Being economical with the truth an old habit that dies hard

When is it legitimate to lie? Can lying ever be virtuous? In the Machiavellian tradition, lying is sometimes justified by reference to the higher needs of political statecraft, and sometimes by the claim that the state, as an embodiment of the public good, represents a higher level of morality.

That tradition is once again in the spotlight, as the question of political untruth has recently resurfaced in many bitter disputes.

Did Karl-Theodor zu Guttenberg, the German defence minister, have to tell the truth about the huge plagiarism that pervaded his doctoral thesis, or could a lie be justified because he was performing an important government job?

Was the 2003 US-led invasion of Saddam Hussein's Iraq illegitimate because it was predicated on a falsehood about the existence of weapons of mass destruction? Or were conservative US anti-abortionists justified in sending actors with a false story into the offices of Planned Parenthood to discredit their opponents?

The economic variant of Machiavellianism is as powerful as the claim that political untruth can be virtuous. Lying or hiding the truth in some circumstances can, it appears, make people better off. Deception might be a source of comfort.

One of the most famous examples concerns the Great Depression, an epoch that policymakers frequently drew on in trying to come to terms with the post-2007 financial crisis.

Many countries in the early 1930s had terrible bank runs that inflicted immense and immediate damage, decimating employment by bringing down businesses that were fundamentally creditworthy.

There was one exception to the general story of Depression-era bank runs: Italy, where Mussolini's fascist government controlled the press, including the financial press.

Although the major Italian banks were constructed on the same model as the German and Austrian banks, the collapse of which had ignited the global conflagration, and although the Italian banks were just as insolvent, the press never discussed these unpleasant problems. Financial journalism was soothing. There were no bank panics and the depression was milder.

Since confidence plays a large part in financial crises, Mussolini's example took hold. States could apparently almost magically create security and trust simply by imposing it.

Deception is instantly appealing to many individual businesses. Would it not be desirable just to hide losses until uncertainty passed and confidence returned? In that case, new profits could quickly be used to plug the gaps, and no one would ever know about an apparently successful deception. Massaging the truth is also appealing to modern governments. They anticipate revenue to appear creditworthy.

They reclassify foreign borrowing as domestic debt to look better in IMF statistics.

For individual businesses, financial misrepresentation is illegal. Most people can easily see why. The legal enforcement of honesty in keeping and reporting financial records is an indispensable feature of a well-functioning market economy. Without some degree of certainty that financial statements are meaningful, there would be a complete loss of confidence.

But government dishonesty is not that different. Deceptions, when they are revealed and the untruths unravel, are deeply disturbing. Indeed, misrepresentation by governments - driven by the belief that political ingenuity can stabilise expectations - is actually at the root of many financial crises.

In 1994, Mexico shook the global economy when the extent of its domestic (but dollar-denominated) debt in the so-called tessobonos became apparent. The Greek government's misstatement of its fiscal position, coupled with the realisation that the European Commission had overlooked or tolerated the Greeks' accounting legerdemain, triggered the euro crisis last year.

The revelation of deception makes it impossible to believe that governments are really enforcing rules fairly.

But misrepresentation is not just at the heart of financial and economic crises; it is also the stuff that drives revolutions. The immediate cause of the protests against the president Zine el Abidine Ben Ali in Tunisia was the WikiLeaks revelations of US diplomatic cables detailing the regime's corruption.

The domino effect from the Tunisian uprising has produced further vivid accounts of corruption and deception, from Egypt and Libya to the Gulf, in each case stoking even greater anger and making more regimes vulnerable.

Markets work by a process of continuous discovery of information. Choking off the flow of information leads to distortion, not confidence. And, as we are now witnessing in the Middle East, the same is true of political systems.

Still, no economic crisis or political revolution is likely to change the inherent proclivity of governments to think they can know better.

A Harold James is professor of history and international affairs at Princeton University and a professor of history at the European University Institute, Florence. His most recent book is The Creation and Destruction of Value: The Globalization Cycle

* Project Syndicate