With 3.6 million jobs lost since the December 2007 beginning of what we are still optimistically calling “the recession,” it is time to rethink the relationship between capital and labor. In mainstream economics, a business is said to be productive when it is able to increase the dollar value of its output compared to the dollar value of its labor costs. Keeping labor costs down is usually the key to increased productivity, and one of the most effective ways to do that is to invest capital in, say, machinery or computers to get more from every labor-hour. But even before the financial crisis, there were signs that this model, under which United States enjoyed years of productivity and growth, was showing signs of strain.

Until now, if an enterprise keeps its cost of labor, energy and materials low relative to its revenues, it earns a high profit margin. And if it can keep the amount of capital it takes to earn that profit low, it maximizes the return on capital, thus minimizing its cost of capital, attracting more capital and generating outsized rewards for the deployers of that capital.

Until now, our model of capitalism has relied on markets to allocate capital to businesses with the best risk-return relationship–where, given the level of risk, capital could earn the highest returns. Businesses that have the best returns get capital more easily and pay less for it. But if we move from the current 7.6 percent unemployment rate to the more than 20 percent jobless levels of the Great Depression, the pain will spread, as millions lose their homes and it becomes increasingly difficult to maintain law and order. If that scenario comes to pass, we must face the difficult question of whether we can continue to allow the market such free reign in allocating societal resources. Economics is about to become political economics: capital will be valued for the jobs it creates, not just for the returns it generates.

Since 1978, when Deng Xiaoping set China on its growth path, the United States has been competing with a system that does not value productivity the way we do. As jobs flowed to China and other countries whose main objective was to lift millions out of poverty by providing them work, America stopped caring about preserving jobs and making tangible goods. But what the Chinese and other Asian state-owned enterprises cared about was jobs. Their for-profit businesses benefitted from workers who had a low opportunity cost in leaving the ricefields and a relatively low amount of social capital invested in them.

We yelled that their too-weak currency was an unfair means of competing with us. Even if by our standards their plants were inefficient and unproductive, these countries could afford to use “too much” labor per unit of output, because of their value system and where they were on the scale of development. In the end, we bought their goods and they did the work.

Before the financial crisis, the US economy had achieved such great productivity of capital in manufacturing and agriculture that one of the best places for capital to go for good returns were businesses where you could earn money on money itself–mortgage securitization, derivatives and various forms of leveraged investing. The financial services sector had come to represent more than 20 percent of our gross domestic product.

The current crisis, which has now damaged every state and nearly every economic sector, has many causes. But most are symptoms of problems that can and should be made to disappear as we make our way back to economic health. In retrospect it’s clear that regulatory bodies were asleep at the switch as the banking system piled on excessive leverage and irresponsibly sold products to investors unaware of the risk they were assuming. Rating agencies were corrupted because their recompense came from those who needed strong ratings. There were global capital imbalances, evidenced by the huge Asian savings and the outsized US deficit spending. And greed–don’t forget greed. All are factors, but none is a satisfying explanation in and of itself for what went wrong. It could be as simple as this: generating return on capital had become a core American value. Or as I wrote on this site in October 2006, we would pay the price “for a self-indulgent capitalist democracy, which worships at the altar of individualism at the expense of the community.”

With the pace of the decline likely to accelerate, the Fed has exhausted its traditional monetary policy remedy–lowering interest rates almost to zero to stimulate economic activity. It must now resort to “ quantitative easing,” which means it will create massive amounts of new money, which will have a tendency to weaken our currency, make our goods cheaper and bring jobs back home. But the problem is that other governments are likely to fight back with their own competitive devaluations and trade barriers.

Meanwhile, the government is scrambling to get cash flowing into the economy through a more direct fiscal approach, with massive spending on public works, education and technological innovation. As the Democrats wrangle with Republicans who want more tax cuts in the package, employment is falling off a cliff. If the situation continues to worsen, the supposed ultimate benefit of such cuts won’t come fast enough even for Republicans, and direct hiring measures such as were employed in the 1930s will again have to be deployed.

But if our spending and our attempt at competitive devaluation of the dollar do succeed in bringing jobs back into the United States, it will probably come with painful adjustments in the very nature of American capitalism. Improved productivity bought by trimming jobs will no longer be a recipe for success. Businesses that create more jobs per dollar invested will enjoy preferred access to government capital. Investors who make fortunes through job-destroying “efficiencies” will be held up to scorn. And government-backed banks may be forbidden to finance mergers that rely on job-eliminating “productivity” improvements.

The Obama administration has not yet recognized that to save the system, government intervention in the civilian economy must go far beyond the Republican comfort zone. Populist anger at the unfair enrichment of corporate executives will be the engine that drives that change.

A reinvention of our capitalist democracy already is under way. We will soon be living in a world where governments play a more and more central role in setting industrial policy for the economy. Jobs will get the velocity of spending back to normal levels. Jobs will get our tax revenues back up. With constituents screaming bloody murder, politicians cannot and will not leave it up to free markets to put folks back to work. Jobs are what stand between us and a breakdown in the social order. Jobs are the new gold standard, and for now at least, productivity be damned.