The Great Degeneration: How Institutions Decay and Economies Die (12 page)

Against ‘Technoptimism’

Revolution and war are not new threats. In the eighteenth century the disruptive ideology that grew out of the Enlightenment became the basis for two major challenges to the Anglophone empire that then bestrode the globe. In fighting revolution on both sides of the Atlantic, the British state accumulated a very large public debt, mainly as a result of its wars against revolutionary France. By the end of the Napoleonic era, the national debt exceeded 250 per cent of GDP. Yet the subsequent deleveraging – which reduced the debt burden by an order of magnitude to just 25 per cent of GDP – was perhaps the most successful in recorded history. Inflation played no role whatsoever. The British government consistently ran peacetime primary surpluses, thanks to a combination of fiscal discipline and a growth rate higher than the rate of interest. This ‘beautiful deleveraging’
*
was not without its ugly episodes, notably in the mid-1820s and late 1840s, when austerity policies caused social unrest (and failed to alleviate a disastrous famine in Ireland). Nevertheless, the deleveraging process coincided with the key phase of the first Industrial Revolution – the railway mania – and the expansion of the British Empire to very nearly its maximum extent. The lesson of history is that a country that achieves technological innovation and profitable geopolitical expansion can grow its way out from under a mountain of debt.
¹²

Can the United States emulate this feat? I doubt it. First, the evidence suggests that it is very hard to achieve higher growth under a heavy debt burden. In their study of twenty-six episodes of ‘debt overhang’ – cases when public debt in advanced countries exceeded 90 per cent of GDP for at least five years – Carmen and Vincent Reinhart and Ken Rogoff show that debt overhangs were associated with lower growth (of 1.2 percentage points of GDP) over protracted periods (lasting an average of twenty-three years), lowering the level of output by nearly a quarter relative to the pre-overhang trend.
¹³
Significantly, the negative impact on growth was not necessarily the result of higher real interest rates. A crucial point is the non-linear character of the relationship between debt and growth. Because the debt burden lowers growth only when it rises above the 90 per cent of GDP threshold, the habit of running deficits gets well established before it becomes deleterious. This evidence poses a serious problem for those Keynesian economists who believe that the correct response to a reduction in aggregate demand via private sector deleveraging is for the already indebted public sector to borrow even more. It also casts doubt on the validity of the claim that low interest rates on US Treasuries are a market signal that the government can and should issue more debt.
¹⁴

Equally remote is the prospect that a technological breakthrough comparable with the railways could provide the United States with a ‘get out of jail’ card. The harsh reality is that, from the vantage point of 2012, the next twenty-five years (2013–38) are highly unlikely to see more dramatic changes than science and technology produced in the last twenty-five (1987–2012). For a start, the end of the Cold War and the Asian economic miracle provided one-off, non-repeatable stimuli to the process of innovation in the form of a massive reduction in labour costs and therefore the price of hardware not to mention all those ex-Soviet PhDs who could finally do something useful. The IT revolution that began in the 1980s was important in terms of its productivity impact inside the US – though even this should not be exaggerated – but we are surely now in the realm of diminishing returns (the symptoms of which are deflation plus underemployment due partly to automation of unskilled work). Likewise, the breakthroughs in medical science we can expect as a result of the successful mapping of the human genome will probably result in further extensions of the average lifespan, but if we make no commensurate advances in neuroscience – if we succeed in protracting the life of the body but not of the mind – the net economic consequences will be negative, because we will simply increase the number of dependent elderly.

My pessimism about the likelihood of a technological
deus ex machina
is supported by a simple historical observation. The achievements of the last twenty-five years were not especially impressive compared with what we did in the preceding twenty-five years, 1961–86 (for example, landing men on the moon). And the technological milestones of the twenty-five years before that, 1935–60, were even more remarkable (such as splitting the atom). In the words of Peter Thiel, perhaps the lone sceptic within a hundred miles of Palo Alto, ‘We wanted flying cars, instead we got 140 characters.’
*
Travel speeds have declined since the days of Concorde. Green energy is ‘unaffordable energy’. And we lack the ambition to ‘declare war’ on Alzheimer’s disease, ‘even though nearly a third of America’s 85-year-olds suffer from some form of dementia’.
¹⁵
Moreover, technological optimists have to explain why the rapid scientific technological progress in those earlier periods coincided with massive conflict between armed ideologies. (Question: Which was the world’s most scientifically advanced society in 1932, in terms of Nobel Prize-winners in the sciences? Answer: Germany.) The implications are clear. More and faster information is not good in itself. Knowledge is not always the cure. And network effects are not always positive. There was great technological progress during the 1930s. But it did not end the Depression. That took a world war.

Weary of counter-insurgency warfare and wakening up to the fossil-fuel riches made accessible by ‘fracking’ – which could end its reliance on Middle Eastern oil by 2035 – the United States is rapidly winding up four decades of hegemony in that region. No one knows who or what will fill the vacuum. A nuclear Iran? A neo-Ottoman Turkey? Arab Islamists led by the Muslim Brotherhood? Whoever emerges on top, they are unlikely to get there without bloodshed. Ask anyone who works in the shadowy world of intelligence to list the biggest threats we face, and they will probably include bio-terrorism, cyber war and nuclear proliferation. What these things have in common, of course, is the way modern technology can empower radicalized (or just plain crazy) individuals and groups. It will surely not be long before another unknown known becomes apparent to non-historians: that it is when empires retreat, not when they advance, that violence reaches its peak. And the violence can manifest itself in the imperial heartland too. The ‘cliometrician’ Peter Turchin argues that ‘the next instability peak [of violence] should occur in the United States around 2020’.
¹⁶

You Didn’t Build That

Countries arrive at the stationary state, as Adam Smith argued, when their ‘laws and institutions’ degenerate to the point that elite rent-seeking dominates the economic and political process. I have tried to suggest that this is the case in important parts of the Western world today. Public debt – stated and implicit – has become a way for the older generation to live at the expense of the young and the unborn. Regulation has become dysfunctional to the point of increasing the fragility of the system. Lawyers, who can be revolutionaries in a dynamic society, become parasites in a stationary one. And civil society withers into a mere no man’s land between corporate interests and big government. Taken together, these are the things I refer to as the Great Degeneration.

On July 13, 2012, as I was completing this book, the President of the United States gave a speech that neatly illustrated the point:

If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business – you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.

. . . There are some things, just like fighting fires, we don’t do on our own . . . So we say to ourselves, ever since the founding of this country, you know what, there are some things we do better together. That’s how we funded the GI Bill. That’s how we created the middle class. That’s how we built the Golden Gate Bridge or the Hoover Dam. That’s how we invented the Internet. That’s how we sent a man to the moon.
¹⁷

This surely is the authentic voice of the stationary state: the chief mandarin, addressing distant subjects in the provinces. It is not that the implied interdependence of the private sector and the state is wrong. It is the overstatement of the case that is disquieting, as if it took government to build every small business or, indeed, to ‘create the middle class’. Also striking is the conspicuous absence from the speech of any future project comparable with those cited from the past (the Manhattan Project would have been an even better example, but presumably it is not politically correct).

In the same way, President Obama’s second inaugural address suggested that the appropriate yardstick for an effective government was ‘whether it helps families find jobs at a decent wage, care they can afford, a retirement that is dignified’. By contrast, ‘without a watchful eye, the market can spin out of control’. The words ‘debt’ and ‘deficit’ were not mentioned. The dangers of excessive regulation and litigation were ignored. And civil society scarcely featured at all, as if the hallowed phrase ‘we the people’ is now synonymous with ‘the government’.

It is bad enough to see state capitalism touted as an economic model by the Chinese Communist Party. But to hear it deployed by the President of the United States as a rhetorical trope nearly devoid of practical content makes this writer, for one, pine for the glad, confident morning of 1989 – when it really seemed the West had won, and a great regeneration had begun.

•  •  •

For a complete list of this author’s books click here or visit
www.penguin.com/fergusonchecklist

Introduction

1
. Francis Fukuyama, ‘The End of History and the Last Man’,
National Interest
, 16 (Summer 1989), pp. 3–18.

2
. McKinsey Global Institute,
Urban World: Cities and the Rise of the Consuming Class
(June 2012).

3
. McKinsey Global Institute,
Debt and Deleveraging: The Global Credit Bubble and its Economic Consequences
(January 2010).

4
. Peter Berezin, ‘The Weak U. S. Labor Market: Mainly a Cyclical Problem . . . for Now’,
Bank Credit Analyst
, 64, 1 (July 2012), p. 40.

5
. See e.g. Jeffrey Sachs,
The Price of Civilization: Reawakening American Virtue and Prosperity
(New York, 2011).

6
. See e.g. International Monetary Fund, ‘Navigating the Fiscal Challenges Ahead’,
Fiscal Monitor
, 14 May 2010.

7
. Anthony B. Atkinson, Thomas Piketty and Emmanuel Saez, ‘Top Incomes in the Long Run of History’,
Journal of Economic Literature
, 49, 1 (2011), pp. 3–71.

8
. Credit Suisse,
Global Wealth Databook
(October 2010), tables 3-1, 3-3 and 3-4.

9
. For a brilliant analysis, see Jamil Baz, ‘Current Crisis Merely a Warm-up Act’,
Financial Times
, 11 July 2012.

10
. Niall Ferguson, ‘Too Big to Live: Why We Must Stamp Out State Monopoly Capitalism’,
Adam Smith Review
, 6 (2011), pp. 327–40.

11
. Juan Enriquez, ‘Medicine’s Missing Measure’,
Atlantic
(May 2012): http://www.theatlantic.com/health/archive/2012/ 05/medicines-missing-measure/257901/.

12
. John Stossel, ‘I Tried to Open a Lemonade Stand’,
Townhall
, 24 February 2012.

13
. Tom Hertz, ‘Rags, Riches, and Race: Intergenerational Income Mobility of Black and White Families in the United States’, in Samuel Bowles, Herbert Gintis and Melissa Osborne (eds.),
Unequal Chances: Family Background and Economic Success
(New York, 2005), table 10.

14
. Charles Murray,
Coming Apart: The State of White America,
1960–2010
(New York, 2012).

15
. Adam Smith,
The Wealth of Nations
(1776), book I, ch. 8.

16
. Ibid., ch. 9.

17
. http://blog.lgiu.org.uk/2011/09/on-libya-and-institutions/. I am grateful to Lord Malloch-Brown for bringing these graffiti to my attention on BBC Radio 4’s
Today
programme.

18
. See most recently Daron Acemoglu and James A. Robinson,
Why Nations Fail: The Origins of Power, Prosperity, and Poverty
(New York, 2012). For a full discussion, see Chapter 1.

Chapter 1: The Human Hive

1
. Richard Taverner,
The Garden of Wysdome Conteynynge Pleasaunt Floures, that is to say, Propre and Quycke Sayinges of Princes, Philosophers and other Sortes of Me[n]. Drawe[n] Forth of Good Aucthours
(London, 1539), p. 6.

2
. Data from Angus Maddison, ‘Statistics on World Population, GDP and Per Capita GDP, 1–2008
AD
’: http://www.ggdc.net/MADDISON/Historical_Statistics/vertical-file_02-2010.xls.

3
. Data from World Bank, World Development Indicators online: http://data.worldbank.org/data-catalog/world-development-indicators.

4
. Jared Diamond,
Guns, Germs and Steel: A Short History of Everybody for the Last
13
,
000
Years
(London, 1998). See also Ian Morris,
Why the West Rules – For Now: The Patterns of History, and What They Reveal About the Future
(New York, 2010).

5
. Kenneth Pomeranz,
The Great Divergence: China, Europe and the Making of the Modern World Economy
(Princeton, 2000).

6
. Douglass C. North, John Joseph Wallis and Barry R. Weingast,
Violence and Social Orders: A Conceptual Framework for Interpreting Recorded Human History
(Cambridge, 2009).

7
. Francis Fukuyama,
The Origins of Political Order: From Prehuman Times to the French Revolution
(New York, 2011).

8
. Daron Acemoglu and James A. Robinson,
Why Nations Fail: The Origins of Power, Prosperity, and Poverty
(New York, 2012), p. 4.

9
. Ibid., pp. 7–9.

10
. Paul Collier,
The Bottom Billion
(Oxford, 2007), pp. 50, 56; idem,
The Plundered Planet: How to Reconcile Prosperity with Nature
(London, 2010), pp. 47f., 58.

11
. Hernando de Soto,
The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else
(New York, 2000).

12
. Hernando de Soto, ‘The Free Market Secret of the Arab Revolutions’,
Financial Times
, 8 November 2011.

13
. J. C. D. Clark, ‘British America: What If There Had Been No American Revolution?’, in Niall Ferguson (ed.),
Virtual History: Alternatives and Counterfactuals
(London, 1993), pp. 125–75.

14
. See e.g. J. R. Jones, ‘The Revolution in Context’, in idem (ed.),
Liberty Secured? Britain before and after
1688
(Stanford, 1992), p. 12.

15
. Stephen C. A. Pincus and James A. Robinson, ‘What Really Happened during the Glorious Revolution?’, National Bureau of Economic Research Working Paper 17206 (July 2011).

16
. Avner Greif, ‘Institutions and the Path to the Modern Economy: Lessons from Medieval Trade’, in C. Ménard and M. Shirley (eds.),
Handbook of New Institutional Economics
(Dordrecht, 2005), pp. 727–86.

17
. Timur Kuran,
The Long Divergence: How Islamic Law Held Back the Middle East
(Princeton, 2010).

18
. OECD,
PISA
2009
Results: What Students Know and Can Do: Student Performance in Reading, Mathematics and Science
(Paris, 2010), p. 15: http://www.oecd.org/dataoecd/10/ 61/48852548.pdf.

19
. Niall Ferguson,
Civilization: The West and the Rest
(London/New York, 2011).

20
. Robert C. Allen,
The British Industrial Revolution in Global Perspective
(Cambridge, 2009).

21
. Douglass C. North and Barry R. Weingast, ‘Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England’,
Journal of Economic History
, 44, 4 (1989), pp. 803–32.

22
. Laurence J. Kotlikoff and Scott Burns,
The Clash of Generations: Saving Ourselves, our Kids, and our Economy
(Cambridge, MA, 2012), p. 33.

23
. Ibid., pp. 30f.

24
. Roberto Cardarelli, James Sefton and Laurence J. Kotlikoff, ‘Generational Accounting in the UK’,
Economic Journal
, 110, 467, Features (November 2000), pp. F547–F574.

25
. Carmen M. Reinhart and Kenneth S. Rogoff, ‘Growth in a Time of Debt’, NBER Working Paper 15639 (January 2010).

Chapter 2: The Darwinian Economy

1
. See e.g. Paul Krugman, ‘Reagan Did It’,
New York Times
, 31 May 2009.

2
. Idem, ‘Financial Reform 101’,
New York Times
, 1 April 2010. See also ‘Punks and Plutocrats’,
New York Times
, 28 March 2010.

3
. Idem, ‘Making Banking Boring’,
New York Times
, 9 April 2009.

4
. Idem, ‘Egos and Immorality’,
New York Times
, 24 May 2012. See also idem, ‘Dimon’s Déjà Vu Debacle’,
New York Times
, 20 May 2012.

5
. Simon Johnson and James Kwak,
Thirteen Bankers: The Wall Street Takeover and the Next Financial Meltdown
(New York, 2010).

6
. Richard A. Posner,
The Crisis of Capitalist Democracy
(Cambridge, MA, 2010).

7
. ‘Wall Street Legend Sandy Weill: Break Up the Big Banks’, CNBC.com, 25 July 2012.

8
. David Kynaston,
The City of London
, vol. IV:
A Club No More,
1945–2000
(London, 2001).

9
. Forest Capie,
The Bank of England:
1950s to
1979
(Cambridge, 2010), pp. 589ff.

10
. See N. H. Dimsdale, ‘British Monetary Policy since 1945’, in N. F. R. Crafts and N. W. C. Woodward (eds.),
The British Economy since
1945
(Oxford, 1991), p. 108.

11
. Niall Ferguson, ‘Regulation and Deregulation in a Time of Stagflation: Siegmund Warburg and the City of London in the 1970s’, paper presented at the European Association for Banking History, Brussels, 2010.

12
. See e.g. Lord Turner, ‘After the Crises: Assessing the Costs and Benefits of Financial Liberalisation’, Fourteenth C. D. Deshmukh Memorial Lecture, Mumbai, 15 February 2010.

13
. Idem, ‘Debt and Deleveraging: Long Term and Short Term Challenges’, Centre for Financial Studies, 21 November 2011.

14
. Hugh Rockoff, ‘Upon Daedalian Wings of Paper Money: Adam Smith and the Crisis of 1772’, NBER Working Paper 15594 (December 2009).

15
. Jessica Pressler, ‘Look Who’s Back’,
New York Magazine
, 8 April 2012: http://nymag.com/news/business/themoney/ john-mack-2012-4/index1.html.

16
. Peter Wallison, ‘Dodd–Frank’s Liquidation Plan is Worse than Bankruptcy’,
Bloomberg
, 11 June 2012.

17
. Brooke Masters, ‘Big Banks Need Extra $566bn, says Fitch’,
Financial Times
, 17 May 2012.

18
. Frances Darwin (ed.),
The Life and Letters of Charles Darwin, including an Autobiographical Chapter
, vol. I (London, 1887), p. 83.

19
. Walter Bagehot,
Lombard Street: A Description of the Money Market
(London, 1896 [1873]), p. 11.

20
. Niall Ferguson, ‘An Evolutionary Approach to Financial History’,
Cold Spring Harbor Symposia on Quantitative Biology
, 74 (2010), pp. 449–54.

21
. Robert F. Weber, ‘Structural Regulation as Antidote to Complexity Capture’,
American Business Law Journal
, 49, 3 (2012).

22
. For an accessible introduction, see Mark Buchanan,
Ubiquity: The Science of History . . . Or Why the World is Simpler Than We Think
(London, 2005).

23
. Andrew Haldane, ‘On Tackling the Credit Cycle and Too Big to Fail’ (January 2011): http://www.iiea.com/event/download_powerpoint?urlKey=andrew-haldane-on-fixing-finance. See also Henry Hu, ‘Too Complex to Depict? Innovation, “Pure Information” and the SEC Disclosure Paradigm’,
Texas Law Review
(June 2012).

24
. Nassim Taleb,
Antifragile: Things that Gain from Disorder
(forthcoming).

25
. Janos Kornai,
The Socialist System: The Political Economy of Communism
(Oxford, 1992).

26
. Bagehot,
Lombard Street
, pp. 17, 160f.

27
. Ibid., p. 165.

28
. Ibid., pp. 58f.

29
. Ibid., p. 199.

30
. Ibid., p. 235.

31
. Ibid., p. 325.

32
. Ibid., p. 321.

33
. Laurence J. Kotlikoff and John C. Goodman, ‘Solving our Nation’s Financial Crisis with Limited Purpose Banking’, Boston University Working Paper (15 April 2009). See also John Kay, ‘Narrow Banking: The Reform of Banking Regulation’, Centre for the Study of Financial Innovation (2009).

34
. Niall Ferguson, ‘Too Big to Live: Why We Must Stamp Out State Monopoly Capitalism’,
Adam Smith Review
, 6 (2011), pp. 327–40.

35
. Bagehot,
Lombard Street
, p. 334.

36
. Ibid., p. 336.

37
. Gretchen Morgenson, ‘Lending Magnate Settles Fraud Case’,
New York Times
, 15 October 2010.

Chapter 3: The Landscape of Law

1
. Chen Guangcheng, ‘How China Flouts its Laws’,
New York Times
, 29 May 2012.

2
. He Weifang, ‘China’s First Steps towards Constitutionalism’, in idem,
In the Name of Justice: Striving for the Rule of Law in China
.

3
. Tom Bingham,
The Rule of Law
(London, 2010).

4
. Ben Wilson,
What Price Liberty? How Freedom was Won and is Being Lost
(London, 2009).

5
. Ronald Dworkin,
Law’s Empire
(London, 1986), pp. 166, 225.

6
. Ibid., p. 346.

7
. Ronald Dworkin,
Justice for Hedgehogs
(Cambridge, MA, 2011), p. 402.

8
. Douglass C. North,
Institutions, Institutional Change and Economic Performance
(Cambridge, 1990), p. 54.

9
. Ibid., p. 59.

10
. Avner Greif, ‘Institutions and the Path to the Modern Economy: Lessons from Medieval Trade’, in C. Ménard and M. Shirley (eds.),
Handbook of New Institutional Economics
(Dordrecht, 2005) , pp. 727–86.

11
. Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert W. Vichny, ‘Legal Determinants of External Finance’,
Journal of Finance
, 52, 3 (July 1997), pp. 1131–50.

12
. Ibid.

13
. Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert Vishny, ‘Investor Protection and Corporate Governance’,
Journal of Financial Economics
, 58 (2000), pp. 3–27.

14
. Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer, ‘The Regulation of Entry’,
Quarterly Journal of Economics
, 117, 1 (February 2002), pp. 1–37.

15
. Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer, ‘Courts’,
Quarterly Journal of Economics
, 118, 2 (May 2003), pp. 453–517.