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Niall Ferguson


Penguin Press, NY., 2013, 175 pgs., end notes


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 political left.


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 prevalent today.
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 others.
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 then dominant.
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 malaise'.
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




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