Capitalism needs periodic catastrophes to keep it on the straight and narrow

There is an age-related distinction: the direct consequences of the slump largely affect the old; the indirect, largely the young

The long misery on the markets continues. It won't for ever, of course, because that is not the way the world works. Nevertheless the fact is that the decline from peak is so great, already more than 40 per cent for all major markets, that it will change the way people, particularly young people, think about both the world of finance and indeed the way they should organise their lives.

The long misery on the markets continues. It won't for ever, of course, because that is not the way the world works. Nevertheless the fact is that the decline from peak is so great, already more than 40 per cent for all major markets, that it will change the way people, particularly young people, think about both the world of finance and indeed the way they should organise their lives.

The last stock market downturn on this scale, in the early 1970s, was accompanied by a huge surge in inflation, fuelled in part by the surge in oil prices, and here in Britain by serious labour disruption. That had a profound effect on social and political attitudes. The surge in inflation led to the so-called monetarist policies, and high interest rates did indeed eventually succeed in taming most aspects of inflation. The labour unrest led to the election of Margaret Thatcher and political support for policies to curb union power.

So in a sense, what happened in the 1980s and 1990s was shaped by the instability of the 1970s. The intriguing question now is whether the latest slump of shares will, in different ways, shape attitudes of the next 20 years. It is of course too early to be at all confident of the change in attitudes that may take place, for we have yet to see the full scale of this market and economic cycle. We don't know, crucially, how much damage has been done to the real economy. Still it seems pretty inescapable that people will view market capitalism differently as a result of this once-in-a-generation share slump.

There is an important age-related distinction here. The direct consequences of the slump largely affect the old; the indirect, largely the young.

Up to now the story has been one of pensions and savings – the effect that falling share prices have on the value of the occupational pension pots and on other savings media such as PEPs and ISAs. Most of us will have had a conversation with someone recently who has realised that retirement will have to be postponed a couple of years, maybe more, because their pension is not worth the number they expected it to be.

But for the young, or at least most of them, the impact is on attitudes and prospects rather than the way they will live in the next few years. Of course some young people will have lost their jobs: I feel particularly sorry for students who chose Enron or Andersen on the milk round rather than BP or KPMG. It is rough, too, on people seeking their first job right now, who will face a much tougher job market than they would have done two or three years ago. But while the demand for young skilled people remains reasonably secure, the impact for most of them will be in the future, not now.

Most obviously there is the impact on attitudes towards the commercial world. I don't think some people in the business community have any inkling of how much damage has been done. In yesterday's Financial Times there was a full-page advert by WorldCom entitled "Moving Forward". It was signed by someone called John Sidgmore, who is the present president and chief executive officer, the previous senior officers having been sacked.

It starts off: "There has been a lot of reporting and speculation about the state of WorldCom lately. I want to tell you what I see as our future." It then goes on about the team of 60,000 "working hard to support our 20 million customers" and the "unparalleled global infrastructure that our customers rely on..." And there is stuff about their "strong competitive and creative spirit" and "our legacy will continue". It ends with a commitment "to operate WorldCom with the highest ethical standards".

As for the fact that the company is bankrupt, having lost 99 per cent of the money that shareholders put in and a wodge to the banks too, there is the little word "unfortunately" to describe the filing for bankruptcy.

The advert is like a spoof – it is as though the firm has no understanding of the damage that it has done, not just to itself, its shareholders, its employees and former employees and its bankers but actually to society as a whole. It does not even bring itself to say sorry and acknowledge that it might actually have made the odd small mistake. Now you can say that this is corporate American culture and maybe the ad does not read so oddly to American eyes. They go in for that sort of thing. But it is worth highlighting because one of the changes that will surely not be credible to young people will be corporate bombast. Good young people will be very careful of the companies they choose to work for. There will continue to be a shortage of the qualified, energetic young for a generation at least and employers will have to learn to deal with them.

Will this keep good people out of big business? Well, that is the danger and the future prosperity of the developed world will depend in large measure on having good people running the worlds of finance and commerce. Society won't get richer because of well-spun politicians; it will make progress by having good people in the wealth-generating industries. That is the key challenge to business. And the young will be the judge.

The next change that will happen will be that the young will seek to make themselves bullet-proof. They will know that grand companies with huge market value can crash in a few months. They will know not to get carried away with the glitz of new technologies, even though those technologies will change many aspects of their life. They will know about market bubbles as well as market busts.

Most crucially, the young will know about deflation as well as inflation. The 1970s experience hammered home to one generation that prices would in the end always go up. So people who were young then became accustomed to buying things now because they would be more expensive in the future; to over-housing themselves; to being cavalier about borrowing. These are key characteristics of the present clutch of middle-aged people both in the US and here and up to now those responses have served most of us pretty well. The continued housing boom will have bailed out many people who would otherwise be in some financial difficulty.

But it looks as though things will be different from now on. We don't know how different because we are still in the early stages of this transition from inflation to price stability. The market crash, happening as it has at a time of decent growth and full employment, in some way reflects this transition. As its message becomes clearer, our own attitudes will adapt.

Not all of this is negative. Far from it. Just as 1930s unemployment encouraged young people to seek "safe" jobs, the end of 1990s excess will encourage them to seek "honourable" ones. It is almost as though market capitalism requires periodic catastrophes to keep it on the straight and narrow. Trouble is, a lot of decent, trusting people get hurt in the cross-fire. Sorry, shareholders of WorldCom.