FISCAL DISCIPLINE AS A SOCIAL NORM: THE EUROPEAN STABILITY PACT N°

Keywords: D63, D71, E62, E63 Stability Pact, Fiscal Rules, Fiscal Policy, Social Norms, Reputation, Enlargement

This paper reviews the arguments for and against the 'Stability and Growth Pact' signed by the countries of the Euro area. We find the theoretical debate to be inconclusive, as both externality and credibility arguments can be used to yield opposite, and equally plausible conclusions. We also argue that evidence in favour of a Pact-like rule is scant. We therefore suggest the view that the Stability Pact is a public social norm, and that a country's adherence to that norm is in fact a response to the need to preserve reputation among the other members of the European Union. Using this extreme but not implausible hypothesis, we build a simple model similar in spirit to Akerlof's (1980) seminal paper on social norms, and we show that reputation issues may cause the emergence of a stable but inferior equilibrium. We further show that after the enlargement, with a number of countries anxious to prove their 'soundness' joining the club, the problems posed by the pact/social norm are likely to increase.

Introduction

This paper extends to public behaviour the framework introduced by [START_REF] Akerlof | A Theory of Social Custom, of Which Unemployment May be One Consequence[END_REF] seminal contribution on social norms. Akerlof shows that social norms, even when costly to follow for individuals, may nevertheless persist if disobedience entails a loss of reputation. We argue that 'public social norms' may limit national governments' ability to manoeuver when building and managing an economic and monetary union, and yet survive because of reputation considerations. More specifically, the public social norm we consider in this paper is the Stability and Growth Pact (SGP), signed in 1997 by the countries participating in the European Monetary Union. Social norms and their effect on economic behaviour and outcomes have been investigated at length. The essays collected by Hechter and Opp (2001a) show the variety of definitions of norms, and the disagreement among scholars about their emergence and persistence. We do not intend to enter into this debate, but rather we highlight some general characteristics of social norms, in order to clarify our claim that the Stability Pact is one of them.

At the core of this literature is the observation that the need for social acceptance contributes to determine individual behaviour. Social psychologists have long studied group behaviour, and the tendency to conformity. In a series of experiments Asch (1951) shows that members of a group, even when capable of making the right choice when deciding in isolation, tend to conform to group decision regardless of whether the decison is correct or not. One of the explanations for group conformity (e.g. [START_REF] Buchanan | Organizational Behaviour[END_REF], may be that groups establish social norms, and punish deviation. This set of findings serves as a justificatiion for [START_REF] Harsanyi | Rational-Choice Models of Political Behavior vs. Functionalist and Conformist Theories[END_REF] postulate that social recognition plays a role along with economic gain in determining the behaviour of economic agents. In other words, 'persons want to be rich and famous -t h eand-famous part of the expression not being redundant' (Akerlof, 1980, p.753). The postulate helps in giving a general definition. Regularity in behaviour is a norm if: first, members of the society generally conform to it; second, deviance is disapproved; third, the fact that most people conform to the norm helps to enforce it [START_REF] Pettit | Virtus Normativa: Rational Choice Perspectives[END_REF].

Such a definition has two important consequences. The firstisthatagents may follow the social norm even when it is against their own economic interest, if the gain in reputation or social esteem is sufficiently large. 1 What matters is a concern for reputation rather than an immediate impact on pri-vate (or social) welfare. The second and related consequence is that the norm does not necessarily originate within the sphere of investigation of economics: scholars seem to agree on the fact that the emergence of social norms is case specific, as on the socio-historical conditions that led to it (Hechter and Opp, 2001b). Thus, when discussing the norm 'Stability Pact' below, we will give some reasons that may explain why that specificn o r me m e r g e di nt h efirst place.

The paper by [START_REF] Akerlof | A Theory of Social Custom, of Which Unemployment May be One Consequence[END_REF] captures well the above-mentioned discussion. Firms, fearing a loss of reputation, are willing to pay a wage perceived as 'fair' and higher than the market clearing one, thus obtaining suboptimal profits; on aggregate, this causes involuntary unemployment. Freely obeyed social norms may thus result in constraints on individual behaviour as well as in departures from the optimal equilibrium.

The fear of reputation losses may of course be justified on the ground of economic rationality. For example, in Akerlof, competent workers aware of a firms's bad reputation would refrain from applying for a job in that firm. In other words, the presence of reputation in the utility function may be seen as the result of a 'meta-maximization' problem in which reputation serves as a means towards other ends (Becker, 1976). Nevertheless, [START_REF] Elster | Social Norms and Economic Theory[END_REF] warns against the temptation to think that norms are always disguised expressions or vehicles of self interest, so that they can be treated as any other element in the utility maximization process. He gives examples of norms that are hard to reconcile with self or common interest, that are nevertheless obeyed2 .E l s t e r argues forcefully that 'to accept social norms as a motivational mechanism is not to deny the importance of rational choice. [...] Actions typically are influenced both by rationality and by norm. Sometimes, the outcome is a compromise between what the norm prescribes and what rationality dictates. [...] At other times rationality acts as a constraint on social norms. Many people vote out of civic duty, except when the costs become very high. Conversely social norm can act as a constraint on rationality.' (Elster, 1989, p. 102). 3 The transition towards the European Monetary Union was dominated by the Maastricht criteria (in particular limits to deficit and debt), later crystallized in the SGP. These restrictions were accepted even by governments which were opposed to their design; many countries encountered serious problems conforming to the criteria, and the only immediately visible benefitw a st h e increased reputation of their governments. This is why we argue that the current fiscal setting has the features of a social norm, in that governments follow its prescriptions primarily because the others are following it. We make this working hypothesis because it is difficult to be convinced by the rationale underlying the European economic government. The main reason for a supranational rule as the Stability Pact is given by the negative externalities of fiscal profligacy, that via the interest rate may affect the level of activity of other members of a monetary union. We will show nevertheless that the theoretical debate is inconclusive, that empirical evidence in favour of the Pact is weak, and that some other explanation for its persistence deserves to be explored.

The question of why governments have accepted such a constraining rule is all the more important because in a monetary union national governments have few instruments left, with the common monetary policy preventing them from setting interest and exchange rates. Furthermore, the single EMU interest rate has differentiated effects on the dynamics of public debt: countries 'enjoying' the lowest rate of inflation will suffer from the highest level of real interest rate.

Thereputationargumentmaynotbeasoddasitlooksatfirst glance. The design of European institutions is such that decisions in most fields are the outcome of a bargaining process between the different governments. Thus, credibility and the bargaining power of each government may depend on reputation among its peers (the meta-maximization problem defined above). If a government wants to earn or maintain a good reputation, for example in order to use it in other negotiation venues, then it may be valuable to obey a norm that is not directly beneficial, simply because it is followed by the other governments. We argue in other words that the European Council resembles a Club where members obey a social norm to earn social acceptance.

In light of these considerations, the enlargement that took place in May 2004 is a major source of concern (see also [START_REF] Buiter | Patching up the Pact: Suggestions for Enhancing Fiscal Sustainability and Macroeconomic Stability in an Enlarged European Union[END_REF]. It is plausible that, with the increase of heterogeneity, the need of stabilization policies to cushion asymmetric shocks will increase, as will do the cost of obeying a norm that limits such policies. If the norm is strong enough to resist the increased pressure, then the negative welfare consequences for the EU may be substantial.

The paper is structured as follows: the next section will briefly describe the provisions of the Stability and Growth Pact, discusses the theoretical arguments underlying the Pact, and argues for their inconclusiveness. Then, in section 3 we highlight a number of features of the SGP that corroborate our interpretation as a social norm. Our model, a simple extension of [START_REF] Akerlof | A Theory of Social Custom, of Which Unemployment May be One Consequence[END_REF] in which obedience to the norm is induced by reputation considerations, will be presented in sections 4 and 5, where we also show the effects of enlargement when a norm like the Pact is in place. Section 6 concludes and suggests themes for further research.

The Debate on Fiscal Rules and on the Stability Pact

The institutions of Europe, in their actual design, stem from two main sources. The first is the founding Treaty signed in Maastricht in 1991, and the second is the Stability and Growth Pact4 that, negotiated together with the Amsterdam Treaty in 1997 completes the setup.

TheMaastrichtT reatydefined the convergence criteria that countries had to fulfil in order to be admitted to the single currency area. In particular, it required a deficittoGDPratioofnomorethan3%,andapublicdebtbelo w 60% of GDP, or approaching that level at a 'satisfactory pace'. The vagueness of the latter requirement allowed to overlook it for high debt country as Italy, Belgium and Greece.

The SGP contains furtherpro visionsregardingfiscal policy that have the objective of increasing transparency and control on public finances. Each year member countries present a Stability and Convergence Programme, to be examined by the European Commission and the Council. The programmes have to contain a medium-term objective for the budgetary position of close to balance or in surplus, together with an account of the adjustment path towards the objective. The requirement to attain a position of close to balance or surplus in the medium term is an important innovation with respect to the Maastricht Treaty. In fact, it implies the strong consequence that public debt as a ratio to GDP should tend asymptotically to zero, a position hard to justify per se [START_REF] De Grauwe | The Stability and Growth Pact in Need of Reform[END_REF].

The Excessive Deficit Procedure (EDP) states what deviations from the 3% budget deficit ceiling are acceptable, and gives the Council the right to sanction (by qualified majority) the countries not respecting it. The EDP has first been invoked for Portugal (for the 2001 deficit). In November 2003 the Council decision to 'forgive' France and Germany, triggered an unprecedented clash with the Commission, which had recommended sanctions to be imposed. The Commission sought a judgement by European Court of Justice, that ruled against the Council in July 2004. In the spring 2004 the Excessive Deficit Procedure was also invoked for The Netherlands, Greece, and six newly admitted countries, while for Italy the Council and the Commission waited June 2005. As of today (July 2007), no country has been sanctioned.

The prolonged period of soft growth experienced by most euro zone countries (especially the largest ones), and the increasing number of countries struggling to maintain their deficits within the limits set by the Pact, have triggered a debate on the flaws of the current fiscal framework, and on possible reforms aimed at a better functioning of fiscal policy in Europe (for detailed accounts of the debate on reforming the Pact see [START_REF] Buti | The Stability Pact Pains: A Forward-Looking Assessment of the Reform Debate[END_REF]Monperrus-Veroni and[START_REF] Monperrus-Veroni | Whither Stability Pact? An Assessment of Reform Proposals[END_REF]. The constitutional Treaty signed in Rome in October 2004 had left substantially unchanged the provisions regarding fiscal and monetary policy, but the long political process has finally yielded a first result in the reform adopted by the European Council in March 2005: the 3% and 60% limits remain unchanged, and no automatic mechanism (such as a golden rule or a 'debt related' rule) is put in place. Nevertheless, on one side the medium term objective of a zero structural deficit is relaxed for countries with low debt and/or with high potential growth; and on the other it contemplates a number of circumstances (e.g. a strong engagement in costly structural reforms) allowing temporary deviations from the deficit ceiling, and longer delays for correcting them.

When discussing fiscal policy one should clearly separate the issue of whether it exists a deficit bias requiring rules to constrain fiscal policy, from the issue of whether a supranational norm like the SGP is needed. In fact, economic commonsense and the principle of subsidiarity would require rules to be country-specific and left to the choice of national governments, unless it were argued convincingly that the effects of suboptimal fiscal policy spill over to the other members of a monetary union. This crucial distinction has unfortunately often been neglected in the debate on the SGP. As we will see several arguments exist in favour of the existence of a deficit bias; while these arguments may be more or less robust (if the debate were settled, why countries adopting fiscal rules remain a small minority?), it is safe to say that most economists agree on the existence of deficit biases in practice, and on t h en e e do fs o m et y p eo fr u l et ol i m i ts u b o p t i m a lu s e so ffiscal policy.

Nevertheless, the existence of a deficit bias per se is not enough to justify a supranational rule in a monetary union. Thus, for our purposes we need to focus on arguments entailing some sort of spillover between countries, that would justify such a rule. In the remainder of this section we will first outline strenghts and weaknesses of these arguments; and then, for completeness, we will give a short account of the more general debate on the utility of fiscal rules.

The main theoretical foundation of the Stability Pact is a simple externality argument: a government running a budget deficit has to borrow; in a monetary union this is supposed to raise the common interest rate, and to have restrictive effects both on public expenditure (the area-wide increased interest payments reduce government consumption and investment possibilities), and on private consumption and investment in the other countries. This negative externality would induce national governments -free from the control of foreign exchange markets -to run excessive budget deficits, allowing them to make the other countries pay part of 'the bill'.

The empirical evidence in favour of this claim rests on several contributions concluding that expansionary fiscal policy has a positive effect on interest rates. 5 Nevertheless, a closer look reveals that this literature cannot be invoked to support the externality argument. In fact, none of these papers looks at the effects on the rates of partner countries, but only on own rates. The need for a common rule has to originate from common effects of government behaviour, domestic effects having to be taken care of by national policies and/or rules. As the evidence on domestic interest rates is not extremely robust, it would be extremely surprising if a study gave empirical arguments in favour of common rules, by finding important effects of fiscal policy on interest rates at the European level. 6More importantly, from a theoretical viewpoint, the externality argument can be reversed. Suppose that a country implemented an unwarranted expansionary fiscal policy, while close to full employment; this would result in inflationary pressure, and hence in reduced competitiveness. If on the other hand the deficit responded to a slump in production, it would sustain demand and hence income and imports. In both cases, the increased demand for the other countries' production would yield larger fiscal revenues and lower deficits. Models with either negative or positive fiscal policy spillovers have flourished in the recent literature; 7 but nothing, from a theoretical point of view, may induce one to think that the negative externality would be larger in size than the positive one. Indeed simple reasoning leads to believe the contrary: generally, a fiscal expansion in a region does not have negative effects on other regions of the same country. Given the short life of the EMU, we will have to wait some more time for empirical work to help shed some light on this debate.

Interest rate spillovers may also operate through a different channel. [START_REF] Detken | On Prosperity and Posterity: The Need for Fiscal Discipline in a Monetary Union[END_REF] show that bond substitutability in a monetary union widens the savings pool at which governments can draw to finance deficits, thus weakening the interest rate costs of excessive deficits. Governments can thus free ride in a monetary union. This mechanism, (that incidentally run against the one described above, and may explain why empirically the effects of deficit on interest rates are not robust) would call for a national rule, as the interest rate costs are paid by the country itself, and no spillovers appear.

A second argument in favour of a supranational rule is credibility: excessive deficits may end up in insolvency, forcing the Central Bank to intervene (against its own statute) to bail out the country involved; otherwise, banks owning the debt would see their financial soundness hampered, and face the risk of depositors' runs [START_REF] Artis | The Stability Pact: Trading Off Flexibility for Credibility?[END_REF]. The moral hazard aspect of excessive deficits could hence undermine the Central Bank's credibility in its commitment to fight inflation. Furthermore, as the costs of an ECB bailout would be sustained by all EMU citizens, this would encourage irresponsible behaviour of governments. A constraint on deficits can avoid this risk.

This argument may be dismissed on several grounds. First, a debt crisis seems scarcely plausible in the present context. Since 1945, even in far more turbulent times, European countries never seriously risked default on their debt. Furthermore, a study on OECD countries by [START_REF] Alesina | Default Risk on Government Debt in OECD Countries[END_REF] showed that markets are capable of monitoring fiscal performance and excerting disciplinatory pressure on governments through interest rate spreads. Bernoth et al. ( 2 0 0 4 )s h o wm o r es p e c i fically that this capacity was not weakened by the inception of EMU. [START_REF] Eichengreen | The Stability Pact: More than a Minor Nuisance?[END_REF] furand [START_REF] Catenaro | Reconsidering the Pros and Cons of Fiscal policy Co-ordination in a Monetary Union: Should we set Public Expenditures Targets?[END_REF]. Some rely on the adverse effect of interest rate increases described in the text, while others focus on negative terms of trade effects. The classic book by [START_REF] Mundell | International Economics,M c M i l l a n[END_REF] assumed positive demand spillovers, that also emerge in [START_REF] Dixon | Fiscal Policy Coordination with Demand Spillovers and Unionised Labour Markets[END_REF]Santorini (1997), and[START_REF] Beetsma | Is Fiscal Policy Coordination in the EMU desirable?[END_REF]. The trade effect may be offset by exchange and interest rates, variations [START_REF] Fitoussi | The Slump in Europe[END_REF], but these arguments clearly do not apply to a monetary union. [START_REF] Levine | Fiscal Policy Coordination and EMU[END_REF] present a model in which all these externalities play a role, and argue that the negative ones probably dominate the positive ones. [START_REF] Allsopp | Regional Macroeconomic Policy, Fiscal Federalism, and European Integration[END_REF] also discuss at length the different effects at work in a monetary union, and reach the conclusion that decentralization of fiscal policy is likely to provide insufficient stabilization.

ther notice that in contrast to Mexico and East Asia during the crises of the 1990s, the European banking system exposure and the term structure of public debt seem more solid, so that the bailout risk is not particularly important. They further argue that such a risk would be better dealt with by improving public debt management and bank regulation.

The credibility argument is also less robust than it may appear. The Pact was designed assuming that governments would accumulate surpluses in good times to allow the operation of automatic stabilizers in bad times 8 . This ideal scenario though, did not take into account at least two complications: the first, correctly predicted by [START_REF] Eichengreen | The Stability Pact: More than a Minor Nuisance?[END_REF], is that this symmetry would only be attainedafteralongtransition;duringthis transition, which is still happening, governments are being forced to restrictive fiscal policies irrespective of the business cycle phase. To make things worse, the Pact was signed at the end of a long phase of convergence to the Maastricht criteria, that involved procyclical fiscal policies during at least the years 1995-97. When growth later resumed in Europe, this in turn provoked -in the attempt to restore 'normal' levels of taxation and expenditureexpansionary policies. For all these reasons the Euro area economy has experienced, especially since the end of the US expansion of the 1990s, an explosive combination of depressed growth and (procyclical or at best neutral) restrictive fiscal policy induced by the convergence to Maastricht criteria first, and by the Stability Pact after. Mainly because of high debt service, the three largest countries -Germany, France and Italy-do not have room for the automatic stabilizers to play, so that fiscal policy is ineffective even facing transitory shocks. This extremely difficult situation is already resulting in creative accounting experiments, and in increasing pressure to revise, soften, or simply ignore the Pact. Even worse, the impossibility of using the fiscal instrument is inducing governments and economists to put pressure on the ECB for a more expansionary monetary stance, undermining the support for the fight against inflation. Finally, the repeated violations of the Pact, and the recent legal controversies between the Commission and the Council have further reinforced the belief that the current institutional setting is inappropriate. These phenomena seem far more threatening, for the credibility of the European institutional system as a whole, than the bailout risk.

T urningnowtothemoregeneralissueoffiscal policy rules, the theoretical debate has revolved around the reasons for a deficit bias o nt h ep a r to ft h e government. These reasons are exhaustively discussed by [START_REF] Schuknecht | Stability and Growth Pact: issues and Lessons from Political Economy[END_REF].

T h em o s tt r i v i a li sfiscal illusion of myopic voters, who tend to reward governments promising tax cuts or expenditure increases, because future fiscal contractions are not properly accounted for. This is related to the strategic behaviour of governments that use fiscal policy and deficits to increase their chances to be re-elected, or at least to reduce the room of manoeuvre for their successors. Another explanation sees the government as the negotiation forum for the demands of vested interests; the compromises that emerge from this bargaining process will also be associated with excessive deficits. Finally, [START_REF] Calmfors | What Remains of the Stability Pact and What Next?[END_REF] cites the literature on dynamic inconsistency that shows how governments not committing to fiscal or monetary discipline will tend to run deficits (or to create surprise inflation) in the attempt to expand aggregate demand and income. In a world populated by rational agents this attempt will result in higher inflation but no changes in income.

An argument in favour of fiscal rules builds on the literature that flouri s h e di nt h e1 9 9 0 so nt h eN o n -K e y n e s i a ne ffe c t so fb u d g e td e ficit reductions (e.g. [START_REF] Giavazzi | Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries[END_REF][START_REF] Alesina | Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects[END_REF][START_REF] Perotti | Fiscal Policy in Good Times and Bad[END_REF][START_REF] Alesina | Fiscal Policy, Profits, and Investment[END_REF]. Broadly speaking, the argument goes as follows: if the budget deficit reduction is credible and significant, it may trigger the expectation of a permanently lower share of government spending in GDP. The consequent upward revision of permanent income, will cause private consumption and investment increases, and hence be expansionary. This will in turn reinforce the initial debt consolidation (the channels described in the various papers differ, but the basic mechanism remains the same). Again, the argument is not convincing. First, the literature cited above finds that empirically this effect has had more chances to overcome the standard Keynesian deflationary effect when public finances are in distress [START_REF] Perotti | Fiscal Policy in Good Times and Bad[END_REF]. Nevertheless, the situation of European countries' public finances can hardly be described as unsustainable or explosive. The argument might serve as a basis for a Maastricht-type limit, but certainly not for the balanced budget rule required by the Stability Pact. Furthermore, as happened with the Pact, a rule may have the perverse effect of inducing governments to find loopholes and shortcuts to meet the requirements, actions that will hardly have a positive effect on private expectations. Finally, the arguments in favour of expansionary effects of a fiscal contraction suggest its una tantum nature. Advocating these effects to justify a long term rule does not seem appropriate 9 .

Another popular argument in favour of the Pact maintains that excessive budget deficits are inherently unfair because they shift to future generations the burden of current expenditure. This is important, and should be appro-priately developed, by fully considering future costs and benefits of current deficits. If anything, the SGP is biased against future generations, in that it does not distinguish between current and capital expenditures. Deficits may be reduced by cutting financing for a high speed train, or by reducing public wages; nevertheless the latter measure being politically costlier, it is less likely to be implemented (see Creel et al., 2007, who analyze the effects of public investment on growth, and discuss the application of the 'Golden rule' to the UK). Furthermore, a rigorous analysis would in fact have to consider that future benefits may come from a variety of current expenditures (e.g. those assuring well functioning educational and health systems) and not only from public investment.

On a completely different note, Eichengreen and Wyplosz (1998) argued that governments had a fixed amount of political capital to spend in unpopular measures, and the Pact forced them to spend it on fiscal consolidation, rather than on more needed measures like labour market or pension reforms.

To sum up, while the theoretical debate on the existence of deficit biases and the ensuing need for some kind of fiscal rule seem to have become consensual, the empirical foundations for such rules, and for supranational measures like the Stability Pact do not look nearly as solid. Such mixed results may explain why, in spite of the consensus in the academic profession, the instances where fiscal rules have been adopted in practice are quite rare.

Fiscal Discipline or Social Acceptance?

The inconclusiveness of economic arguments in favour of the SGP is at the basis of our claim that other factors, namely reputation, may be used to explain why most countries of the EMU have adopted strict and often procyclical fiscal policies even when suffering from low growth, and lack of policy instruments. This claim also rests on a number of features of the Pact that remind characteristics of social norms recalled in the introduction. First, the circumstances that led to the Stability Pact. Stark (2001) or [START_REF] Heipertz | The Dog That Would Never Bite? What We Can Learn from the Origins of the Stability and Growth Pact[END_REF] give accurate accounts of its genesis, that could explain why reputation in the European 'club' is founded on a sound fiscal position, and not on more sensible measures of public welfare, like low unemployment or high GDP growth. As happens for other social norms (e.g. what determines a 'fair' wage?) the answer seems to lie in a mix of historical, social and political factors: Germany's historically strong aversion to inflationthatmadeits government give up its monetary sovereignty only in exchange for an insurance of prudent fiscal behaviour. Alternatively it could be, as many argue, the desire of core countries to keep out of the union the so-called 'club Med' nations (Greece, Italy, Portugal and Spain). Furthermore, the rule persisted even after the special circumstances that originated it have disappeared (to the point that Germany was, between 2003 and 2006, one defaulting member of the club), a sort of hysteresis that is also common among other social norms. A second element in favour of our interpretation is the sanctioning scheme associated with the Pact; we will argue in what follows that the sanctions are not likely to be imposed, because too heavy and delayed. In fact until now sanctions for deviating countries have simply taken the form of a public reprimand (i.e. the starting of an Excessive Deficit Procedure). If this is the case then, it appears that the efforts of most countries to respect the provisions of the Pact are dictated by the need for social recognition rather than by the fear of actual costs. Whatever its origins may be, we are interested in the effects that the social norm 'Stability Pact' has on government behaviour and social welfare. One point should nevertheless be stressed: most private social norms have their origin in a notion of fairness, implying that agents behave in such a way as to refrain from taking full advantage of a (possibly temporary) dominant position [START_REF] Hicks | The Crisis in Keynesian Economics[END_REF]. Social norms of this type may even been considered as a way to address the so called 'zero contribution' problem, namely that 'unless the number of individuals in a group is quite small, or unless there is coercion or some other special device to make individuals act in their common interest, rational, self interested individuals will not act to achieve their common or group interests '. (Olson, 1965, p.2). Norms constraining public behaviour may also have the same origin, the quest for common interest. But by definition -because they are written at a particular moment-they cannot reflect the outcome of a repeated game. For this reason they are often entrenched in some doctrine representing the current economic paradigm, and may survive after it disappears (the political economy explanation). The threat of social sanctions is enough to make it rational to obey the norms.

While we outlined a number of reasons why the SGP has the features of a social norm, there may be other reasons for the emergence of a suboptimal arrangement in Europe. For instance, an anti-inflationary coalition would benefit from a rule constraining demand side interventions and making supply side interventions (structural reforms) inevitable 10 . Such a political economy interpretation is certainly convincing in explaining why the Stability Pact emerged in its current form. Nevertheless, it presupposes an ideological homogeneity of European governments and vested interests that does not seem to be observed in practice. Once we need to explain why more inter-ventionist governments ended up accepting an agenda that ran contrary to the interest of their constituencies, reputation appears again as a plausible and appealing explanation.

The Stability Pact is not the only instance of a social norm constraining public behaviour in recent European history. In the early 1990s, the obedience to the theoretically dubious requirement of maintaining exchange rate parities vis-à-vis the German mark had most of the features of a social norm. In fact some governments believed these parities to be crucial for their reputation. Adherence to that norm led to a strongly procyclical monetary policy, similar in many respects to the widely studied (e.g. [START_REF] Clarke | Central Bank Cooperation: 1924-31[END_REF] British experience of the 1920s. As a result, Europe entered a period of slow growth and mounting unemploymentt h a tl a s t e da l m o s ts i xy e a r s .

In the next section we present a simple model derived from [START_REF] Akerlof | A Theory of Social Custom, of Which Unemployment May be One Consequence[END_REF], in which we show that an inefficient equilibrium caused by a social norm can be sustained, if deviation from the norm causes a loss of reputation. The existence of a social norm may therefore result in a lower level of income for t h ea r e aa saw h o l e .

4T h e M o d e l

This section introduces a static, very stylized model of public choice and reputation. In general terms, the government's objective function has two arguments, welfare of the population, and reputation among its peers. This general setting may be applied to various problems; in this paper we assume that the welfare measure is the output gap,11 whereas reputation stems from obeying the Stability Pact, and giving up income stabilization. Consistently with our previous discussion, we assume that positive and negative externalities linked to budget deficits wash out, so that they do not play a role in the model.

S u p po s ew eh a v ea ne c o n o m icu n io no fm a s s2( t h er e a s o nf o rt h isc h o ic e will be clear shortly below). Each country belonging to the union (indexed by i) is very broadly described by an aggregate demand relationship, and by a stochastic process describing private demand:

y i = c i + g i ( 1
)
c i = y n + ε i
Total income in country i is simply the sum of private (c i ) and public (g i ) expenditure, that for sake of simplicity can be viewed as deficit spending.

The natural or potential level of income (y n ) is given by the deterministic part of private consumption, and it is assumed to be equal across countries. We assume that the shock has a uniform distribution with zero mean: ε i ∼ U(-a, a).12 Government expenditure g i can be decomposed into a discretionary part, g d,i and an automatic stabilization g a,i , that is assumed to partially stabilize output (γ<1):

g i ≡ g a,i + g d,i
(2)

g a,i = -γε i
The government objective is to set g d,i in order to minimize deviations from the natural rate of income (the output gap). We assume that it acts after the shock is realized. Suppose nevertheless that a social norm is in place, call it 'Stability Pact'. This norm stems from a political process, and has no clear economic justification; it considers values of g i larger than a threshold ḡ, i.e. excessive deficits, as 'bad'. Each government knows that, by breaking the norm, it will gain the undesired reputation of a 'naughty boy'. The objective function is a loss minimization

min g d,i L i = α (y i -y n ) 2 + R i (3)
Notice that our formalization rules out any deficit bias, as governments do not try to push output above its natural level; this has the important implication that no conflict with the Central Bank arises, and we can avoid modelling monetary policy.13 R i is the loss linked to a bad reputation. We assume that the loss of reputation is proportional to the fraction of governments that believe in the norm, μ, and that it does not depend on the magnitude of g i .

½ R i =0if g i ≤ ḡ R i = β 2 μ if g i > ḡ (4)
Obviously, for positive shocks the government faces no choice, and it stabilizes the economy. A government facing a negative shock faces a two step problem: (a) decide whether to break the norm and stabilize (g i > ḡ ⇒ R i > 0), which it will do if the shock is large enough; and (b) if the norm is broken, what level of g d,i to choose. The problem can be tackled backwards, remembering that if the code is broken the reputation loss is not linked to the size of stabilization. Substituting equations ( 1) and (2) within equation (3), we obtain min

g d,i α [g d,i +(1-γ)ε i ] 2 + R i (5)
whose solution is

g d,i = -(1 -γ)ε i ⇒ ½ g i = -ε i y i = y n (6)
If the government chooses to use discretionary policy to complement automatic stabilization, income remains at its natural level.

On the other hand, if the government opts for obedience to the norm, total expenditure will be limited by the threshold ḡ, and y iy n =ḡ + ε i . This implies that regarding the choice of whether to stabilize, the loss in the two cases (S/F, stabilize/follow the norm) will be

½ L S i = R i = β 2 μ L F i = α [ḡ + ε i ] 2 (7)
The norm will be followed only if

L F i < L S i , i.e. if |ε i | ≤ ε = β r μ α +ḡ (8)
Thus, the larger the reputation loss (high β), and the lower the weight given t ot h eo u t p u tg a p( l o wα), the higher the threshold ε, i.e. the shock governments will endure without intervening to stabilize. On the other hand, if the rule were made less stringent (larger ḡ), more governments would follow the norm (larger ε).

For computational simplicity, and without any loss of generality, from now on we will assume that ḡ =0, meaning that any deficit will be sanctioned by a reputation loss. Furthermore, when referring to the 'union' or the 'area', we will focus on the part of governments faced with negative shocks, that has unit mass, and a distribution of shocks ε i ∼ U (-a, 0).

Short term equilibrium

In the short term the fraction μ of believers in the norm is given. As the shock has a uniform distribution, the fraction of governments following the norm, i.e. those for which the absolute value of the shock is small enough, is

x = β a r μ α (9)
Long term equilibria In the long run, the number of believers in the norm changes according to their number with respect to the followers.

μ = ϕ(x -μ) ϕ>0 (10)
where ϕ is a positive multiplicative constant. Thus, if more governments believe in the norm, than follow it, the number of believers will decrease; and if the opposite holds, the number will increase. The following proposition characterizes the long run, or steady state equilibrium ( μ =0):

Proposition 1 Suppose that β>0; then (a) Two equilibria may exist, one in which nobody follows the rule, and one in which a positive fraction 0 <μ * * ≤ 1 of governments follows the rule:

μ * =0 (11) μ * * =m i n µ 1, β 2 a 2 α ¶ (b)
The equilibrium μ * is unstable, whereas the equilibrium μ * * is globally stable Proof. See Appendix μ * corresponds to the equilibrium without reputation (nobody believes in the norm, nobody follows it and nobody is sanctioned for that). The other equilibrium is characterized by a positive fraction of governments following the rule and hence not stabilizing 14 . μ * * is inversely related to the parameters α and a: both a higher weight given to stabilization, and a more unstable macroeconomic environment, make the rule less sustainable. In particular the role of the latter parameter may be worth investigation in further research. Notice that if the sanctions are weak enough (0 <β 2 <a 2 α ⇒ μ * * < 1) there is coexistence, in steady state, of governments stabilizing and governments abiding by the rule. In the following we will assume to be in such a situation.

Substituting back in equation 8, we obtain the long term value for the threshold:

ε = β 2 aα ( 12
)
Aggregate income and welfare At the μ * =0equilibrium all governments stabilize, and aggregate income is Y * = y n (the countries hit by negative shocks have unit mass). Accordingly, aggregate loss is L * =0 ,a sR i is equal to zero for every i. The equilibrium with some countries following the rule will on the other hand be characterized by lower aggregate income and larger aggregate loss.

Proposition 2 Suppose β 2 ∈ (0,a 2 α); then (a) The μ * * equilibrium, with a positive number of followers of the norm, is characterized by a lower level of production than the μ * equilibrium:

Y * = y n >Y * * = y n - β 4 2a 3 α 2 (13) (b) The μ * * equilibrium is inferior: L * =0< L * * = μ * * β 2 a (a -ε)+ α 3a ε3 .

Proof. See appendix

In this section we proved in the general case that the emergence of a social norm whose violation involves a reputational loss may yield two equilibria, one in which the norm is neglected, and the other in which it is followed by a positive fraction of agents. The latter equilibrium is globally stable, and it involves both a lower aggregate welfare and a lower average income.

To keep the algebra of the model tractable, in the following we normalize the shock and the weight to a = α =1. As a consequence,

μ * * =ε = β 2 (14) L * * = β 4 (1 - 2 3 β 2 ) Y * * = y n - β 4 2
From now on we will focus on the only stable equilibrium ( μ = μ * * ).

Enlarging the Club: New Members and Reputation

In this section we explore the effects of the norm in the case of an enlargement of the union. To do so, we introduce heterogeneity in a peculiar way: we assume that for exogenous reasons (for example past history) not all countries suffer from the same reputational loss in case they break the code. To keep things simple, they are divided in two groups, (b)ad and (g)ood, of mass ν and 1ν respectively. We further assume that countries belonging to the two groups face the same shocks, have the same natural income, and the same weight for output stabilization. The only difference is that reputation loss is larger for 'bad' countries (β g <β b ) . F o re a c hg r o u pw ec a nc o m p u t e the threshold and the fraction of followers (see eqs. 8 and 9, remembering that here a = α =1):

εj = x j = β j √ μj = b, g (15)
The total number of norm followers is then

x = νx b +(1-ν)x g =(νβ b +(1-ν)β g ) √ μ = β √ μ (16)
w h e r ew ed e fine β ≡ νβ b +( 1-ν)β g . The steady state equation and its nonzero solution (eqs. 10 and 11) are

(νβ b +(1-ν)β g ) √ μ -μ =0 (17)
μ * * =(νβ b +(1-ν)β g ) 2 = β 2
where β g <β b ⇒ εg < εb . A v e r a g ei n c o m ef o rt h ea r e ac a nb ew r i t t e na s

Y * * = Z y n -ε b y n -1 y n dy | {z } A + Z y n y n -ε g yd y | {z } B + Z y n -ε g y n -ε b (νy +(1-ν)y n ) dy | {z } C (19)
The integral A collects the countries that do stabilize, because (the absolute value of) the negative shock is above all the thresholds. B represents countries whose shock is so small that they do not stabilize whatever their group is. Finally, integral C represents the group of countries for which the behaviour depends on the group. If they are bad (ν of them), they do not stabilize, whereas if they are good, they will find it convenient to stabilize. Equation 19 yields

Y * * = y n - 1 2 (νε 2 b +(1-ν)ε 2 g ) (20)
that is the equivalent of equation ( 13).

Notice that, as fewer countries will stabilize, average income in the 'b' group will be lower than in the 'g'g r o u p :

Y * * b = y n - 1 2 ε2 b <y n - 1 2 ε2 g = Y * * g (21)
Hence, even assuming that the natural level of income is the same, the mere existence of the norm may generate income inequality.

Newly admitted members are usually closely scrutinized to verify whether they abide by the rules. The ten countries that joined the European Union in May 2004 are no exception, and though not formally, their public finances will most probably be subject to stricter controls from the old member states. In fact, in May 2004 the European Commission issued early warnings for six of the ten new member states, namely Cyprus, the Czech Republic, Hungary, Malta, Poland and Slovakia. Even more plausibly, the newcomers themselves will do whatever is within their capabilities to show the other participants of the club that they deserve to be part of it. In terms of our model, this means that the ratio of governments for which deviations from the norm imply a higher reputation loss has increased with the enlargement. Assume that the reputation loss of good countries is a fraction of the reputation loss of bad countries, β g = xβ b ,x∈ (0, 1). The following proposition relates average income, and its variability, with the ratio of bad governments on the total. If the difference between good and bad countries in terms of reputational loss is large enough (x<2/3) then, income volatility will increase even if the number of bad members of the club is low. Similarly, if the number of bad countries is large enough (ν>1/2), then income volatility will increase even if the penalty is similar for the two groups. Only the combination of similar penalties (large x) and a large majority of good countries (low ν)c o u l dy i e l da decreased variability of income; in such a case, the decreased income variability of good countries would more than compensate the increased income variability of the bad countries. x ()

x ν ν 2 (0) 3 x = 0 V ν ∂ > ∂ Figure 1:
∂V ∂ν as a function of ν and x.

assumption that entrants will have to be more rigorous than the old members of the union proves correct, then the norm will become more binding, with the effect of generally increasing income variability, and reducing the average income and welfare of the area. We believe that such a risk should be taken into account when discussing the future institutional setup of the EMU, and especially when coming to the issue of 'deepening vs. enlarging' the union. Notice furthermore that this result is derived in the most unfavorable case, given that besides reputation countries are all alike; the negative effects of the norm would be even more evident if we had allowed for heterogeneity.

Conclusion: Enlargement and the Pact

This paper developed the consequences of a strong but plausible premise, namely that the Stability and Growth Pact has uncertain theoretical justifications, and that its raison d'être is mainly a reputation issue. In this sense it may be considered a social norm of the type discussed in the introduction.

The model we presented was willingly kept abstract and simple, in particular assuming that the system, as described by equations 1, was static; and more importantly that positive and negative externalities washed out. At the price of more cumbersome algebra, we could express the model in terms of growth rates, keeping the main conclusions unaltered:

-In spite of its lack of economic justification, the norm generates a stable equilibrium with lower income and welfare. Furthermore, the higher the weight attached to reputation loss, the lower the equilibrium income level.

-Further making the realistic assumption that in case they broke the Pact, new members would suffer a higher loss in reputation than the others, we showed that the enlargement would further decrease the area wide average income level, and increase its dispersion. This conclusion seems to suggest that enlargement may help break the 'bad' equilibrium and help the EU out of the suboptimal social norm.

A few extensions might add to the insights of model. Some would intuitively strengthen our results, for example if the model was complicated in order to keep track of long term variations in potential income. If we consider that, especially in periods of fast technological change, potential output is plausibly affected (via investment) by protracted periods of low growth, the dynamics would probably result in even stronger long run negative effects of a social norm depressing output in the short run. Another extension that would highlight the negative effects of the Pact is the consideration of common (instead of independent) shocks. If business cycles are synchronized, then the number of countries breaking the code would be higher in recession times (something we are observing nowadays). The effect of this extension on the norm itself (could it be that if a common shock is severe enough the norm simply breaks down?) would be particularly interesting to study. On the other hand, the explicit consideration of negative externalities of budget deficits would soften our conclusion; showing how do externalities interact with the reputational issue tackled in this paper would certainly be interesting.

Another topic for future research is the introduction of size effects, that may affect both the sanctioning scheme, and the influence of deficits on reputation. Stark, J. (2001), 'Genesis of a Pact', in A. Brunila, M. Buti and D. Franco (eds), The Stability and Growth Pact The Architecture of Fiscal Policy in EMU, Palgrave, Basingstoke, 77-105.

Appendix: Proof of Propositions Proof. Proposition 1 (a) Equation ( 10), together with the steady state condition μ =0implies x = μ, i.e. (using eq. 9)

μ = β a r μ α (22)
the two solutions are given in equation ( 11), and repeated here for convenience:

μ * =0 μ * * =m i n µ 1, β 2 a 2 α ¶
where the formulation for μ * * stems from the fact that μ ∈ [0, 1].

(b)

For notational convenience, define K = β a √ α , implying that μ * * = K 2 . In order to study stability, we substitute ( 9) inside (10), to obtain the following:

μ = F (μ)=ϕ(K √ μ -μ) (23)
Notice that F (0) = F (μ * * )=0. Furthermore, notice that lim μ→0 F 0 (μ)=lim μ→0 1 2 √ μ -1 > 0 so that the μ * =0equilibrium in unstable. Global stability of μ * * requires F (μ) > 0 ∀μ<μ * * = K 2 , and F (μ) < 0 ∀μ>μ * * = K 2 ,e x a c t l yw h a tw e have (remember that ϕ>0):

K √ μ -μ>0 ⇐⇒ μ<K 2 = μ * * (24) K √ μ -μ<0 ⇐⇒ μ>K 2 = μ * *
so that μ * * is globally stable.

Proof. Proposition 2 (a)

If ε i ∼ U(-a, 0), it follows that y i = y n + ε i ∼ U (y na, y n ). Aggregate (and average) income of the area, when μ = μ * * , c a nt h e nb ew r i t t e na s where A denotes the 'extreme' countries, whose shock is large, whereas B is the income of countries which do not stabilize, and consequently produce y i = y n + ε i . Changing from y i to ε i , and collecting the y n term, equation 25 can be rewritten as

Y * * = 1 a µ y n Z 0 -a dε + Z 0 -ε εd ε ¶ = = y n - 1 2a ε2 = y n - β 4 2a 3 α 2 <y n (b)
Governments stabilizing will face a reputation loss of β 2 μ, Countries following the rule will suffer a loss of αε 2 i . Aggregate loss can be written as

L * * = 1 a µZ -ε -a μ * * β 2 dε + Z 0 -ε αε 2 dε ¶ (26) = μ * * β 2 a (a -ε)+ α 3a ε3 (27) = β 4 a 2 α µ 1 - 2 3 β 2 a 2 α ¶ > 0 ( 28
)
given that β 2 ∈ (0,a 2 α). Thus,

L * * > L * =0

A

  c c o r d i n g l y ,t h ev a l u e sf o rt h et h r e s h o l d sa r e εj = β j β = β j (νβ b +(1-ν)β g ) j = b, g

Proposition 3

 3 Assume that 0 <β g = xβ b <β b < 1. Then, as the ratio of bad governments ν increases: ( a )A v e r a g ei n c o m ef o rt h ea r e aa saw h o l ed e c r e a s e s . (b) Income variability for the area as a whole, V (Y ), increases, for values of x sufficiently low: x<x(ν) (c) The threshold x(ν) is increasing in ν: x0(ν) > 0 Proof. See appendix Figure (1) shows the shape of the threshold as a function of ν.

  T h em o d e lg i v e st h u sa ni n s i g h to nt h ep o s s i b l ee ffects of enlargement in presence of a constraining rule on stabilization policies. If the intuitive

Contrary to the game theoretic literature, that defines reputation as the coherence between ex ante and ex post behaviour (reputation is equivalent to credibility), the literature on social norms defines reputation in more general terms, as the positive effect on welfare coming from the acceptance by other members of the community.

A trivial, and yet forceful, example is that bus riders do not pick their nose. They want others to think that they 'know how to behave', even if they will never meet again.

Elster echoes a tradition on social norms rejecting the utilitarian (or functional) approach that we describe in the text. For authors like Habermas and Rawls the social norm emerges when individuals accept limitations to their behaviour in order to form a community. Thus, norms mark the passage from the state of nature to civil society[START_REF] Forsé | [END_REF]. This approach, dominant in sociology, is a minority view in economics.

The SGP consists of a Resolution of the European Council (OJ 1997, C 236/1), and two Council Regulations (1466/97 and 1467/97)

To cite just the most recent ones,[START_REF] Laubach | New Evidence on the Interest Rate Effects of Budget Defcits and Debt[END_REF],[START_REF] Ardagna | Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries[END_REF],[START_REF] Canzoneri | Should the European Central Bank and the Federal Reserve Be Concerned About Fiscal Policy?[END_REF]. These results nevertheless are not extremely robust, as other studies are inconclusive[START_REF] Mehra | Deficits and Long-Term Interest Rates: An Empirical Note[END_REF][START_REF] Cunningham | Is Keynesian Demand Management Policy Still Viable?[END_REF], or find negative correlation[START_REF] Caporale | Long-term Nominal Interest Rates and Domestic Fundamentals[END_REF].

[START_REF] Landon | Government Debt Spillovers and Creditworthiness in a Federation[END_REF] find some effect of provincial debt in Canada, and the creditworthiness of the other provinces. These effects are nevertheless small, and the authors do not clearly take position between a market based and a rule based approach to fiscal discipline.

[START_REF] Fatás | The Case for Restricting Fiscal Policy Discretion[END_REF] Examples of negative spillovers are in[START_REF] Andersen | Unemployment and Fiscal Policy in an Economic and Monetary Union[END_REF],[START_REF] Jensen | The Advantage of International Fiscal Cooperation under Alternative Monetary Regimes[END_REF],

'Nevertheless, the problem, with the Pact as presently framed is that it is all stick and no carrot; rewarding good fiscal behaviour in booms rather than, or in addition to, punishing bad behaviour in slumps, would certainly make better sense'(Bean, 1998, p.106).

We thank Robert Solow for suggesting this argument.

In a similar vein[START_REF] Fitoussi | Macroeconomic Policies and Institutions[END_REF] speaks of an 'hidden agenda' that the current European institutions help to push.

By targeting the output gap, on one side the government reduces variability of income, therefore reducing uncertainty for its citizens; on the other, it sustains employment and per capita income, both linked to individual welfare.

Given the assumption of mass 2, the density function is f (x)=1/a. Notice that this assumption about the shocks rules out ex ante correlation between income in the countries.

Ad e ficit bias would simply shift towards a positive average deficit the equilibrium of the economy, thus leaving unaltered the logic of our argument. By ruling out deficit biases, we are not concerned by strong empirical results like those of[START_REF] Fatás | The Case for Restricting Fiscal Policy Discretion[END_REF].

As we are only concerned by the welfare effects of the norm, and as μ * * is the only stable equilibrium, we don't deal with the emergence of the rule, nor with its robustness with respect to parameter changes.

The matlab code is available at (web page reference delete for blind refereeing)

Proof. Proposition 3

First of all notice that β b >β g ⇒ εb > εg , i.e. that the threshold value is different for countries belonging to the two groups (a)

Recall that average income is (from equation 20)

whose derivative is

) by the assumption β bβ g > 0 which guarantees that the term within square brackets is positive.

(b)

T h ev a r i a n c eo fi n c o m ec a nbew r i t t e n ,s i m i l a r l yt ot h em e a n ,a s

Tedious algebra, and substitution of Y * * with the value from equation (20), yields

Further remembering that with α = a =1 , we have εj = ββ j (j = b, g). Furthermore, take the derivative with respect to ν, divide throughout for β 6 b , 28 and for notational ease, define b = β 2 b :

We want to show that

We notice that if b → 0, considering that x, ν ∈ (0, 1),

and that the derivative of C with respect to b is negative:

Thus, there will be a threshold level of b, such that C =0:

For values lower than the threshold we have that C>0, so that when b is equal or larger than one, then the derivative of income variance with respect to ν will be positive. Unfortunately this is not true for any pair (ν, x) ∈ (0, 1), a n dw en e e dt od e fine a threshold x for which the variance is positive, given the other parameters.

An explicit relationship between x and ν is impossible to find, but we can 29 study the function at its extremes. When ν → 0, the threshold is

In other words, whenever x<x = 2 3 , the variance of income will be increasing in ν. If x → 1, then we have

In the (x, 1) and (0, ν) range we have to use numerical simulations to solve for the relationship between the threshold x and the proportion of bad countries ν. 15 . The results of the simulation allow to draw figure 1 in the text, that shows a positive relationship between x and ν.


Jean-Paul Fitoussi
email: jean-paul.fitoussi@sciences-po.fr

The end of (economic) history

Keywords: secular growth, human needs, capitalism, economic systems, inequalities JEL codes: A13, D11, D63, E12, E21, O47, P17

Some papers, for reasons which remain at least partially obscure, leave a persistent trace in intellectual history. Such is the case with Keynes' paper "Economic Possibilities for our Grandchildren", although it never attracted much attention within the economic profession, besides reference here and there to the power of simple economic calculations: A possible explanation is that Keynes, in freeing himself from economic rigor, is attempting to unveil his moral philosophy. Because a great economist is not necessarily a great philosopher we should not ab initio expect the result to be at the level we are accustomed to in reading Keynes. What matters is not so much the way Keynes answers the questions he poses but the nature of the questions themselves. Could the very functioning of the capitalist system lead to the solution of the economic problem and hence to the end of capitalism itself?

This paper sustains that the answers given by Keynes to these questions are grounded on three elements: arithmetic, the neurosis of capitalism and the communism of the elites. On the first element, Keynes is right; one may even argue that his reasoning anticipates Solow's growth model. The second element is rooted in the context in which Keynes was writing and grounded on a false interpretation of Freud's work which led him to a simplistic analysis of human needs. The third element unveils his aristocratic view of society. What is remarkable in "the economic possibilities" is the powerful intuition of Keynes and even more remarkable the nature of the questions he poses. Each and every economist should try to answer the question of the ends of the economic system and of its possible end. What is deceptive is the naivety with which Keynes deals with human needs and even more deceptive his arrogance and the questionable moral which goes with it.

Some papers, for reasons which remain at least partially obscure, leave a persistent trace in intellectual history. Such is the case with Keynes' paper "Economic Possibilities for our Grandchildren", although it never attracted much attention within the economic profession, besides reference here and there to the power of simple economic calculations: "The greatest economists of my lifetime have been extraordinarily wise in guessing by rule of thumb what the more elaborate models of the cliometricians will derive after tedious calculation" [START_REF] Samuelson | The World Economy at Century's end[END_REF]. A possible explanation is that Keynes, in freeing himself from economic rigor, is attempting to unveil his moral philosophy. There is nothing wrong in such an attempt as it is utterly normal that a thinker of the calibre of Keynes undertakes to look beyond his own field.

Because a great economist is not necessarily a great philosopher we should not ab initio expect the result to be at the level we are accustomed to in reading Keynes. But we should nonetheless expect it to be worthwhile, as what matters is not so much the way Keynes answers the questions he poses but the nature of the questions themselves.

Could the very functioning of the capitalist system lead to the solution of the economic problem and hence to the end of capitalism itself? Would an era of abundance entail a radical change in the system of values on which capitalism presently relies? What can the life of the people in the new era reasonably expected to resemble?

The answers by Keynes to these questions are grounded on three elements: arithmetic, the neurosis of capitalism and the communism of the elites.

Arithmetic

At the beginning of Keynes' reflection is the calculus of compound interest and its well known spectacular outcome when applied to long periods of time. At a rate of growth of 2% any figure will be multiplied by 7.5 in a century. So would be the GDP per capita of human beings living in the civilised world thanks to capital accumulation and technical progress 2 . Keynes is prudent enough to give a multiplier lying in between 4 and 8. With insight backed by powerful intuition, back of the envelope calculation may deliver more truth than the most sophisticated model. That is the most robust element of the paper. One may quarrel with the mercantilist view of capital accumulation developed in the paper or with its explicit focus on developed "progressive" countries -Europe and the United States. But even if he would have taken into account the developing countries, Keynes' prediction would not have been that wrong thanks to China, India, and Brazil etc., before 2029 which is the time horizon of the reasoning.

So what? Would the economic problem of mankind be resolved by an eight fold increase of all economic dimensions, but the population? The answer by Keynes is a straightforward yes, because such an increase will allow the satiation of what he calls "the absolute needs".

True, Keynes is well aware that relative needs -keeping up with the Joneses' -will never be satiated, but he thought that to the extent that the needs of the first type would be satisfied, those of the second type would become of a second order of importance.

Implicitly, he thinks that the rush to fulfil the desire for superiority will appear so remote from the search for the good life that it will soon be recognised as a mental disease rather than a sign of strength. Indeed, Keynes is referring to the nervous breakdown "which is already common enough in England and the United States amongst the wives of the well-to-do classes, unfortunate women, many of them who have been deprived by their wealth of their traditional tasks and occupation…". Of course Keynes was not predicting that in one century from now we should expect a general "nervous breakdown" because "mankind will be deprived of its traditional purpose". We would progressively learn how "to devote our further energies to noneconomic purpose".

2 Ever since, the power of compound interest has always amazed economists. As Lucas wrote: "in Korea, over the same period , per capita income grew at 6,2 percent per year, a rate consistent with the doubling of living standards every 11 years." And Lucas concluded: "If we understand the process of economic growth… we ought to be capable of demonstrating this knowledge by creating it in these pen and paper (and computer-equipped) laboratories of ours. If we know what an economic miracle is, we ought to be able to make one." [START_REF] Lucas | Making a Miracle[END_REF]. Utopias are alive and well! But here sheer arithmetic should have rung a bell in Keynes' ears: nowhere in the paper is Keynes concerned with income distribution, nor is he expressing the idea that inequalities will progressively, if not disappear, at least significantly shrink. Now an eightfold increase of all percentiles of the income distribution leads to an eightfold increase in the absolute differences between the percentiles. Relativities stay unchanged but the range of the distribution is becoming so huge that it will make people of the same society live in entirely different planets. In the twenties, inequalities were considerable, perhaps as considerable as at the belle époque. Keynes was well aware of that state of affairs in other texts, like The General Theory, he considered income and wealth inequalities as one of the two flaws of our system, the other being unemployment. But in "The Economic Possibilities" he disregards completely the question as the following quotation of the paper shows: "Let us, for the sake of argument, suppose that a hundred years hence we are all of us, on the average, eight times better off in the economic sense than we are to-day". Now even if the utility function of every household is of a lexicographic type -the absolute needs being satisfied before the others -we are not sure that an eightfold increase in his income will allow him to satisfy his absolute needs if his income is very low to begin with.

Here ends arithmetic and begins the complexity of human nature. How can we define "absolute needs"? Like Marx, by the value of the goods necessary for the reproduction of the workforce of a wage earner? Or by what Ricardo calls the subsistence level of wage? Are absolute needs independent of time and place? Were they the same at the beginning of the twentieth century and are they now? Answers to these questions are crucial to Keynes' thesis. A straightforward yes would mean that he is right, a no that we are in trouble. And I think we are in trouble: a human being is a social being, and this has far reaching consequences. One of them is on the definition of "absolute needs". If we depart from the fiction that economic agents are Robinson Crusoe's, we have to define absolute needs as those whose satisfaction allow social inclusion, and not as Keynes does, those "that we feel whatever the situation of our fellows human beings may be". But that means that absolute needs are relative after all! They are relative even if we do not take account of social interaction: life expectancy has increased with time thanks to the progress of medicine and hygiene and to the increased quality and diversity of the basket of goods aimed at satisfying the "absolute needs".

They are relative because there is no such a thing as a one-to-one mapping of specific goods to each "absolute need". They are relative because at a certain date and place, goods are more or less satisfying the needs to which they apply, think of glasses, water, bathroom, eating system, medicine, proteases, beds and the like. The demand for a better match between goods and needs seems to be boundless and constitutes one of the more powerful engines for scientific research and innovation, in short, progress. The taxonomy of needs between absolute and relative is too crude to serve as a hierarchy for human wants. Even if we limit ourselves to the fulfilment of subsistence needs, we have to admit that the degree with which goods may satisfy those needs may vary widely with the quality of the goods (think, for example, of the complementarity between goods' quality and health). Hence the positional concern of consumers is not the only motto of non-satiation of needs, the search for a better life suffices.

Why does a brilliant's mind like Keynes rely so heavily on such a simplistic characterisation of human needs? One possible answer is that he uses it as a rhetoric devise to belabour his point "that the economic problem is not -if we look into the future -the permanent problem of the human race". For all of us who believe in economic and social progress, this statement may be exaggerated, but not entirely wrong. There is little doubt, if we learn how to avoid the potential catastrophes emerging from our time and mode of development -e.g. climatic change, wars -that economic and social progress will in a remote future lead to the resolution of the most pressing economic problems at a global scale. At least we could hope that a time will come when the economic problem will no more be as it is today, a question of life and death. I am writing these lines from France, a very rich country where each week brings its news of the death of some homeless. But the social protest against such a situation is very strong and all political parties have accepted to sign a charter to put an end to such a state of affairs. There also exists in France "the restaurants of the heart", privately founded, which are serving millions of lunches and dinners to the needy and this number is increasing year after year since the beginning of the eighties. So it is a matter of utopia, a feasible one, to believe that essential needs would be satisfied in not so remote a future. To become reality this utopia needs at least two conditions, the increase of the standard of leaving through compound interest, and social cohesion, that is the refusal by members of the society to endanger the life of the poorest through a lack of redistribution. But that would not mean that the economic problem will be solved but that its nature will change. There is no such a thing as a stationary state, where all the needs being satiated, mankind will cease to hope for a better future, at least on earth.

Another complementary interpretation is that Keynes is trying to oppose a "modern" view to the grand (but melancholy long-run) dynamics of the classics. Keynes seems to be speaking to Ricardo, Malthus and Mill3 . They were the ones who set the stage for Carlyle to call economics "the dismal science" with the spectre of stagnation as the inevitable long run fate of economic prophecy -mainly due to diminishing returns.

Here Keynes is extolling the virtues of increasing returns; hence his affinity with Solow, Lucas and compound interest. After all with increasing returns and compounds interests trees so to speak can grow up to the sky -the end of scarcity -and the avarice of Nature emphasized by the classics is no more a limitative factor.

But the emphatic tone Keynes is using throughout the paper aims at a more definitive conclusion: that of the solution of the economic problem. He has to believe in his own taxonomy of needs to reach such a conclusion. How could it be? A possible explanation lies with his understanding of Freud's contribution. According to Skidelsky, "Keynes was fascinated by Freud's reflection on the pathology of money, particularly its association with the anal sadistic character, and by the Freudian mechanism of sublimation. Freud enabled him to build on his insight into the sacrificial nature of capitalism, first expressed in The Economic Consequences of the Peace. Here the price of economic progress is seen as the cultural deformation of the 'rentier bourgeoisie' who have sacrificed the 'art of enjoyment' to 'compound interest'". The 'love of money' which Keynes seems to associate with the satisfaction of relative needs 4 is thus of a neurotic type and in a world where all the material needs would be satisfied, the course towards differentiation would appear all the more immature that it would be remote from the good life. The insistence by Keynes on "unsatisfied purposiveness", and the passage of the paper on Sylvie and Bruno are all going in this direction. Keynes is drawing from pathological cases general consequences. What psychoanalysis is teaching is that human's desire can't be satisfied because it is characterised by a permanent lack, impossible to fill, which leads to a boundless research for satisfaction. Now desire and needs are not quite the same thing, but one may easily imagine how the boundlessness of the first translates into the boundlessness of the second.

The unlovable but unavoidable capitalism

Phases of maladjustments apart, "all this means in the long run that mankind is solving its economic problem" 5 . Of course the road to prosperity will be full of pitfalls, but if we are intelligent enough we could discern under the surface "the trend of things". The time will come when economic history will end. This is the message Keynes wanted to convey to his readers in prophesising the withering away of the problem of economic scarcity. The illusion of the End of History re-emerged recently with Fukuyama's thesis. For Keynes it is the end of the struggle for subsistence which leads to the end of (economic) history. For Fukuyama, it is the end of the struggle between ideologies and the triumph of liberal democracy which leads to the end of history tout court. It's interesting to notice that both conclusions are the consequences of a dichotomybetween absolute and relative needs in Keynes paper, between Soviet socialism and liberal democracy in Fukuyama's book 6 . Furthermore, there was a period when the feelings of Keynes about Soviet Socialism were ambiguous. In the three papers he published back from Russia in October 25 in the Nation ("Soviet Russia"), this ambiguity was asserted: "It is here [Russia] that we feel from time to time, despite poverty, stupidity and oppression, that lies the true laboratory of life". Indeed, most of the arguments of "the economic possibilities" were already contained in these papers.

What Keynes dislikes most is Capitalism as an end in itself, and what he finds most detestable, is Soviet Socialism as both a political and economic method. Hence if you take capitalism as an efficient means -however disgusting it may be -and the advent of pure communism as the only moral end of any economic system, compound interest will lead to that end. In other words, there are at least two roads towards abundance, Soviet Socialism and Capitalism, because each economic system should aim at its own end. The former is explicitly doing so -in promising after the transition the advent of pure communism in a world of abundance -which gives it a moral superiority, but it is such an infringement of freedom that Keynes is not ready to accept it: "Comfort and habits let us ready to forgo, but I am not ready for a creed which does not care how much it destroys the liberty and security of daily life, which uses deliberately the weapons of persecution, destruction and international strife" ("Soviet Russia"). The latter, Capitalism is thus the surer way, and although it has not much to recommend to it, its efficiency as a method to increase the standard of living has already been proved in the past centuries. It is morally inferior as it relies on the less attractive characteristics of human behaviour and confuses vices with virtues. But once the new era will begin, "we shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues.

The love of money as a possession …. will be recognized for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease." One can't but agree with Keynes' philosophy, according to which economic progress should serve moral objectives, and nonetheless disagree with the caricatured picture he gives of Capitalism. If avarice, the exaction of usury, the love of money were the main characteristics of Capitalism, certainly the system would not be efficient and able to deliver, even in several centuries ahead, the fruits of abundance. If purposiveness has always to be considered as a vice, investment, education, entrepreneurship would have to be considered as sins. Whatever the world in which we live, it would be hard to understand why Carpe Diem as a principle is always morally superior in the action we undertake to the consideration of tomorrow and even after tomorrow. May be that, on the contrary, one of the moral strength of Capitalism is its consequentialism as it may lead say to intergenerational altruism. As Edmund Phelps forcefully argues in his Nobel Lecture, a good economy -entrepreneurship's Capitalism -may even deliver a good life.

Elite's Communism

If we consider that any articulated proposition is a metaphor combining the idiosyncratic circumstances in which we live, the fashionable ideas of our time, our moral judgements on the social framework, the vision of the world we dream will prevail -dream, not hope as sometimes we would not like our dreams to come truewe have to recognize that Keynes' paper contains all these elements. This is why his thinking, depending on the angle from which one looks at the paper, may appear sophisticated or, on the contrary, simplistic, almost right or exactly wrong.

In particular, Keynes' calculation is almost right, his rejection of Capitalism -because the greediness it supposes from economic agents and their egoistic behaviour -is not so badly founded. But there are many moral principles, and the one Keynes seems to prefer is not so superior indeed! It is rare to find in a paper so great a contempt for so many categories of people: the purposeful, the Jews, the wealthy classes, the wives of the well-to-do classes etc. "Yet it will be only for those who have to do with the singing that life will be tolerable and how few of us can sing! … But it will be those peoples, who can keep alive, and cultivate into a fuller perfection, the art of life itself and do not sell themselves for the means of life, who will be able to enjoy the abundance when it comes." This kind of arrogance is all but sympathetic; it is so idiosyncratic of Keynes' milieu, so remote from the virtues he seems to praise that it is no wonder that it did not pass the proof of time.

"Educated bourgeoisie", those who have frequented Eton and the Bloomsbury circle, are those who are elected to the new heaven after the end of economic history. They had the chance of benefiting from the then luxury goods, higher education, the understanding and appreciation of the arts and music and so on, because they had the means to pay for them and the leisure to enjoy them. The others, "the ordinary persons with no special talents", will have to elevate themselves in order to benefit from the new freedom they are entitled to. The first, rather to be the last in this paradise, will on the contrary be the first. Keynes here, rather naïvely, is attempting to apply the Freudian mechanism of sublimation. Only those who will be able to sublimate their lack (the non-satisfied relative needs) into a higher ideal would find their way in the new paradise. "We shall honour those who can teach us how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin." Elite's Communism seems to be a contradictory statement but the wording of Keynes does not allow for any other interpretation. Of course with time and in a world of abundance one may hope that the class of elites will become ever larger. But this enlargement may very well lead to Schumpeter's prediction as interpreted by Samuelson: "That rationality of Capitalism which makes for productivity will serve to corrode the irrational sentiments of social cohesiveness. The spoiled children of affluence will reject their parents and heritage. Their self-hate will lead to boredom and anomie". I prefer without hesitation the conclusion of Keynes that the increase in the standard of living will help us cure our neurosis rather than the one of Schumpeter according to which it will aggravate it. It is not pure chance if Capitalism with inbuilt Keynesian mechanisms -a system that Schumpeter calls Capitalism under "oxygen tent" has been a success story since the end of WW2, as even [START_REF] Lucas | Macroeconomic Priorities[END_REF] recognises. But I do not understand Keynes' position when he asserts that we should value ends above means. First it appears as somewhat in contradiction with Keynes' own rejection of socialism: what he finds detestable is the Soviet regime as a means, but not its end which seemed to him to contain the germ of a new ideal ("Soviet Russia"). Second and more importantly such a principle is morally highly questionable. The caricatured Machiavellian principle according to which the ends justify the means has lead in the past to the most abominable, atrocious actions of mankind and it helps today to justify terrorism and torture. It is why, since already a long time, it has been consensually agreed at least in the democratic countries of the world to obey the Gandhian principle that on the contrary the ends do not justify the means. One can attempt at a generous interpretation of Keynes' assertion, according to which he wanted to alert the reader on a possible confusion between ends and means. After all such confusion is very common nowadays, so common that it is frequently leading to an inversion in the hierarchy of socio-economic objectives (e.g. a lower level of public debt rather than a higher level of employment; a balanced trade account rather than a higher level of growth etc.). But it is difficult to believe that a thinker of Keynes' calibre does not pay attention to the words he uses, especially in the final version of a paper which he had already presented several times. I end this reflection with mixed feelings. What is remarkable in "the economic possibilities" is the powerful intuition of Keynes and even more remarkable the nature of the questions he poses. Each and every economist should try to answer the question of the ends of the economic system and of its possible end. May be this would lead them to consider their discipline differently. What is deceptive is the naivety with which Keynes deals with human needs and even more deceptive his arrogance and the questionable moral which goes with it. Of course I know that Keynes condemned Nazism as early as 1933, but I know also that for reasons which pertained to an exactly inverse perspective than that of "the economic possibilities" -the short-medium run rather than the long term -his preface to the German edition of The General Theory was ambiguous vis à vis the German regime.

The quotations are from "The Economic Possibilities for our Grandchildren" unless otherwise specified. I am very much indebted to Vela Velupillai for Helpful comments on earlier versions of this paper.

This interpretation has been suggested to me by Vela Velupillai.

Keynes is pretty clear on this: "Needs of the second class, those which satisfy the desire for superiority, may indeed be insatiable….but this is not so true of the absolute needs -a point may soon be reached, much sooner perhaps than we are aware all of us aware, when these needs are satisfied in the sense that we prefer to devote our further energies to non-economic purpose."

In The Tract on Monetary Reform, Keynes told us that we were all dead in the long run! He should have added that fortunately for mankind our grandchildren will be alive!

The prophecy of the end of history seems hence to be the outcome of a narrow, partial vision of the world. But here the similarities end. In Fukuyama's thesis it is the satisfaction of the need for recognition by liberal democracy which provides the end point for history. However the need for recognition would rather be classified by Keynes within the relative needs. Hence at this point their conclusions are incompatible. After the end of history, in Keynes' world people will care only about enjoying themselves; in Fukuyama's one, they will still continue to devote energy to satisfy their need for recognition relative to the others.