A call to the west in its last-chance saloon

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The Great Degeneration: How Institutions Decay and Economies Die, by Niall Ferguson, Allen Lane, RRP£16.99

After struggling through inconclusive technical arguments on subjects such as fiscal multipliers it is a relief to come across a civilised book on political economy by Niall Ferguson. Unlike most historians the author is capable of understanding the technical literature and explaining its conclusions in straightforward terms. Even if you do not believe a word of his thesis in The Great Degeneration, I guarantee an informative and enjoyable read.

Ferguson’s starting point is the temporary nature of the west’s ascendancy. Five hundred years ago living standards in the west were about the same as in the rest of the world. But at the beginning of the 20th century they were about 20 times as high. Now they are only four or five times higher than some of Asia’s leading economies. I am not clear whether the author would like the west to stay ahead or merely stop it from falling behind. But he diagnoses failings in its political, economic, legal and social structures to justify a clarion call.

Ferguson cites the key features of western institutions as democracy, capitalism, the rule of law and civil society. Not everyone will agree with him that the welfare state seems to create an ever-increasing number of dependent drones for workers to support. The most refreshing aspect of his diagnosis is that he eschews complex regulation that “has become to disease of which is thought to be the cure, distorting and corrupting both the political and economic process”.

Is it perhaps unfortunate that my main disagreement with Ferguson is on the purely economic side. He cites Adam Smith on the dangers of a stationary state but he should have gone on to look at John Stuart Mill’s endorsement of a stationary state at the much higher level of technology envisaged in the later 19th century, as something to be desired, where humans were not always pushing and elbowing each other away.

The author seems obsessed with national debt. I usually respond by citing Lord Macaulay, who scoffed at false alarm on this issue. When I have done this, some readers have responded by saying that when this debt was accumulated Britain bestrode the world, which it no longer does. My riposte would be that debt is now not Britain’s problem alone but common to the main industrial countries, with the exception of Germany. No doubt the truth lies somewhere in between.

But I rejoin him on the importance of inclusive rather than extractive political institutions. Roughly speaking, inclusive ones are those in which people prosper by new developments and new force of wealth. Extractive ones are where people try to prosper by extracting revenues from their fellows. He traces the ascendancy of inclusive institutions to the triumph of constitutional principles in England from the 1688 revolution. Other countries have followed in its wake.

I have learnt most from his clear account of the origins of the 2008 international financial crisis, which unlike others he traces not to deregulation but to bad regulation. He also criticises the US Federal Reserve for cutting interest rates when asset prices fell but standing idly by when they rose. Alan Greenspan might have denied this, but it is very much what the market supposed. Above all he is sceptical of the benefits of regulation as a cure. He would prefer to rely on the simple principles laid down by Walter Bagehot, including the recommendation that central banks should lend freely in a crisis but at penalty rates. But where there have been clear breaches of elementary prudential rules, he advocates “the exemplary incarceration of bad bankers”.

The author’s heart seems to be in the last two chapters dealing with law and civil society. He cannot entirely make up his mind between the precedent-based English traditional approach and more principle-based theories. But he is sure about the enemies of the rule of law. They include the national security state, the growing complexity and sloppiness of statute law and the mounting cost, especially in the US. I cannot, however, accept the incorporation into English law of the 1953 European convention on fundamental rights is such a threat. But his parting shot, that the rule of law has degenerated into the rule of lawyers, has already evoked a sympathetic response.

His most controversial conclusion relates to education. He would like Michael Gove, the UK education secretary, to go a step further to increase the number of schools that are truly independent, in the sense of being privately funded and free to select pupils. In responding I must get Thomas Arnold’s Rugby out of my head and think of modern Sweden. He concludes that “if you’re against that then you are a true elitist; you are the one who wants to keep poor kids in lousy schools” – a rare example of the author’s descent into the demotic.

The writer is an FT columnist

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