The Great Degeneration — How Institutions Decay and Economies Die
We all know that the world became unipolar after the end of the Cold War. Economically, militarily and in terms of intellectual property, Russia, China and India are also powers which cannot be ignored — so the world is becoming multipolar. We have always read books exploring reasons for poor countries staying poor, but this particular book by Niall Ferguson analyses why Western Civilisation is decaying.
Democracy – The Human Hive
The great divergence from 1500 AD onwards till the 1970s had two distinguished phases of human organisation. The first can be called the "natural state" or "limited access pattern," characterised by a slow-growing economy, relatively few non-state organisations, and social relationships organised along personal and dynastic lines. The second is the "open access pattern," characterised by a faster-growing economy, a rich and vibrant civil society, a bigger more decentralised government, and social relationships governed by impersonal forces like the rule of law involving secure property rights, fairness and equality.
The Glorious Revolution of 1688 made England the first country to move to having inclusive or pluralistic rather than extractive political institutions. The sequence for the rise of Britain is clear: first the Glorious Revolution, then agricultural improvement, then imperial expansion, and then industrial revolution.
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 yet unborn. Edmund Burke wrote about the real social contract — not Rousseau's contract between the sovereign and the people, but the partnership between the generations: "Society is indeed a contract — a partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born."
The Darwinian Economy
The 2007 financial crisis had its origins precisely in over-complex regulation. The Basel Committee on banking supervision's 1988 accord allowed very large quantities of assets to be held by banks relative to their capital, provided these assets were classified as low risk. From 1996, the Basel rules were modified to allow firms to effectively set their own capital requirements based on their internal risk estimates. Central banks evolved a peculiarly lopsided doctrine of monetary policy — they believed they should intervene by cutting interest rates if asset prices abruptly fell, but should not intervene if they rose rapidly.
The author argues for simplicity in regulations over complexity, more discretionary power to people, individual prudence rather than mere compliance, facilitator codes rather than enforced codes, and a robust punishment mechanism. Overcomplicated regulation can indeed be the disease of which it purports to be the cure.
The Landscape of Law
Lord Chief Justice Tom Bingham specified 7 criteria by which we should assess a legal system: accessibility and predictability of law; resolution by application of law rather than discretion; equal application of law to all; good faith exercise of powers by public officers; adequate protection of fundamental human rights; affordable and timely resolution of civil disputes; and fair adjudicative procedures.
According to Douglas North, the inability of societies to develop effective, low-cost enforcement of contracts is the most important source of both historical stagnation and contemporary under-development. Rule of law has become rule of lawyers.
Civil and Uncivil Societies
The power of voluntary associations to come together spontaneously — without any public sector involvement and without any profit motive — is immense. When social capital rises, nations rise; when it falls, nations fall. Tocqueville was fascinated by American associations and wrote: "Americans of all ages, all conditions, all minds constantly unite. Not only do they have commercial and industrial associations in which all take part, but they also have a thousand other kinds: religious, moral, grave, futile, very general and very particular."
However, attendance at public meetings, service as an officer of a club, membership of parent-teacher associations — all are historically down. Tocqueville had warned: "He was surely right. Not technology but the state — with its seductive promise of security from cradle to grave — was the real enemy of civil society."
Key Takeaways
- We need liberal democracy which is representative of the people it governs, with institutions that work with more autonomy.
- We must be mindful of the rights of future generations — the present system is, to put it bluntly, fraudulent in concealing huge liabilities from public view.
- Simplicity in regulation over complexity; individual prudence over mere compliance.
- Strong civil society is the foundation of a strong nation — voluntary associations must be nurtured, not replaced by the state.