Widening inequalities have been the cost of the expansion and integration of the global economy in the past two decades. As societies overall have become richer, critics of the market economy have focused on the unequal distribution of the fruits of growth. With the world in recession, inequality in unemployment is becoming at least as potent a political issue as inequality in income.

Output of manufacturing industry has collapsed. This month BMW cut 850 jobs at its Mini factory in Oxford. As these were agency workers rather than direct employees of BMW, they received a week's notice of termination of their contracts. Jobs are being shed also in technology, services and finance: 500 at Vodafone, 1,200 at Royal Sun Alliance, and 450 at Legal & General.

Yet the most damaging story for the Government this week was the treatment accorded to senior bank executives who drove their companies to ruin.

Sir Fred Goodwin has insisted on maintaining his pension package of £693,000 a year partly on the ground that he had already made a sacrifice when stepping down as chief executive of Royal Bank of Scotland: he waived his entitlement to a year's salary in lieu of notice.

When Andy Hornby quit as chief executive of HBOS, his departure was sweetened by the offer of a consultancy role at the merged Lloyds-HBOS at £60,000 a month.

There is an understandable public view that these vast sums are the spoils of a dysfunctional financial system. That view is right.

The benefits of market capitalism and economic openness will not win public acknowledgement if the fairness of the system is in question. Inequality in unemployment is a crucial test of legitimacy.

The problem lies not in the market economy but in bad incentives and protection from the costs of failure. The US and British economies have been through a business cycle where markets looked favourably on companies that reorganised their businesses. So Sir Fred's strategy of building up a US banking network and acquiring ABN Amro, the Dutch bank, were seen as enhancing the returns to shareholders.

The costs of gross, culpable failure in trying to re-engineer large companies have not been paid by senior executives, because their departure from office has been cushioned by generous severance.

Thus compensation arrangements at the most senior levels of commerce did not encourage managers to devise operating efficiencies so much as build corporate empires. The demise of those empires has had heavy costs in reputation but little in personal hardship. This is inconsistent with the principles of the liberal economy and threatens to tarnish them.

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