Niall Ferguson's Warning to the West: Great Pain Is Coming
Reality Check
I am a fan of Niall Ferguson. (I am told by someone who knows him that he pronounces Niall "Neel"). I offer six reasons.
First, and most important, he has a larger audience among the intellectual elite of this country than any other person I can think of who shares 80% of my views. He did two major PBS series, and he wrote two books to accompany them. One was titled Second, he is young: under 50 years old. He is the only person I've ever heard of who has a teaching position at Harvard University, Harvard Business School, and Oxford University. Third, when he speaks, the intellectual elite pays attention to him. I cannot think of anybody else whose view of civil society is close to that of my mentor, Robert Nisbet, who also has had such a large audience among American intellectuals. Fourth, he is generally in favor of the free market. There are some Keynesian elements in his writing, but they sneak in only occasionally. They are not at the center of his writing. Fifth, there is his writing. He writes a lot of books, and he is an exceptionally good writer. I don't think he is as good as Paul Johnson, but I don't think anybody is as good as Paul Johnson among those who I regard as serious historians. Sixth, he stands in front of an audience and gives a good speech. He does not put you to sleep. Ferguson is a heavy hitter in academia and the media. Hardly anyone else is, and surely no one whose views are as far to the right as his are. SIMPLE BUT CENTRAL THEMES He hones in on some very simple themes, which he believes are really crucial. I find that most of these things are really crucial. In his 2012 book, The Great Degeneration, he lists four of them: democracy, capitalism, the rule of law, and civil society. These have been at the heart of Western civilization. He is concerned that all four of them are weakening in the Anglo-American world. He is correct. I want to focus on this book. He discusses Adam Smith's concept of the stationary state. In my opinion, this was one of the weakest aspects of Smith's theory. He wrote as a way to persuade people to free up the economy, and one of his goals was to overcome the stationary state. Within a few years of the publication of the book, and perhaps as few as four years, Western society, led by Great Britain and the United States, reversed the stationary economy as never before in the history of the world. Of anything that Adam Smith did not have to worry about in 1776, it was the stationary economy. Ferguson makes a very important point. In the days of Adam Smith, China was probably as rich as England per capita. I don't know exactly how you can prove this, but that is his assumption. Certainly, China was a powerful economy. By 1980, the wealth of the West dwarfed per capita wealth in China. He estimates the per capita wealth was probably 20 times higher in the United States than China. Today, it is probably five times higher. This has happened in about 30 years. He thinks that the West is stagnating, when compared with Asia. This is not a major insight. He is concerned about the stagnation, and he wants to find reasons for it. This map shows what has happened since 2000. The world's economic center of gravity is shifting to the east. This raises the other question, with respect to Asia: What has changed there? How did China grow so fast in response to the deregulation of agriculture under Deng Xiaoping in 1979? Even more impressive, though rarely discussed, was the transformation of South Korea from a country with a per capita income of a nation in sub-Saharan Africa in 1950, to one of the economic powerhouses of the world today. That deserves an explanation. But Ferguson is correct when he says that there is an institutional difference between North Korea and South Korea that explains the economic differences. That is probably the best test case in the history of man of the difference of institutions and their effects on society. The difference is Marxism vs. capitalism. DEBT, REGULATION, AND STATE EXPANSION He sees the economic faltering of the West in terms of these trends: rising public debt, excessive government regulation, and the decline of civil society. I certainly couldn't argue with any of these. He gave one example of the welfare state that I had heard about at some point, but it never quite registered. On page 3, he says that in the three years after June 2009, which was the bottom of the recession, the United States economy created 2.4 million jobs. During the same period, 3.3 million Americans were awarded disabled worker benefits by the Social Security Administration. In 1990, about 3% of working-age Americans were collecting disability insurance. Today, it is around 6%. This statistic points to a major problem with Ferguson's theory. There was no fundamental legal change in the United States between 1990 and 2012. The institutional structure remained the same. Yet the percentage of people who claimed eligibility for disability payments from the federal government doubled. That is not an institutional issue. That is a moral issue. As a moral issue, it comes into conflict with Ferguson's emphasis on institutions as the central features of the modern Western economy. He thinks the crisis in public finance threatens the Western economy. He thinks the enormous increase of the unfunded liabilities of the United States government is also indicative of a major change of thought. Today's retirees think that children and grandchildren are going to support them. They are wrong, however. This is what Ferguson does not perceive. It is not simply the institutional existence of the Social Security system that is central. It is the naïve assumption that future generations are going to pay for the oldsters, when in fact the moral transformation that is implied in the older generation's transfer of liabilities to the younger generation is going to be matched, and then some, by the political reaction by younger generations, who will go to the polls and elect politicians who say they will cut off the oldsters. This is a moral issue, not an institutional issue. He understands that there are only three things that will enable the West to escape the implications of the unfunded liabilities. First, the rate of economic growth has to exceed the rate of interest, thanks to technological innovation. He doesn't think that is possible. Neither do I. Second, the federal government can default on a large portion of its public debt. It can go into bankruptcy in order to escape. Third, the government can wipe out the debts through currency depreciation inflation. He does not think that is possible anymore. I think he is correct. This leaves the second option, namely, the Great Default (p. 3). He knows it is going to happen. I know it is going to happen. You know it's going to happen. But a hundred million adult Americans don't know it is going to happen. They are not going to be told. Congress will not tell them. The economists will tell them. The literati won't tell them. Even Ferguson did not come out and say it explicitly. But it is obvious that this is what he believes. He makes the point that the regulatory system has created a world in which it is now 100 times more expensive to bring a new medicine to the market than it was 60 years ago. He sees this is a disaster, and so Do I (p. 7). He is a clever writer. He said that the FDA would probably prohibit the sale of table salt if it were ever put forward as a new medicine. INSTITUTIONAL CHANGE He said that bad institutions produce bad results. There's nothing radical about this statement. The question I would offer is this: When did the great change from good institutions to bad institutions come to Western civilization? This is also worth asking: How did the institutional legacy of the medieval world produce economic growth? It began around 1800. But that raises that crucial question: Why did it take place in Great Britain in 1800? Why didn't it take place in Mesopotamia 1800 BC? Academic historians and economists still do not have the answer. It is the great question, and Ferguson does not deal with it. It is this pair of questions. (1) When did we go right? (2) When did we go wrong? Then we must answer this: How? What is fascinating is the fact that, after 1500, the Western economy started growing faster than Asia's. Asia was ahead in 1500, and it may still have been ahead in 1800. It was clearly not ahead in 1900. Now it is catching up. But, as he shows, institutionally, the rule of law in China is pretty much fraudulent. China is growing very fast. State capitalism seems to be working. How did this happen? What institutional change took place? All that happened was that Deng Xiaoping pulled the controls off of agriculture. The rest, as they say, is history. This seems to indicate that it was the free market, not the rule of law, that was fundamental to the Asian transformation. India has lagged behind China, yet India has been based on the rule of law, and specifically common law, for 250 years. The fundamental issue is this: private property. Do you own your own land? Do you own your own labor? If you own your own land, and if you own your own labor, and if you are permitted to bargain in terms of this ownership, there is going to be economic growth. That has been the message out of non-Communist Asia since 1950, and the message out of China since 1979. He thinks the glorious Revolution of 1688 was the central event in British history, at least with respect to the liberation of the economy. The trouble is, the economy did not begin to grow exponentially for 100 years thereafter. He mentions what he calls the killer applications of Western civilization: economic competition, the scientific revolution, modern medicine, the consumer society, and the work ethic. But there is a problem here. Asia had these in 1500. Why did it fall behind? A large number of the crucial inventions in the West came from China. The West put these inventions to work, and China did not. One of the classic examples of this was the clock. The same thing could be said about Korea, which invented movable metal type 200 years before Gutenberg did. He makes a major Keynesian mistake. It is one of the most popular mistakes of economic historians in our day. He said that it was the ability of Great Britain's government to borrow massive amounts of debt that was central to the success of Great Britain's economy. On the contrary, it was this ability that has led ultimately to the undermining of Great Britain's economy, and ours. Ferguson is basically a fan of the British Empire. We Yanks challenged this arrangement, twice. If Great Britain had not been defending an empire, and had not gone into two world wars against France in the 18th century, it would be vastly richer today. The whole tradition of warfare funded by debt, and especially by central bank purchases of government debt, is the heart, mind, and soul of the vast expansion of debt which he knows is the great threat to the West. Yet he takes the position, as do virtually all Keynesians, that it was the ability of the British government to load up on debt that make possible the modern world. This is the main problem with Ferguson's writing. He thinks that the good old days were pretty good institutionally, and that we mistakenly extended the good aspects of the good old days beyond their proper limits. The classic example in the whole book is public debt. But he does the same thing with respect to tax-funded education. He knows, and insists, that the private schools of Great Britain are the most effective functioning institutions in that society. Yet he still defends tax-funded education, and he still thinks it is possible to create independent schools financed by tax money. He thinks this is the wave of the future. He of course favors vouchers. It is the same old story. Government schools are okay, but they have just become too powerful. He knows that the government's reporting on its debt is fraudulent. It will not report the unfunded liabilities. On page 46 he writes: "The present system is, to put it bluntly, 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 possibly carry on in this fashion. The last Corporation to publish financial statements this misleading was Enron." He's got that right. He has a good chapter refuting the idea that banking de-regulation was the cause of the crisis of 2008. Both Bear Stearns and Lehman Brothers, which triggered the crisis, were investment banks. They were not under the old Glass-Steagall laws. They were not commercial banks. They were pure investment banks. They could have gone down before 1999. He points out that the British banking system was heavily regulated prior to the 1980s. Yet the British system got into the same kind of trouble. The endless multiplication of banking controls has not saved Western banking. He blames bad regulation, not the absence of regulation. But, true to form, he doesn't blame the central problem, namely, fractional reserve banking. He understands that the Federal Reserve and other central banks did terrible jobs, but he does not come out and say that they never should have existed in the first place. He has not thought through the banking system. He has no trust in the Dodd-Frank law. He thinks there will be another breakdown again. He really has no solution for it. But, then again, neither does anybody else within the Establishment. He thinks we should strengthen the central bank as the ultimate authority (p. 74). I think he is wrong. His section on the rule of law is very good. He shows how important it is to restrict the expansion of the government in every area of life. For centuries, this was the view of Anglo-American law. The common law system did protect property. It has especially protected investors. This is a great advantage. The French system did not. He said the civil liberties in Great Britain began to be eroded at a specific time: 1914. He said that in that year, the British government passed the Defense of the Realm (p. 96). He compares this with the United States Congress in response to 9/11 (p. 97). Centralized law began to reappear in this country. He calls this "Napoleon's revenge." It is the Frenchification of the common law. The law is too complex today. It is to elaborate. It is too expensive to enforce. It is strangling the West. I cannot disagree with him here. This is a startling fact. He quotes from the World Economic Forum's annual Global Competitiveness index. Here's what he writes: On page 102, he points out that much of this has taken place in the last 20 years. We are accelerating in terms of our decline in the area of the rule of law. CIVIL SOCIETY The best chapter is Chapter 4: civil society. He ties it to DeTocqueville's Democracy in America. DeTocqueville was impressed by the number of voluntary societies that existed in the United States. The people did not rely on the government to get things done. They did it themselves. Not today. In Britain, the number of these voluntary societies has been declining since the end of World War II. This began even earlier. He points out that in Great Britain in 1914, there were 36,000 independent voluntary societies. The peak membership was in 1908: about 34 million members. That was when the United Kingdom had about 44 million people. Today it has 60 million people. The number of societies is down to about 12,000. The number of members is down to about 10 million. Something fundamental has taken place in Great Britain. He blames the extension of the state. He thinks the state has replaced these organizations. That is correct. It is true in the United States. Tocqueville blamed the state in 1840; Ferguson blames it today (p. 124). I certainly cannot argue with this. STAGNATION In his conclusion, he made a point that I was unaware of. On page 137, he writes this: "Between 1935 and 1973 the average real income of the 99 per cent rose (before tax) by a factor of 4 and a half. Yet from 1973 until 2010 it actually fell." He took 1935 as the base year: the depression. But his point about 1973 to today is shocking. Something fundamental has changed. On page 151, he offers a very good summary of what is taking place in the West. This is a good list. I can think of no list better than this that has been publicly announced by anyone in the world of American intellectuals. He thinks that the increase of public debt is going to slow the growth of the West. That is certainly the case. I also agree with this: CONCLUSION The good news is that this kind of message is beginning to get out. It is compromised by conservative Keynesianism and respect for central banking in principle, but it is clearly closer to the position espoused by free market economists and conservatives like Nisbet than anything else I can think of from a widely acknowledged representative of the chattering class. It indicates that the Establishment no longer speaks with a unified voice.
The survey includes fifteen measures of the rule of law, ranging from the protection of private property rights to the policing of corruption in the control of organized crime. It is an astonishing yet scarcely acknowledged fact that on no fewer than fifteen out of fifteen counts, the United States now fears markedly worse than Hong Kong. Taiwan out rates the US in nine out of fifteen. Even mainland China does better in two dimensions. Indeed, the United States makes makes the global top 20 in only one area. On every other count, it's reputation is shockingly bad. In the heritage foundation's freedom index, too, the US ranks 21st in the world in terms of freedom from corruption, a considerable distance behind Hong Kong and Singapore (pp. 100-1).
Public debt -- stated and implicit -- has become a way for the older generation to live at the expense of the young and the unborn. Regulation has become dysfunctional to the point of increasing the fragility of the system. Lawyers, who can be revolutionaries in a dynamic society, become parasites in a stationary one. And civil society where there's into a mere no man's land between corporate interests and big government. Taken together, these are the things I refer to as the Great Degeneration.
Ask anyone who works in the shadowy world of intelligence to list the biggest threats we face, and they will probably include bioterrorism, cyber war, and nuclear proliferation. What these things have in common, of course, is the way modern technology can empower radicalized or just plain crazy individuals and groups. It will surely not be long before another unknown known becomes apparent to non-historians: that it is when empires retreat, not when they advance, that violence reaches its peak (p. 150).