Penguin Press, NY., 2013, 175 pgs.,
The author states that "This book is about the causes of
our stationary state. It is inspired by Smith's insight that both stagnation
and growth are in large measure the results of 'laws and institutions.' It is
our laws and institutions that are the problem. The Great Recession is merely a
symptom of a more profound Great Degeneration." He gives as the
'over-arching question today 'what exactly has gone wrong in the Western World
in our time? And his book is about answering that question. It should be
studied along with several of the references he mentioned and several others in
my list. Naturally both his assessment of the very idea that the West ever was
superior and his views on the 'west and the rest' today are anathema to the
Introduction - Francis Fukuyama's belief that the 'end of
history' has arrived with the triumph of western liberalism has not come to
pass. Western democracies with 'developed' economies are not expanding but
rather experiencing contraction. The establishment explanation is that the
private sector is "deleveraging", that is reducing debts. But to
counter this views that 'debt deflation' is 'lethal' governments are expanding
their public debts through Western fiscal and monetary 'stimulus'. Dr. Ferguson
believes 'that more is going on here than just deleveraging". For
instance, millions of Americans have received 'disabled worker' status and
benefits. Unemployment is being concealed. "Social mobility has also
declined". Differences in income distribution increased. The problems
affecting the United States are widespread also in Western Europe.
Globalization has affected all countries. The causes are not limited to
economics. "Mainstream economic theory' cannot explain the causes. Dr.
Ferguson offers some suggestions.
The Stationary State - He quotes Adam Smith's definition of a state whose
economy ceases to expand. (1) it is socially regressive - that means most
people's wages are low. (2) A corrupt and monopolistic elite exploit the legal
and administrative system. Ferguson believes these characteristics are too
The Four Black Boxes - The author focuses on these four 'black boxes' to
demonstrate that Western institutions have degenerated. They are: 'democracy',
'capitalism', 'rule of law', and 'civil society'. These four concepts encompass
the complex institutions that have made Western societies function. Ferguson
invokes Mandeville's 'Fable of the Bees'. He believes that it is political
rather than economic organization which most resembles the bee hive. They are
the 'structures' within which social groups are organized . These are the
institutions created by the modern western nation-state that regulate economic
and social life and redistribute income. The 'welfare state' did not exist in
the past in democracies. Today's democracy' creates an expanding class of
'drones' that are dependent on 'worker bees' for survival. And its finances are
based on taxes of future worker bees. The 'rule of law' is critical. "It
is inconceivable that either democracy or capitalism could function without an
effective system of justice..." Civil society is that created by a
multitude of voluntary associations that serve individuals. The three chapters
are devoted to analysis of these four critical 'black boxes'.
Why Institutions Fail - He views the economy as a kind of Darwinian ecosystem
that is continually selecting the fittest. But this operates within an
effective system of laws. Some sets of institutions are much better than
And while some societies today are developing better institutions others are
creating worse ones. The latter are those that are subverting the rule of law.
He mentions several influential authors and books such as Hernando de Soto's
The Mystery of Capital, and especially Robinson's and Acemoglu's fine
Why Nations Fail.
Chapter 1 - The Human Hive - Ferguson accepts the notion that
it is institutions that 'determine modern historical outcomes, more than
natural forces like the weather, geography or even the incidence of disease.
(These three have been promoted by best-selling authors. But not that
individual leaders are not mentioned. ) Here he poses the question much
discussed these days, including by Ferguson in other books (The Ascent of
Money and Civilization: The West and the Rest. "Why, after
around 1500, did Western civilization - as found in the quarrelsome petty
states of Western Eurasia and their colonies of settlements in the New World -
fare so much better than other civilzations? His answer: "I believe the
best answers to the question of what caused the great divergence focus on the
role of institutions." He cites the difference between a ' limited access
pattern' and an 'open access pattern' in a societies political institutions. He
states that England lead the world in the change from the first to second
structure. He cites Fukuyama and Acemoglu and Robinson again.
Glorious Institutions - A clear understanding of why Western civilization
succeeded is important for understand why it is degenerating now. Here he
refers to research on why living standards on various places are so different.
Much of what is missing now in other countries was created or enhanced in
England during the Glorious Revolution by the political/economic institutions
The Inglorious Revolution - Ferguson then poses the issue as a question.
"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 in our
lifetimes ; the end of the great divergence, and the advent of a great
reconvergence between West and East?" He believes that "the economic,
social and political difficulties of the Western world today reflect a
degeneration of our once world-beating institutions." At the same time
some of the 'developing world' societies are adopting some of the ideas that
made western nations strong. Ferguson writes that the currently popular
'causes' such as excessive debt, mismanaged banks, and widening inequality arfe
symptoms rather than causes of the fundamental problem - 'institutional
Debt and the English - Ferguson again references Mandeville to assert that
societies with 'the right institutions' can overcome whatever drawbacks come
from individuals. He describes favorable results of the Glorious Revolution
that were favorable to saving, investment and innovation. He cites North and
Weingast for showing that a key fundamental was the 'credibility' it gave to
the English state as a borrower. This phenomena was well understood by
Napoleon, who pointed to the British financial system that financed his
overthrow. But Ferguson does not delve deeply into the particulars. He notes
that the British national debt increased but not in detail. Actually it was the
Bank of England that had Parliament's approval to issue perpetual bonds -
perpetual and bearing an initial fixed interest rate. The merchant class then
placed its surplus savings into these bonds, which then were readily traded in
the financial market. Thus the bonds became money - Still today it is little
understood that central bank debt=credit and can become a major component of
the national money supply. After 1815 with the lower demand for wartime
financing paying off bonds automatically reduced the size of the money supply.
But Ferguson is incorrect to state that there was no inflation - there was
indeed in the 18th century, but it then reverted to deflation after 1815.
Partnership between the Generations - In this section Ferguson focuses on the
defects of modern representative government. He insists that whatever the
problems, representative democracy is better than any authoritian form of
government. However Western governments have piled up unpayable debts. He
provides the statistics and a chart. However the underlying cause is 'more
profound'. The problem is that the expanding public debt enables the current
generation to live beyond their means at the expense of future generations.
Worse, the official debt measured in current bonds ignores the implicit debts
created by government promises for future expenditures, especially on various
welfare schemes. One measure of total U.S. Government debt reaches 200 trillion
dollars or 13 times the officially published debt. Plus, there is state and
local debt as well. This is an enormous and unprecedented 'inter-generational
transfer' - a breach of government social contract. Ferguson describes a number
of problems this debt has created. But he does not mention that with the
debt=credit becoming a huge component of the actual national money supply, its
reduction will have other results.
Unsettling Accounts - Ferguson poses two possible solutions or ways out of the
debt mess. He comments: "The present system is, to put it bluntly,
fraudulent." Indeed it is. As he notes, no real accounting is published,
everything is either hidden or falsified. He suggests to methods for solution -
1 a 'good' way is for 'proponents of reform to succeed'. This means creation of
the kind of accounting all businesses must use. This would require a major vote
by young and old to create a 'responsible fiscal system.' The second scenario
leads to some form of default and inflation. This is much more likely. He notes
a third possible scenario which would see debt continue to increase while the
FED artificially kept government interest rates below reality. Ferguson's
point, he writes, is to 'show that excessive public debts are a symptom of the
breakdown of the social contract between generations.".
Chapter 2 - The Darwinian Economy -
The Deregulation Illusion - In this chapter he shows that Paul Krugman and the
rest of the Keynesian cabal are wrong. The financial crisis of 2008 was not due
to deregulation. Among the rediculous quotations from Krugman Ferguson provides
is this one: 'It was only after the Reagan deregulation that thrift gradually
disappeared from the American way of life....' - But Krugman is continually
harping on there being TOO MUCH thrift as he advocated expanding credit and
debt. Ferguson also cites mistaken ideas of Simon Johnson and Richard Posner.
He provides plenty of facts. One conclusion he makes: "In my view, the
lesson of the 1970's is not that deregulation is bad, but that bad regulation
is bad, especially in the context of bad monetary and fiscal policy."
A Regulated Crisis - "The financial crisis that began in 2007 had its
origins precisely in over-complex regulation." He notes something that has
been cited repeatedly by other observers. Namely, it was the very Basil II
regulations that classified sovereign debt and mortgage paper as the low risk
assets that banks were required to hold. Also, the central banks including the
FED doctrine was to interveen in the economy by pushing interest rates near
zero if asset prices fell, but not to interveen if asset prices rose. This,
too, has been frequently cited with the term 'Greenspan put'. Then, also, the
government demanded that mortgage markets expand loans to their favored voters
- minority voters. He also mentions that the Chinese government aided the whole
scheme by buying Western debt to keep the value of the Chinese currency low.
Finally, he remarks that the real issue is not whether financial markets
'should' be regulated (with the claim they are not) since all financial markets
have always been regulated since ancientg Mesopotamia.
Who Regulates the Regulators? He notes that: 'The rule of law has many enemies,
One of them is bad law." In this section he disects the horrible yet
ineffective Dodd-Frank Act. His analysis runs on for several pages.
Unintelligent Design - In this section Ferguson cites Charles Darwin and Walter
Bagehot. He gives 6 features that financial markets have in common with
Darwinian biological evolution. He provides graphs from Andrew Haldane that
show the extreme increase in the number of complex interrelationships in
concentration, interbank lending, financial innovation and technological
acceleration that have made the modern financial system vulnerable to a crash.
He mentions Nassim Taleb's new book, Antifragile. The government created
regulation system makes the situation more fragile rather than antifragile.
Lessons from Lombard Street - He writes: "Over-complicated regulation can
indeed bethe disease of which it purports to be the cure." Herfe he cites
Fredrich Hayek and Waler Bagehot. - read Lombard Street.
How to Encourage Bankers -
Chapter 3=- The Landscape of Law
Chapter 4 - Civil and Uncivil Societies