In 1705, Bernard Mandeville, a Dutch physician resident in London, published a doggerel poem, The Grumbling Hive, reissued with a commentary in 1714 as The Fable of the Bees. Mandeville’s Grumbling Hive is a society indistinguishable from the England of his day – powerful, prosperous, but also teeming with every imaginable vice.

…every part was full of vice, / Yet the whole mass a paradise.

The inhabitants of the grumbling hive protest against the corruption, decadence, and dishonesty that everywhere surround them. Alas, God hears their complaints; the whole society is instantaneously reformed, and the result is catastrophe. Full now of honest, industrious, thrifty citizens the society rapidly becomes impoverished and enfeebled. It turns out that what kept the wheels of commerce turning, and laid the foundations for military power, was extravagance, hypocrisy, pride, boastfulness, and laziness. It was these that gave employment to the poor and profits to the sharp-witted. Once people start living within their means, being thrifty and frugal, and working hard, trade dries up, and living standards collapse. Mandeville’s moral is a striking one: private vices are public benefits. Moralists inveigh against luxurious living; but it is extravagance and avarice that make prosperity possible.

There was thus a neat fit between Mandeville’s psychology and his economic theory. Human beings, he held, are naturally selfish; selfishness, unchecked, leads to prosperity. Other enlightenment thinkers acknowledged the importance of self-love, but they advocated a forethoughtful selfishness, a restricted range of passions which would keep the individual, and society, out of trouble. Mandeville, on the other hand, thought whoring, boozing, gambling, fine clothes, fancy carriages, and magnificent houses were all essential for prosperity and for state power.

Moreover, moral reform (without divine intervention) was impossible. Virtue was always a form of hypocrisy and self-deception, an attempt to look good in the eyes of others and in one’s own eyes, and the motives of the superficially virtuous were as self-serving as those of the greedy and improvident. Selfish human beings have to be domesticated to live in a society without violence and lawlessness, but the efforts to improve human nature should not be allowed to go too far, for they would prove self-defeating.

There’s something odd about Mandeville’s portrait of commercial society. His psychology, which derives from Hobbes and Bayle and influenced Montesquieu, Voltaire, and Rousseau, still seems challenging, but there appears to be something wrong with his economic theory. The whole eighteenth-century debate about luxury, to which Mandeville contributed, puzzles the modern reader. Why should one (as the wealthy Helvétius and the impoverished Rousseau urged) return to a Spartan simplicity? Alternatively, why feel the need, as Voltaire did, to defend extravagance?

It occurs to me that there is a simple explanation for why private vices are no longer public benefits, and that answer is the invention of new ways of circulating money through banking and shareholding. Mandeville assumed that if the rich didn’t spend, spend, spend, the poor would be unemployed. By the time Adam Smith published The Wealth of Nations in 1776, this simple logic no longer applied in England or, for that matter Holland, though it continued to be relevant over much of Europe until the nineteenth century.

Banks originally existed to facilitate payment at a distance – a merchant could travel with a letter of credit, rather than with sacks of gold. One of the key differences between England and France in the early eighteenth century was that the English government moved money in the form of paper, while the French moved it in the form of bullion, protected by squads of soldiers. But, by the second half of the century in England, banks fulfilled another, more important, function: those with money to spare could save, and those without enough money could borrow. The unintended consequence was the moral reform of commercial society.

Extravagance was no longer required to keep the economy going. The rich could put their money in the bank and live frugally, but the money would still fund investment, some of it risky. So, too, with bonds and shares: widows and orphans could live modestly on dividends, while buccaneering capitalists accumulated wealth by spending their money. The biggest borrower was the British government, which funded the vast costs of war by going into debt on a hitherto unimaginable scale. Thus, saving became transmuted by the banking and stock exchange systems into a new way of spending. Commercial society had always run on credit – gentlemen owed money to their tailors, and the tailors owed money to the clothiers. Small sums, lent to personal acquaintances, kept the economy going. But credit had now been institutionalised, rationalised, systematised by the introduction of banks and stockbrokers as middle men between the provident and the needy. And the result was a new world where ancien régime extravagance was replaced by modest luxuries – Hogarth prints, Wedgwood china, the novels of Richardson – of a new middle class.

In this new world, that of Adam Smith rather than Mandeville, private vices no longer translated into public benefits. The key figures of the new commercial society were not goldsmiths, lacemakers, carriage-makers, and clockmakers, but bankers such as the Quaker James Barclay, manufacturers such as the Unitarian Josiah Wedgwood, and printers such as the deist Benjamin Franklin. Commercial society had been domesticated, and private virtues now generated public benefits.

The moral philosophy of Smith and Hume took for granted this new congruence between virtue and prosperity, while Helvétius, Rousseau, and Voltaire continued to assume they were in irreconcilable conflict. When Voltaire came to England it was the Quakers who caught his attention; but there were no Quakers in France, and Mandeville’s economic theory continued to be relevant there long after it had become outmoded in England.

The new, credit-based commercial society no longer depended on vice; instead it depended on something invisible and intangible: confidence. As I write, the Silicon Valley Bank has just gone bust, and shares in Credit Suisse are on the slide. No bank, no company whose shares are traded on the open market, can survive a crisis of confidence. Customers who withdraw their deposits and shareholders who sell their shares are bringing about the very thing they wanted to avoid: financial collapse. A trickle quickly turns into a flood, and the point of no return is reached far sooner than expected. At such moments private prudence has catastrophic consequences, and we are back in a Mandevillian world, where private virtues produce public disbenefits. Commercial society turns once more into a grumbling hive.

Commerce once seemed fundamentally immoral, and few were, as Mandeville was, prepared to draw the conclusion that immorality was to be admired and encouraged. Now commerce is grounded in a confidence trick; like Tinkerbell it survives and prospers only so long as we believe in it. And when we cease to believe, Mandeville seems relevant once again.