THE GREAT DEGENERATION

Niall Ferguson

Subtitle: How Institutions Decay and Economies Die, Penguin Press, NYC., 2012, 174 pgs. , notes

Reviewer Comment
This is a continuation of the author's book - The Ascent of Money, published in 2008, prior to the collapse of Lehman Brothers. In this volume he expands on his ideas about the greater context that brought on the financial crisis. There is a review by George Melloan, himself an author on the same subject,(The Great Money Binge) in WSJ of June 20, 2013. Mr. Melloan cites immediately Ferguson's main theme: that the author "warns that Western civilization has entered into a period of decline due mainly to the strangling of private initiative by the ever-encroaching state". Well, there are dozens of books that also predict or even cite current evidence that this is taking place. Of course Toynbee claimed decades ago that this is the fate of all civilizations. And Joseph Tainter places the cause right in the title of his book The Collapse of Complex Societies. Melloan also notes that Ferguson writes that, "The most worrisome evidence of decline, he believes, is the 'crisis of public debt', with government budgets out of control in the U.S. and Europe. He sees outsized debt as a symptom of the 'betrayal of future generations: a breach of Edmund Burke's social contract between the present and the future'". And indeed, this is so, as we will see below. There are dozens of books that view this expansion of debt - both public and private - with dismay. But the likes of Dr. Randall Wray claim such concerns are 'hysterical' and that governments now simply with 'keystrokes' can create as much 'money' (that is credit=debt) as they choose. - See Modern Money Theory.

Mr. Melloan continues: "The author's argument that civil society is undergoing decay is no less depressing. as government has grown, civil society has withered, he asserts,". And rightly so, as, again, many other researchers and commentators have shown. But this is the second major assault that government in the name of 'the state' has launched, this time on the civil society that developed and flourished during the 'betterment' period so well described by Dr. McCloskey. The first similar assault took place in the 15th - 16th centuries assault of the forming 'state' against medieval civil society. For instance, in the Tudor reign of Henry VIII with dissolution, without replacement, of the civil role of the monasteries.

Mr. Melloan concludes with: '"The Great Degeneration' won't be popular in the Obama White House or other centers of power. Jeremiah wasn't popular with the elders of Judea either. They tossed him in jail for his sedition. The had reason later to be sorry".

Introduction
The author starts right off. "The West is stagnating, and not only in economic terms".... "The voguish explanation for the Western slowdown is 'deleveraging' the painful process of debt reduction (or balance sheet repair):. ... "Certainly, there are few precedents for the scale of debt in the West today". ... "To prevent this process from generating a lethal debt deflation, governments and central banks have stepped in with fiscal and monetary stimulus unparalleled in time of peace" ... "Yet more is going on here than just deleveraging". .. "The percentage of working age Americans collecting disability insurance has risen from below 3 percent in 1990 to 6 percent"... "You cannot blame all this on deleveraging. In the United States, the wider debate is about globalization, technological change, education and fiscal policy".... "By definition, globalization has affected all countries to some degree".. "Any highly indebted economy confronts a narrow range of options. There are essentially three:". - 'increasing the rate of economic expansion - defaulting on at least part of the public debt - or wiping out the debts through currency depreciation and inflation.

"The Stationary State"
Dr. Ferguson cites Adam Smith for explaining the cause and effect of a 'state' becoming 'stationary'. The quotes are applicable to the present. He continues: "This book is about the causes of our stationary state". "It is our laws and institutions that are the problem. The Great Recession is merely a symptom of a more profound Great Degeneration".

"The Four Black Boxes"
"To demonstrate that Western institutions have indeed degenerated, I am going to have to open up some long-sealed black boxes". These, he describes as 'democracy', 'capitalism', 'rule of law', and' civil society'. He asserts: "Together, they are the key components of our civilization".

"Why Institutions Fail"
For this he introduces a metaphor of wild animals. But humans create complex and interacting institutions, some good and worthwhile, and others bad and detrimental. or 'suboptimal". So as a historian he is interested in the study of institutions. He turns to a major authority on these, Douglass North. Although North won a Nobel for his work, Dr. McCloskey disagrees with his emphasis on institutions are a driving cause for the bourgeoisie 'betterment'. Ferguson also mentions Hernando de Soto, (The Mystery of Capital) and Daron Acemoglu, (Why Nations Fail).

Chapter 1 - The Human Hive
Dr. Ferguson poses the much asked question: "Why, after around 1500, did Western civilization - as found in the quarrelsome petty states of Western Eurasia and their colonies of settlement in the New World - fare so much better than other civilizations"?
The bibliography devoted to this question is already huge and varied, revealing much controversy among economists, historians, anthropologists, and especially politicians. A partial listing is attached to the reviews of Dr. McCloskey's three volumes.
He continues: "How are we to explain this, the ultimate global imbalance, which placed a minority of mankind - at most a fifth - in such a position of material and political dominance over the rest?" He discounts the old-fashioned, now denounced, previous theories. And also claims that Jared Diamond's concept of geographical causes is inadequate.

Dr. Ferguson then writes: "I believe the best answers to the question of what caused the great divergence focus on the role of institutions", and he describes some of North's theory. Dr. McCloskey strongly disagrees. But Ferguson forges on with reference to Francis Fukuyama, Daron Acemoglu, Max Weber and David Landes. But there are many other authors in addition to Dr. McCloskey who have decidedly different conceptions about why, how, when, and even if this 'ascendancy' took place.

"Glorious Institutions".

Dr. Ferguson continues: "The debate about the causes of the Great Divergence is of more than merely historical interest. Understanding Western success helps us to frame some rather more urgent questions about the recent past, the present and possible futures". He advocates the 'institutional argument' supporting the concept of the West's success. For this he cites the research of Acemoglu and Robinson who correlate relative economic advance with relative government institutions, for instance between Mexico and the U.S. And he also cites the interesting experiences recounted by Hernando de Soto in the relative easy of establishing title to ownership and to creating as new business in various countries. He also believes the idea that the British "Glorious Revolution" and its subsequent political and economic developments were more decisive in terms of an institutional break than other historians believe. He believes there was a sequence.
"The sequence is clear: first the Glorious Revolution, then agricultural improvement, then imperial expansion, then industrial revolution".
But it seems to me that agricultural improvement was underway long before the Glorious Revolution and the industrial revolution was at lease simultaneous with imperial expansion and did not rely totally on it.

"The Inglorious Revolution"

Dr. Ferguson then presumes he has proven his case -or accepted the concept of others as proven.
"So if institutional evolution is the key to understanding Western ascendancy as well as enduring poverty in Africa and elsewhere, is this also how we should understand what is surely the most astonishing trend of our lifetimes: the end of the great divergence, and the advent of a great reconvergence between west and East? I think it is."

So we will have to accept his theory as the basis for what follows. He turns next to the other 'side of the coin' so to speak by discussing the other half of the 'divergence' namely why China was 'overtaken and surpassed' during the 18th and 19th centuries. There are many books related to this issue as well- some focuses on China itself and some comparative in approach. Dr. Ferguson cites the usual statistic that whereas the Chinese were 20 times less wealthy than Americans in 1978, they now are 'only' 5 times less wealthy. This is also shown in the annual listings and analysis of the world's wealty - such as the number of billionaires - published by Forbes magazine. He notes that one explanation for this is the obvious method of 'catchup' those 'behind' can accomplish by taking advantage of copying from those who are leaders.
But he sees deeper causation. "To my mind, however, these are nothing more than symptoms of an underlying institutional malaise, an Inglorious Revolution, if you ]like, which is undoing the achievements of half a millennium of Western institutional evolution".

"Debt and the English"
Dr. Ferguson quotes from Mandeville's The Fable of the Bees, as a way to highlight the role of institutions. And he states that; "There was one particular institution that decisively altered the trajectory of English history. In a seminal article published in 1989, North and Weigast argued that the real significance of the Glorious Revolution lay in the credibility that it gave the English state as a sovereign borrower". His brief summary of this, without explicitly naming the Bank of England, is described in much more detail in many other books, for instance Felix Martin's Unauthorized Biography of Money.

"The Partnership between the Generations"
Dr. Ferguson writes: "In the rest of this chapter, I want to make an argument about our modern representative government - and what ails it". And further: "But the critics of Western democracy are right to discern that something is amiss with our political institutions. The most obvious symptoms of the malaise are the huge debts we have managed to accumulate in recent decades, which (unlike the past) cannot largely be blamed on wars". And further: "The heart of the matter is the way public debt allows the current generation of voters to live at the expense of those as yet too young to vote or as yet unborn". The result: "The best available estimate for the difference between the net present value of federal government liabilities and the net present value of federal revenues is $200 trillion, nearly thirteen times the debt as stated by the US Treasury". He cites Rousseau's concept of contract between sovereign and the people and a 'partnership' between the generations. "In the enormous inter-generational transfers implied by current fiscal-policies we see a shocking and perhaps unparalleled breach of precisely that partnership". He suggests some possible efforts that might help. Then refers to Carmen Reinhart and Ken Rogoff's This Time is Different, in which they studied many past results of large public debts.

"Unsettling Accounts"
"It seems as if there are only two possible ways out of this mess". One way is to reform government budget accounting to show assets and liabilities clearly. Another is that governments that eventually debt will force governments to reduce spending or endure default and inflation. Then a possible third result of that debt would continue to increase with the result that nations stagnate.

But he does not mention the real fundamental financial problem. The governments operate on a 'pay-as-you-go' budget basis - that is they attempt to pay for each year's expenditures with each year's revenue while deferring future expenditures into constantly increasing debt. In other words government fiscal policy is a giant "Ponzi Scheme" Simply balancing the annual budget by limiting current expenditures to current revenue would not suffice as long as future predicted expenditures are simply deferred. What is needed is for governments to collect and INVEST some portion of current revenue against future liabilities the way any solvent insurance company matches its future liabilities with future assets that result from current investment.

Dr. Ferguson concludes the chapter with: "In this chapter I have tried to show that excessive public debts are a symptom of the breakdown of the social contract between the generations".

Chapter 2 - The Darwinian Economy

"The Deregulation Illusion"
"What is the biggest problem facing the world economy today? To listen to some people, you might think the correct answer is insufficient financial regulation". Indeed, he cites the notorious Keynesian journalist, Paul Krugman, who continually demands increased regulation and who blames former President Reagan for everything. He mentions others of the same persuasion but disagrees politely. Again, there are many books published on this issue in which a variety of 'causes 'are adduced. The author summarizes some of this.

"A Regulated Crisis"
The author's view: "The financial crisis that began in 2007 had its origins precisely in over-complex regulation. A serious history of the crisis would need to have at least five chapters on its perverse consequences".
"First the executives of large publicly owned banks were strongly incentivized to 'maximize shareholder value'...
"Secondly, from 1996 the Basel rules were modified to allow firms effectively to set their own capital requirements..."
"Thirdly, central banks - led by the Federal Reserve - evolved a peculiarly lopsided doctrine of monetary policy..."
"Fourthly, the US Congress passed legislation designed to increase the percentage of lower-income families - especially minority families - that owned their own homes".
"A final layer of market distortion was provided by the Chinese government, which spent literally trillions of dollars' worth of its own currency to prevent it from appreciating relative to the dollar".

I understand the first four issues and have read about them repeatedly, but I don't understand this last one.

The author writes, "Nor were the Chinese the only ones who chose to plough their current account surpluses into dollars".

What does he mean' plough'? The surpluses were by definition already in dollars a situation that began with the Bretton Woods Agrement and the Marshal Plan and continued with the Euro-dollars and Petrodollars. Once the dollar replaced gold as the world reserve currency national banks HAD to retain sizable assets in dollars to pay for international commercial exchange . And then they exercised the normal bank game of 'fractional banking' to leverage their dollar assets into loans. Now the Chinese have a larger debt problem than does the US.

Dr. Ferguson then shifts to the subject of derivatives such as CDOs and others. Then he mentions the general issue of 'risk management', another topic with multiple books already published.
He concludes, "I believe excessively complex regulation is the disease of which it pretends to be the cure".

Wonderful, agree fully.

"Who Regulates the Regulators?"
Dr. Ferguson writes another conclusion, "The rule of law has many enemies, One of them is bad law". This section is about a notorious bad law - the Dodd-Frank Act.


"Unintelligent Design"
For this section the author turns to Charles Darwin, Thomas Malthus and Walter Bagehot. His reference to Darwin comes from the author's belief that financial markets are similar to the natural in which wild animals fight for survival in a 'contest over finite resources". Unfortunately this idea plays right into the concept that resources are finite and therefore the 'rich' are taking from the 'poor' rather than expanding the quantity of resources.
Dr. Ferguson continues with discussion of 'disruption' and 'regulation' "Whereas evolution in biology takes place in a pitiless natural environment, evolution in finance occurs within a regulatory framework where - to adapt a phrase from anti-Darwinian creationists - 'intelligent-design' plays a part".

It seems to me that all this is rather stretching analogies. But he continues with extensive analysis of the Dodd-Frank law in this context. Then he skips to discuss finance in terms of a complex system and cites Nassim Taleb's excellent book, Antifragile.

"Lessons from Lombard Street".
Here he introduces Walter Bagehot's classic, Lombard Streetin the context of recent 'bank runs' such as that against Northern Rock and Countrywide. The former is well described by Felix Martin. Bagehot's rules for central bank acting as a reserve of last resort are well known, but not used.

"How to Encourage Bankers"
Dr. Ferguson suggests that a return to Bagehot's rules would be a good idea. This would "strengthen the central bank as the ultimate authority in both the monetary and supervisory systems". It would also "ensure that those in charge" were experienced and qualified. It would also "give them considerable latitude in their use of the principal central banking tools". Plus, he recommends, that anyone violating regulatory authority should be severely and personally punished. The author mentions Angelo Mozilo, a fraudster whose Countrywide bankruptcy cost the taxpayers plenty.
He writes: "The failure to apply regulation - to apply the law - is one of the most troubling aspects of the years since 2007".

But instead, we have commentators such as John Tamny and Ron Paul, who demand that the FED be abolished.

Chapter 3 - The Landscape of Law

"The Law of Law"
Dr. Ferguson notes that China has laws but lacks the 'rule of law'.

"The English Way of Law"
He lists several attributes that constitute law being 'the rule of law'. And he describes briefly the evolution of English law as opposed to Roman Law or Napoleonic Law.

"Law and Economics - and History"
Dr. Ferguson states that: "Few contributions to the literature on law and economics have had a greater impact than the arguments of Andrei Shleifer and his coauthors that the common law system that evolved in the English-speaking world was superior in performing the twin roles of contract enforcement and coercion constraint to all other systems". He goes on to list seven attributes. And he compares the English common law with other systems such as Islamic and Chinese.

"Law and the Victorians"
Here he notes that some countries lacking English common law, such as France, Germany and Brazil, nevertheless have successful economies. This is a comparatively lengthy section in which he continues to describe events in the evolution of English law.

"The Role of Law's Enemies"
Turning from history, Dr. Ferguson contemplates the current situation. He identifies four distinct threats to common law today.
"First, I must pose the familiar question about how far our civil liberties have been eroded by the national security state..."
"A second threat is the very obvious one possed by the intrusion of European law - with its civil law character - into the English legal system..."
"A third threat is the growing complexity (and sloppiness) of statute law, a grave problem on both sides of the Atlantic, as the mania for elaborate regulation spreads through the political class".
"A fourth threat - especially apparent in the United States - is the mounting cost of the law". He provides various examples. Then he cites David Kennedy and Joseph Stiglitz who claim three 'egregious defects' in the rule of law in the United States. But he questions their approach and believes a wider context is necessary. He cites reasons that American businessmen claim are detrimental to expanding business and the economy. They amount to various types of government intervention and manipulation.

"Legal Reform around the World"
Here is cites World Bank studies that compare business in various countries and find tat four in Africa rank in the top 20. He adds data from other surveys relatred to government impact on business.

"The Rule of Lawyers"
Dr. Ferguson's point in this section is that law forms an integral part of the 'landscape' in which we live and conduct business, and lawyers are the creators of law as they control the legal institutions.

Chapter 4 - Civil and Uncivil Societies

"Clearing the Beach"
Dr. Ferguson digresses into a personal anecdote that illustrates his theme. This is the occasion on which he enlisted local volunteers to clean up the trash on the beach in front of him home. His point is that volunteers may be found, but society today is lacking in the former extent of organized volunteer groups.

"The Rise and Fall of Social Capital"
He refers to the oft cited book of Alexis de Tocqueville - Democracy in America in which the author was observing American society and contrasting American volunteer associations with Europe. Dr. Ferguson presents statistics that indicate a significant decline in recent years in such membership. He concludes: "Tocqueville was surely right. Not technology, but the state - with its seductive promise of 'security from the cradle to the grave' - was the real enemy of civil society".

Actually this is nothing new. Hannah Arendt, among many others, years ago described how the 'state' tolerates no competition for loyalty or support or even attention. From its earliest development it has sought to exercise total domination.

"Privitizing Schools"
In this section Dr. Ferguson enters the controversy over governments enabling to creation of private 'charter' schools - that is schools run by and according to private teachers but funded out of public taxes. The issue is creating great opposition in both the US and US. He is all for them.

Conclusion

"Inequalities Explained"
He asks the current political question: "Why are some countries so much richer than others?" But he then asks: "To be precise, why are real wages - wages adjusted for the cost of living - higher in some countries than in others?"

I do not believe this is the actual question or political issue, precise or not. The 'wealth' about which Piketty and Krugman and the left in general rail aggitate against has much more about it than wages. For instance, Piketty rails against the accumulation of capital by the 'rich'. But Ferguson first focuses on relative wages of Chinese and Americans. In endevoring to answer his question he again turns to his acceptance of the North theory of the role of institutions.

"The Urban Future"
He writes: "In these concluding pages, I want to ask what my diagnosis of the great institutional degeneration in the Western world implies about the future". In this section Dr. Ferguson uses Donald Rumsfield's idea about different types of know and unknows And he then notes Nassim Taleb's 'anti-fragile.

"Shooters and Diggers"This is a mixture of jumps, mostly about huge government debt and other 'known unknown's'. Among 'unknown unknowns' one dangerous example is the future of the Middle East.

"Against 'Technoptimism'"
He doubts that the US can manage a simple way out of the huge debt. A comment: "This evidence poses a serious problem for these Keynesian economists who believe that the correct response to a reduction in aggregate demand via private sector deleverging is for the already indebted public sectior to borrow even more". And: "Equally remote is the prospect that a techonolgical breakthrough comparable with the railways could provide the United States with a 'get out of jail' card". Further; "Myh pessimism about the likehood of a technological deux et machina is supported by a simple historical observation". It is that the achievements of the recent past when compared with prior periods.

"You didn't Build That"
Dr. Ferguson contends that the U.S. has entered a 'stagnate' period as far as exconomic expansion is concerne a "stationary state". And this is caused by the degeration of public government in catering to the 'welfare state'. In this he is agreeing with Robert Gordon's view expressed in The Rise and Fall of American Growth. But this assmption is controversial.

Some references to the themes Dr. Ferguson describes: and see also archives of the two weekly letters by John Mauldin - "Thoughts from the Front Line" and "Outside the Box".

Acemoglu, Daron & James A. Robinson - Why Nations Fail

A summary, commentary, and link to the three important books on the role of the Bourgeoise by Dr. Deirdre McCloskey

Anat Admiati & Martin Hellwig - The Banker's New Clothes: What's Wrong with Banking and What to Do about It

Bernholz, Peter - Monetary Regimes and Inflation: History, Economic and Political Relationships

Booth, Danielle, Dimartino - FEDUP

Conti-Brown, Peter - The Power and Independence of the Federal Reserve

Coogan, Philip - Paper Promises: Debt, Money and the New World Order

Davies, Glyn -History of Money: From Ancient Times to the Present Day

Ferguson, Niall - Civilization

Ferguson, Nill - The Ascent of Money

Fisher, David Hackett - The Great Wave: Price Revolutions and the Rhythm of History

Friedman, Jeffrey - Engineering the Financial Crisis

Gilder, George - The Scandal of Money: Why Wall Street Recovers but the Economy never Does

Gilder, George - Wealth and Poverty

Gordon, John Steele - An Empire of Wealth - The Epic History of American Economic Power

Gordon, Robert - The Rise and Fall of American Growth

Graeber, David - Debt: The First 5,000 Years

Greenspan, Alan - The Map and the Territory

Hubbard, Douglas W. - The Failure of Risk Management

Ingham, Geoffrey- Capitalism

Ingham, Geoffrey - the Nature of Money

King, Stephen - When the Money Runs out

Kling, Arnold - Specialization and Trade

Krugman, Paul - The Return of Depression Economics

Kwarteng, Kwasi - War and Gold: A 500-year history of Empires, Adventures and Debt

Landes, David - Wealth and Poverty of Nations

Landes, David S. and Joel Mokyur, William Baumol - eds. The Invention of Enterprise

Mantoux, Paul - The Industrial Revolution in the Eighteenth Century

Mehrling, Perry - The New Lombard Street: How the Fed Became the Dealer of Last Resort

Melloan, George - The Great Money Binge

Mishkin, Frederic S. The Economics of Money, Banking & Financial Markets, 9th edition,

Morgenson, Gretchen - Recklis$ Endangerment

Reinhart, Carmen M. & Kenneth S. Rogoff - This Time is Different: Eight Centuries of Financial Folly

Richards, Jay W. - Money, Greed, and God: Why Capitalism is the Solution and Not the Problem

Rickards, James - The Death of Money: The Coming Collapse of the International Monetary System

Rickards, James - Currency Wars: The Making of the Next Global Crisis

Ritholtz, Barry - Bailout Nation

Skousen, Mark - The Structure of Production

von Mises, Ludwig - The Theory of Money and Credit

von Reden, Sitta: Money in Classical Antiquity

Wagner, Richard E." Boom and Bust: The Political Economy of Economic Disorder"

Wallison, Peter J - Hidden in Plain Sight: What Really Caused the World's Worst Financial Crisis and Why it Could Happen Again

Wessel, David - In FED We Trust

Whalen, R. Christopher - Inflated: How Money and Debt Built the American Dream

Wray, L. Randall - Modern Money Theory