The Great Degeneration

Stationary states and the great degeneration

In his book The Great Degeneration, historian Niall Ferguson discusses the slowdown in Western economic and social progress, describing his views on why institutions decay and economies collapse. The Great Degeneration is a short book, with brief but interesting case studies. While it may not satisfy the ardent readers that seek a more rigorous historical survey, I found the way Ferguson thinks about complex systems valuable. This post will review some of the thematic ideas that I took from his work.

Four black boxes

There are many reasons for the economic malaise that countries experience today. Geography, climate, culture, markets, policies, and technology are common explanations for the rise and fall of nations. But Ferguson argues that such interpretations describe only the symptoms of institutional decay, and not the underlying cause. Instead, Ferguson believes that economic progress rests on a complex matrix of interlocking and interacting black boxes. These are the black boxes of political, economic, legal, and social institutions. In other words, they are democracy, capitalism, the rule of law and civil society, respectively.

Evolutionary processes

Ferguson also believes it naïve to assume that the wealth of nations is a deterministic process, dependent on the initial conditions of institutional design. Rather, he likens historical narratives to evolutionary processes, where contingency is important, and where small differences compound tremendously over time. Ferguson also highlights a few more metaphors and analogies that are helpful in thinking about complex systems. I highlight a few of these, briefly as follows.

The fable of the bees

Ferguson pays homage to Bernard Mandeville and his work on The Fable of the Bees in 1714. The satirical book offers an interesting parallel between humans (institutions) and bees (hives), pondering the relationship between private vices and public benefits, and the behaviours of individuals within organised structures. Furthermore, the idea that humans can organise, much like hives, highlight the important role of institutional order and design. Fergusons suggests that it is perhaps within the hive design of democracy, capitalism, regulation and markets that we see economic processes flourish or collapse.

Civil society

The author points out that economic progress depends not only on institutional reforms but on civic participation and the strength of social capital. He suggests that benefits of growth in non-traditional associations, such as television and social networks, may not offset the cost of declines in local services, volunteering and charitable giving. He believes it important that societies foster reciprocal action, and we not remain, as Alexis de Tocqueville once said, “a stranger to the destiny of all the others”.

Darwinian economy

Like the hive structure of organisations, Ferguson suggests it helpful to think about institutional design and economic processes as a type of ‘Darwinian’ economy. That is, businesses and economies experience a type of natural selection, set within a regulatory framework. Institutions evolve in their cooperation and competition for finite resources. And the generations that ‘survived’ contained ‘mutations’ (e.g. innovation, culture, institutional memory) that contributed to their success.

Fragility from complexity

But Ferguson highlights how often we underestimate the fragility, complexity and interconnectedness of our global ‘ecosystem’. Too often we neglect its dependence on sustained confidence, expectations and trust between individuals. Likewise, the author believes it difficult to manage complex systems with even more complexity, whether it be excessively complicated compliance, macro-prudential or counter-cyclical regulation. Instead, Ferguson calls for simpler regulations and stronger enforcement to encourage individual prudence within such systems.

The landscape of law

Ferguson describes the rule of law as a slow-moving landscape and historical process that societies can improve or erode over time. It is an adaptive process that is stabilised by legal principle and precedent. The rule of law is fundamental to human rights, political stability and economic progress. Douglas North for example highlights the risk of stagnation and underdevelopment when societies are unable to develop and enforce contracts cost-effectively. Ferguson notes that this too depends on the legislation and judges’ integrity, and our commitment to political morality.

Rule of lawyers

Ferguson sees several challenges that risk terraforming the rule of law into a rule of lawyers. This includes the tension between civil liberty and national security, growing complexity in law, rising costs of administration (e.g. interpretation, enforcement, etc.) and threat of rent-seeking special interest groups. It may take a powerful force, such as war or revolution, to reset entrenched corruption and cronyism. History has shown the difficulty in fostering a rule of law that curbs violence, protects property rights, impose institutional checks and prevents public sector corruption.

In the Wealth of Nations, Adam Smith introduced the notion of the stationary state, a term for once wealthy countries that now struggle to grow. Stationary states are marked by two common features. Firstly, it is reflected in the elites’ capacity to arrange law and administration for their own benefit. Secondly, it is reflected in low wages for the population’s majority. Adam Smith believed that laws and institutions were fundamental to economic development and avoiding stagnation. To avoid the great degeneration, Ferguson emphasises we recognise the roles of democracy, capitalism, the rule of law and civil society, and the scope for reform. The four interacting black boxes must be addressed in unison.

Intergenerational contracts

Finally, we should also view our own society as an unspoken social contract, as Edmund Burke once described in 1790. It is a partnership, not just between the living, but with those before us and those to be born as well. As such, the role of the state and democracies is in restoring and balancing this social contract between generations. It is for this reason that Ferguson calls for more transparency in public balance sheets. That is to better clarify the public’s stock of assets and liabilities, deficits to finance consumption or investment, and inter-generational consequences of our policy and choices.

References

Ferguson, N. (2012). The Great Degeneration: How Institutions Decay and Economies Die.

The Great Degeneration – Niall Ferguson on how institutions decay and economies die