The Great Degeneration: How Institutions Decay and Economies Die

Niall Ferguson, “The Great Degeneration: How Institutions Decay and Economies Die” Pengu  in Press , 2013, 153 pps  

In economic power and standards of living, the West has dominated other parts of the world for the past 500 years.  This domination was made possible because of the West’s political (democratic), economic (Capitalism), legal (The Rule of Law), and social institutions (Civil Society); institutions that are beginning to deteriorate in the West.  As stagnation in the west sets in, the rest of the world is catching up, particularly countries such as China and India.

Capitalism: Western institutions used to devote themselves to making it easy for businesses to start-up.  No longer: now complex laws and regulations send corporations off-shore.  The author argues that financial institutions are not under-regulated—they are poorly regulated. 

Rule of Law:  tort law has allowed civil suits to choke the legal system.  The patent system and its danger are best illustrated by the pharmaceutical industry.  Copyright law is becoming another disaster.  All is best summed up as the Rule of Lawyers rather than the rule of law.

Civil Society:  Before the government began to be perceived as a cradle to grave caretaker, most Western citizens freely donated their time and money to worthy causes and charities, and flocked to join associations, clubs and organizations that promoted both civic-feeling and the public good.  Now citizens mostly wait and expect the government to take care of the less fortunate and any and all public goods.

My Notes:

Pg. 3: There is more going on than the painful process of debt reduction in the U.S.  Consider: the the US economy created 2.4 million jobs in the three years beginning in June 2009.  In the same period, 3.3 million Americans were awarded disabled worker benefits.  The percentage of working-age Americans collecting disability insurance has risen from below 3 percent in 1990 to 6 percent.  Unemployment is being concealed—and rendered permanent.

Pg. 4:  The crisis of public finance is not uniquely American.  Japan, Greece, Italy, Ireland and Portugal are also members of the club of countries with public debts in excess of 100 percent of GDP. 

Pg. 10:  Adam Smith, in his day, found much to criticize about China and its stagnation.  This book’s central thesis is that what was true of China in Smith’s day is true of large parts of the Western world in our time.  It is our laws and institutions that are the problem.  The Great Recession (2008 crash) is merely a symptom of a more profound Great Degeneration.

Pg. 21:  Institutions—in the broadest sense of the term—determine modern historical outcomes, more than natural forces like the weather, geography or even the incidence of disease.  As recently as 300 years ago, the average Chinese was probably still a bit better off than the average North American.  By 1978, the average American was at least twenty-two times richer than the average Chinese.  History’s great divergence was not just economic.  It was also a divergence in terms of longevity and health.  As recently as 1960, life expectancy in China was in the low forties, whereas already in the US it had reached seventy.  Westerners dominated the realm of science, as well as that of popular culture.  The climate, topography and natural resources of Europe were much the same in 1500 as they had been in 500. 

Pg. 26:  Francis Fukuyama’s Origins of Political Order defines the three components of a modern political order as a strong and capable state, the state’s subordination to a rule of law and government accountability to all citizens.  These three components came together for the first time in Western Europe, with England as the trailblazer.

Pg. 27:  It is very tempting to attribute historical agency to an amalgam of ideas and norms to explain Western domination: Greek philosophy, the Hebrew Commandments, Roman law, Christ’s ethics, the doctrine of Luther and Calvin – called something like ‘Judeo-Christian culture.’  But there is a real risk of cherry-picking here.  Terrible Western ideas like, say, witch-burning or communism never get mentioned, though they seem just as plausibly the products of Judeo-Christian culture as the spirit of capitalism. 

Pg. 40: US debt as a percentage of GDP is 112; Italy’s is 128, Ireland 119, and Portugal 124.  Japan is the leader at 245.  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.  And making matters much worse, the official debts in the form of bonds do not include the often far larger unfunded liabilities of welfare schemes like the American programs of Medicare, Medicaid, and Social Security.  The best available estimate for the difference between the net present value of federal government liabilities and the net present value of future federal revenues is $200 trillion, nearly thirteen times the debt as stated by the US treasury.  (Note: this is leaving out the unfunded liabilities of state and local governments, which are estimated to be around $38 trillion). (We have lived well at the expense of our progeny, and have set them up for failure).

Pg. 51:  Had Glass-Steagall still been in force in 2008 and not eliminated in 1999, it would not have prevented the failures of Bear Stearns and Lehman Brothers; both were pure investment banks that could just as easily have been mismanaged to death before 1999.

Pg. 100: Americans could once boast that their political system set the benchmark for the world; the US was the rule of law.  But now what we see is the rule of lawyers, which is something different.  The share of senators who are lawyers is admittedly below its peak of 51 percent in the early 1970s but it is still 37 percent.  (24 percent in the House).

Pg. 153:  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 US in his speech “You didn’t build that” is really disturbing.