Reviews, interviews and insights


Capitalist Futures: The Great Degeneration - Niall Ferguson

by Yasmin Crowther

The second blog in our Capitalist Futures series looks at Niall Ferguson’s book, The Great Degeneration – How Institutions Decay and Economies Die, published by Allen Lane in 2012. Niall Ferguson is Laurence A.Tisch Professor of History at Harvard University and a Senior Research Fellow at both Jesus College, Oxford and the Hoover Institution, Stanford.

The book is intriguing and sometimes frustrating – intriguing because it pitches important provocative ideas, but frustrating because sometimes those ideas don’t seem as fully elucidated or cross-connected as they might be.  The narrative took me on a journey to understand and explore the various qualities of a state that renders it ‘progressive’ or ‘stationary’ – in Adam Smith’s terminology.

Sleep walking into the stationary state

Adam Smith saw the characteristics of a stationary state as low wages for most, combined with the existence of a corrupt and monopolistic elite that is able to exploit the system through a combination of failing laws and institutions. Ferguson’s argument is that ‘the West’ – and he names the USA, UK and Japan – is showing evidence of slipping or sleepwalking into such a stationary state.

In particular, he takes on the argument that debt is ‘the voguish explanation for the West’s slowdown’ by suggesting that debt is less a problem in its own right, than ‘a symptom of a more profound institutional malfunction’, that is allowing current generations to live at the expense of future generations in an ‘enormous generational transfer’ and ‘unparalleled breach’ of the social contract between the living and the unborn, the voters of today and tomorrow.

When the West got it right

Before picking up various stones to explore where ‘the West’ is slipping, Ferguson establishes a context of how ‘the West’ once got it right for decades – via its creation and advocacy of open, inclusive and pluralistic institutions that helped certain states excel, in contrast to those with closed extractive institutions. Ferguson invites us to compare East and West Germany and North and South Korea, and also touches on differences in colonial legacies and the consequences for socio-economics. Where the Spanish and Portuguese approach to South America largely involved the extraction of wealth through closed institutions, British colonists took a more open and inclusive mindset to the USA, but – fundamentally - not to India, where the British Raj and East India Company effectively worked as closed, extractive vehicles. None of us can be good all of the time.

How the West is Failing

The book then looks inside the ‘black boxes’ of democracy, capitalism, rule of law and civil society to identify four critical failures rendering ‘the West’ less effective in the openness and inclusiveness of its institutions:

Failure 1: Fraudulent accounting by the State

Ferguson is unforgiving when it comes to how modern governments account for their finance. He writes: ‘The present system is fraudulent. There are no regularly published and accurate official balance sheets. Huge liabilities are simply hidden from view. Not even the current income and expenditure statements can be relied upon. No legitimate business could carry on in this fashion. The last corporation to publish financial statements this misleading was Enron.’

Instead, he argues, governments should publish balance sheets so government assets and liabilities can be compared, helping to clarify the difference between financing for current consumption versus financing for future investments. Furthermore, states, like businesses, should adopt generally accepted accounting principles and publish generational accounts that make clear the implications of current policy for the future.

Failure 2: Too much complex regulation & weak deterrents

Ferguson is opposed to the idea that fiscal failures can be blamed on deregulation since the 1980s, and the unpacking of Glass-Steagall. In fact, he is vehemently critical of red tape and the ways in which overly complex regulation can in fact compound rather than counter systemic fragility and risk, and also hinder essential innovation and commercial enterprise. 

He suggests that part of what makes complex regulation self-defeating is that the ‘political process [surrounding that regulation] is itself complex’ and vulnerable to manipulation by vested interests, although Ferguson doesn’t spell it out so bluntly.  He uses more polite language to suggest the ways that regulatory bodies can be ‘captured’ - ‘by those whom they are supposed to be regulating, not least by the prospect of well-paid jobs should gamekeeper turn poacher. They can also be captured in other ways – for example, by reliance on the entities they regulate for the very data they need to do their work.

Ferguson suggests that far better than complex regulation would be the meaningful punishment for rule-breaking – that goes far beyond loss of a knighthood. He writes: ‘All the detailed regulation in the world will do less to avert a future financial crisis than the clear and present danger in the minds of today’s bankers that, if they transgress in the eyes of the authority on whom their business ultimately depends, they could go to prison.’

Failure 3: Compromised governance and rule of law

In light of the well-known benefits of the rule of law and strong systems of justice, Ferguson questions the extent to which these benefits have been undermined in the West as a result of civil liberties being eroded in the wake of national security concerns post 9/11; the intrusion of European law; the complexity of statue law, and the massive costs arising as a result of the legal sector – from lobbying through to compliance.

Ferguson cites a variety of studies that show how the US in particular is slipping in its delivery of strong governance and rule of law, such as the World Bank Indicators of World Governance, and the WEF Global Competitiveness Index, both of which show the United States lagging such countries as Hong Kong, Germany and Taiwan on governmental accountability and effectiveness and rule of law.

Failure 4: The weakening of civil society

Finally, Ferguson looks at the way civil society has declined and cites the drastic falls in membership of a whole range of voluntary social organisations – including political parties and trade unions – over the last century. He is with Malcolm Gladwell in his view that social media engenders ‘weak’ ties between people and that it does not galvanise substantial societal action and impact – he’s not convinced that its role in the Arab Spring was as powerful as often represented.

Indeed, he sees recent technological advances failing to help society make the great leaps it once did – such as putting a man on the moon - and cites Peter Thiel’s words: ‘We wanted flying cars; instead we got 140 letters.’ This makes for uncomfortable reading because of the disconnect between the massive government funding that goes into a space program versus the lone entrepreneurialism from which so much social media has sprung – they are different types of innovation and the comparison doesn’t  fully convince. It also begs the question that on the one hand Ferguson appeals for less government intervention and regulation, and yet longs for the grand technological progress – the equivalent of a moon walk – that can only take place when governments get involved.   

The books closes with an appeal to investment in private education as an essential way to reinvigorate society and competitiveness. Ferguson is passionate in advocating the success of private education and the great benefits and progress to be accrued from enabling greater access – for instance through vouchers – to the best learning in the world.  

In Summary

There are useful concepts and insights in this book – particularly with regard to the stationary state and some of the ways it may be avoided:

1.       By finding ways to challenge and punish endemic and corrupting vested interests that work to close down, rope off or subvert open, pluralistic institutions and debate, and

2.       By encouraging far greater transparency in accounting by governments as well as business, not least when it comes to quantifying how our lives today are – and have long been – accumulating debt that our children and grandchildren will need to pay. 

The question that all this poses is a familiar one: if we had to individually hand our grandchildren an accurate bill for the cost of our way of life, what would we do differently right now – how would we vote, how would we organise, what would we tweet, how would we change the things we do and say, so that our children inherited a world in credit (environmentally, economically, socially) and not one that is depressed and overdrawn.