The Simple Explanations for the Global Financial Crisis and Western Slowdown are Wrong

Key Excerpts from Niall Ferguson’s 2013 book, “The Great Degeneration: How Institutions Decay and Economies Die”:

“You cannot blame all of this on deleveraging. In the United States, the wider debate is about globalization, technology change, education, and fiscal policy.”

“The first draft of the history of the financial crisis is in, and here is what it says: deregulation is to blame. Unfettered after 1980, financial markets ran amok, banks blew up and then had to be bailed out. Now they must be fettered once again. As will become clear, it is not my purpose to whitewash bankers. But I do believe this story is mostly wrong.”

“Because legislators and regulators acted with an almost complete disregard for the law of unintended consequences, they inadvertently helped to inflate a real estate bubble in countries all over the developed world.”

“Think of it this way. The regulatory frameworks of the post-1980 period encouraged banks to increase their balance sheets relative to their capital. This happened in all kinds of different countries, in Germany and Spain as much as the United States. (We really cannot blame Ronald Reagan for what happened in Berlin and Madrid.) When property-backed assets fell in price, banks were threatened with insolvency. When short-term funding dried up, they were threatened with illiquidity. The authorities found they had to choose between a Great Depression scenario of massive bank failures or bailing the banks out. They bailed them out. Chastened by ungrateful voters (who still do not appreciate how much worse things could have got if the ‘too big’ had actually failed), the legislators now draw up statutes designed to avoid future bailouts.”

“Countries arrive at the stationary state, as Adam Smith argued, when their ‘laws and institutions’ degenerate to the point that elite rent-seeking dominates the economic and political process. I have tried to suggest that this is the case in important parts of the Western world today. Public debt…stated and implicit….had become a way for the older generation to live at the expense of the young and unborn. Regulation has become dysfunctional to the point of increasing fragility of the system. Lawyers, who can be revolutionaries in a dynamic society, become parasites in a stationary one. And civil society withers 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.”

More Excerpts from Niall Ferguson’s 2013 book, “The Great Degeneration: How Institutions Decay and Economies Die”:

Jacket Cover

“What causes rich countries to lose their way? Symptoms of decline are all around us today: slowing growth, crushing debts, increasing inequality, aging populations, antisocial behavior. But what exactly has gone wrong?”

“Niall Ferguson argues in The Great Degeneration, is that our institutions…the intricate frameworks within which society can flourish or fail….are degenerating.”

“Representative government, the free market, the rule of law and civil society…these are the four pillars of our way of life. It was these institutions, rather than any geographical or climatic advantages, that set the West on the path to prosperity and security. In our time, however, these institutions have deteriorated in disturbing ways.”

“Our democracies have broken the contract between generations by heaping IOUs on our children and grandchildren. Our markets are hindered by overcomplex regulations that debilitate the political and economic processes, they were created to support; the rule of law has become the rule of lawyers. And civil society has degenerated into uncivil society, where we lazily expect all of our problems to be solved by the state.”

“It is institutional degeneration, in other words, that lies behind economic stagnation and the geopolitical decline that comes with it.”

Introduction

“The voguish explanation for the Western slowdown is ‘deleveraging’: the painful process of debt reduction (or balance sheet repair). Certainly, there are few precedents for the scale of debt in the West today. This is only the second time in American history that combined public and private debt has exceeded 250 per cent of GDP. In a survey of fifty countries, the McKinsey Global Institute identifies forty-five episodes of deleveraging since 1930. In only eight was the initial debt/GDP ratio above 250 percent, as it is today not only in the U.S. but also in all of the major English-speaking countries (including Australia and Canada), all the major continental European countries (including Germany), plus Japan and South Korea.”

“The deleveraging argument is that households and banks are struggling to reduce their debts, having gambled foolishly on ever rising property prices. But as people have sought to spend less and save more, aggregate demand has slumped. To prevent this process from generating a lethal debt deflation, governments and central banks have stepped in with fiscal and monetary stimulus unparalleled in time of peace. Public sector deficits have help mitigate the contraction, but they risk transforming a crisis of excess private debt into a crisis of excess public debt. In the same way, the expansion of central bank balance sheets (the monetary base), prevented a cascade of bank failures, but now appears to have diminishing returns in terms of reflation and growth.”

“Yet more is going on here than just deleveraging.”

“You cannot blame all of this on deleveraging. In the United States, the wider debate is about globalization, technology change, education, and fiscal policy.”

“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.”

“Only by historical methods can we explain why, over the past thirty years, so many countries created forms of debt that, by design, cannot be inflated away; and why, as a result, the next generation will be saddled for life with liabilities incurred by their parents and grandparents.”

“In the same way, it is easy to explain why the financial crisis was caused by excessively large and leveraged financial institutions, but much harder to explain why, after more than four years of debate, the problem of ‘too big to fail’ banks has not been solved.”

“Today, a mere ten highly diversified financial institutions are responsible for three-quarters of total financial assets under management in the United States. Yet the country’s largest banks are at least $50 billion short of meeting new capital requirements under the new Basel III accords governing bank capital adequacy. Again, only a political and historical approach can explain why Western politicians today call simultaneously for banks to lend more money and for them to shrink their balance sheets.”

“Why is it now a hundred times more expensive to bring a new medicine to market than it was sixty years ago…Why would the FDA probably prohibit table salt if it were put forward as a new pharmacological product? Why, to give another suggestive example, did it take an American journalist sixty-five days to get official permission (including, after a wait of up to five weeks, a Food Protection Certificate) top open a lemonade stand in New York City?…This is the kind of debilitating red tape that development economists often blame for poverty in Africa or Latin America.”

“The Four Black Boxes”

“To demonstrate that Western institutions have indeed degenerated, I am going to have to open up some long-sealed black boxes.”

“The first is the on labeled ‘democracy’. The second is labeled ‘capitalism’. The third is ‘the rule of law’. And the fourth is ‘civil society’. Together, they are the key components of our civilization.”

The Human Hive

“Most commentators who address this question tend to concern themselves with phenomena like excessive debt, mismanaged banks, and widening inequality. To my mind, however, these are nothing more than symptoms of an underlying institutional malaise: an Inglorious Revolution, if you like, which is undoing the achievements of half a millennium of Western institutional evolution.”

“A second problem is that today’s Western democracies now play such a large part in redistributing income that politicians who argue for cutting expenditures nearly always run into the well-organized opposition for one or both of two groups: recipients of public sector pay and recipients of government benefits.”

“But I believe there is a way of making such leadership more likely to succeed, and that is to alter the way in which governments account for their finances. The present system is, to put it bluntly, fraudulent. There are no regular published and accurate official balance sheets. Huge liabilities are simply hidden from view. Not even 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.”

“There is in fact a better way. Public sector balance sheets can and should be drawn up so that liabilities of governments can be compared with their assets. That would help clarify the differences between deficits to finance investment and deficits to finance current consumption. Government should also follow the lead of business and adopt Generally Accepted Accounting Principles. And above all, generational accounts should be prepared on a regular basis to make absolutely cleare the inter generational implications of current policy.”

“As our economic difficulties have worsened, we voters have struggled to find appropriate scapegoats. We blame the politicians whose hard lot it is to bring public finances under control. But we also like to blame bankers and financial markets, as if their reckless lending were to blame for our reckless borrowing. We bay for tougher regulation, though not of ourselves.”

The Darwinian Economy

“The first draft of the history of the financial crisis is in, and here is what it says: deregulation is to blame. Unfettered after 1980, financial markets ran amok, banks blew up and then had to be bailed out. Now they must be fettered once again.”

“As will become clear, it is not my purpose to whitewash bankers. But I do believe this story is mostly wrong. For one thing, it is hard to think of a major event in the U.S. crisis….beginning with the failure of Bear Stearns and Lehman Brothers….that could not equally well have happened with Glass-Steagall still in force.”

“For another, the claim that economic performance for the U.S. economy before Ronald Reagan was superior to what followed because of the tighter controls on banks before 1980 is simply laughable. Productivity certainly grew faster between 1950 and 1979 than between 1980 and 2009. But it grew faster in the 1980s and 1990s than in the 1970s. And it consistently grew faster than in Canada after 1979…..I could triumphantly point out that Canada retained a far more tightly regulated banking system than the U.S…and as a result lagged behind in terms of productivity.”

“To a British reader, if not to an American, there is something especially implausible about the story that regulated financial markets were responsible for rapid growth, while deregulation caused crisis…..Yet there was anything but ‘spectacular economic progress’ in this era of financial regulation. On the contrary, the 1970s were arguably Britain’s most financially disastrous decade since the 1820s, witnessing not only a major banking crisis, but also a stock market crash, a real estate bubble and bust, and double-digit inflation, all rounded off by the arrival of the International Monetary Fund in 1976….the lesson of the 1970s (in Britain) is not that deregulation is bad, but that bad regulation is bad, especially in the context of bad monetary and fiscal policy. And I believe the same can be said of our crisis, too.”

“The financial crisis that began in 2007 had its origins precisely in over-complex regulation.”

“First, the executives of large publicly owned banks were strongly incentivized to ‘maximize shareholder value’….All over the Western world, balance sheets grew to dizzying sizes relative to bank equity. How was this possible? The answer is that it was expressly permitted by regulation. To be precise, the Basel Committee on Banking Supervision’s 1998 Accord allowed very large quantities of assets to be held by banks relative to their capital, provided these assets were classified as low risk…for example, government bonds.”

“Secondly….In practice risk weightings came to be based on the ratings given to securities….and, later to structured financial products…by the private rating agencies.”

“Thirdly, central banks…led by the Federal Reserve….evolved a peculiarly lopsided doctrine of monetary policy, with taught that they should intervene by cutting rates if asset prices abruptly fell, but should not intervene if they rose rapidly, so long as the rise did not affect public expectations of something called ‘core” inflation (which excluded changes in the prices of food and energy and wholly failed to capture the bubble in housing prices). The colloquial term for this approach is the ‘Greenspan (later Bernanke) Put’, which implied the Fed would intervene to prop up the U.S. equity market, but would not intervene to deflate an asset bubble. The Fed was supposed to care only about consumer-price inflation, and for some obscure reason not about house-price inflation.”

“Fourthly, the U.S. Congress passed legislation designed to increase the percentage of lower-income families…especially minority families….that owned their own homes. The mortgage market was highly distorted by the ‘government sponsored entities’ Fannie Mae and Freddie Mac. Both parties viewed this as desirable social and political reasons. Neither considered that, from a financial point of view, they were encouraging low-income households to place large, leveraged, unhedged and unidirectional bets on the U.S. housing market.”

“A final layer of market distortion was provided by the Chinese government, which spent literally trillions of dollars’ worth of its own currency to prevent it from appreciating relative to the dollar…Nor were the Chinese the only ones who chose to plough their current account surpluses into dollars. The secondary and unintended consequence was to provide the United States with a vast credit line. Because much of what the surplus countries bought was U.S. government or government agency debt, the yields on these securities were artificially held low. Because mortgage rates are closely linked to Treasury yields…..thus it helped further to inflate an already bubbling property market.”

“The only chapter in this history that really fits the ‘blame deregulation’ thesis is the non-regulation of the markets in derivatives such as credit default swaps……However, I do not believe this can be seen as a primary cause of the crisis. Banks were the key to the crisis, and the banks were regulated.”

“The issue is whether or not additional regulation of the sort that is currently being devised and implemented can improve matters by reducing the frequency or magnitude of future financial crises. I think it is highly unlikely. Indeed, I would go further. I think the new regulations may have precisely the opposite effect. The problem we are dealing with here is not inherent in financial innovation. It is inherent in financial regulation.”

“Because legislators and regulators acted with an almost complete disregard for the law of unintended consequences, they inadvertently helped to inflate a real estate bubble in countries all over the developed world.”

“Today, it seems to me, the balance of opinion favours complexity over simplicity; rules over discretion; codes of compliance over individual and corporate responsibility. I believe this approach is based on a flawed understanding of how financial markets work.”

“I believe excessively complex regulation is the disease of which it pretends to be the cure.”

“As I have suggested, it was the most-regulated institutions in the financial system that were in fact the most disaster-prone: big banks on both sides of the Atlantic, not hedge funds. It is more than a little convenient for America’s political class to have the crisis blamed on deregulation and the resulting excess of bankers. Not only does that neatly pass the buck it also creates justification for more regulation.”

“Under the Basel III Framework for bank capital standards, which is due to come into force between 2013 and the end of 2018, the world’s twenty-nine largest global banks will need to raise an additional $566 billion in new capital or shed around $5.5 trillion in assets. According to the rating agency Fitch, this implies a 23 percent increase relative to the capital the banks had at the end of 2011. It is quite true that big banks became under-capitalized….or excessively leveraged if you prefer the term…after 1980. But it is far from clear how forcing banks to hold more capital or make fewer loans can be compatible with the goal of sustained economic recovery, without which financial stability is very unlikely to return to the U.S., much less Europe.”

“Lurking inside every such regulation is the universal law of unintended consequences.”

“One of the many new features of Basel III is a requirement for banks to build up capital in good times, so as to have a buffer in bad times. This innovation was widely hailed some years ago when it was introduced by Spanish bank regulators. Enough said.”

“The editor of the Economist Walter Bagehot was only one of many Victorian contemporaries who drew the parallel back from Darwin’s theory of evolution to the economy. As he once observed: ‘The rough and vulgar structure of English commerce is the secret of its life; for it contains the ‘propensity to variation’, which, in the social and the animal kingdom, is the principle of progress.’”

“The Great Depression of the 1930s and the Great Inflation of the 1970s stand out as times of major discontinuity, with the ‘mass extinctions” such as the bank panics of the 1930s and the Savings and Loans failures of the 1980s. A comparably large disruption has clearly happened in our time. But where are the mass extinctions? The dinosaurs still roam the financial world.”

“The answer is that, whereas evolution in biology takes place in the pitiless natural environment, evolution in finance occurs within a regulatory framework where….to adapt a phrase from anti-Darwinian creationists….’intelligent design’ plays a part. But just how intelligent is this design? The answer is: not intelligent enough to second-guess the evolutionary process. In fact, stupid enough to make a fragile system even more fragile.”

“Think of it this way. The regulatory frameworks of the post-1980 period encouraged banks to increase their balance sheets relative to their capital. This happened in all kinds of different countries, in Germany and Spain as much as the United States. (We really cannot blame Ronald Reagan for what happened in Berlin and Madrid.) When property-backed assets fell in price, banks were threatened with insolvency. When short-term funding dried up, they were threatened with illiquidity. The authorities found they had to choose between a Great Depression scenario of massive bank failures or bailing the banks out. They bailed them out. Chastened by ungrateful voters (who still do not appreciate how much worse things could have got if the ‘too big’ had actually failed), the legislators now draw up statutes designed to avoid future bailouts.”

“Another and related way of thinking about the financial system is as a highly complex system, made up of a very large number of interacting components that are asymmetrically organized in a network. This network operates somewhere between order and disorder….on ‘the edge of chaos’. Such complex systems can appear to operate quite smoothly for some time, apparently in equilibrium, in reality constantly adapting as positive feedback loops operate. But there comes a moment when they ‘go critical’. A slight perturbation can set off a ‘phase transition’ from a benign equilibrium to a crisis. This is especially common where the network nodes are ‘tightly coupled’. When the interrelatedness of a network increases, conflicting constraints can quickly produce a ‘complexity catastrophe’.”

“All complex systems in the natural world….from termite hills to large forests to the human nervous system….share certain characteristics. A small input to such a system can produce huge, unanticipated changes. Causal relationships are often non-linear. Indeed, some theorists would go so far as to say that certain complex systems are wholly non-deterministic, meaning that it is next to impossible to make predictions about their future behavior based on past data…..It turns out that financial crises are much the same.”

“As heterodox economists like W. Brian Arthur have been arguing for years, a complex economy is characterized by the interaction of dispersed agents, a lack of central control, multiple levels of organization, continual adaptation, incessant creation of new market niches and no general equilibrium.”

“Viewed in this light, as Andrew Haldane of the Bank of England has argued, Wall Street and the City of London are parts of one of the most complex systems that humans beings have ever made. And the combination of concentration, interbank lending, financial innovation, and technological acceleration makes it a system especially prone to crash.”

“Once again, however, the difference between the natural world and the financial world is the role of regulation. Regulation is supposed to reduce the number and size of financial forest fires. And yet, as we have seen, it can quite easily have the opposite effect….The point is that regulation should be designed to heighten anti-fragility. But the regulation we are contemplating today does the opposite: because of its very complexity….and often contradictory objectives…it is pro-fragile.”

“Over-complicated regulation can indeed be the disease of which it purports to be the cure.”

“Just as the planners of the old Soviet system could never hope to direct a modern economy in all its complexity for reasons long ago explained by Friedrich Hayek and Janos Kornai, so the regulators of the post-crisis world are doomed to fail in their efforts to make the global financial system crisis-free. They can never know enough to manage such a complex system. They will only ever learn from the last crisis how to make the next one.”

The Landscape of Law

“I believe this gives an invaluable insight into the authentically evolutionary character of the common law system. It was this, rather than any specific functional difference in the treatment of investors or creditors, that gave the English system and its relatives around the world an advantage in terms of economic development.”

“First (threat), we must post the familiar question about how far our civil liberties have been eroded by the national security state…a process that in fact dates back almost a hundred years to the outbreak of the First World War….”

“A second threat is the very obvious on posed by the intrusion of European law….with its civil law character….into the English legal system…This may be considered Napoleon’s revenge: a creeping ‘Frenchification’ of the common law.”

“A third threat is the growing complexity (and sloppiness) of statute law, a grave problem on both sides of the Atlantic as the mania for elaborate regulation spreads through the political class.”

“I agree with the American legal critic Philip K. Howard that we need a ‘legal spring cleaning” of obsolete legislation and routine inclusion of ‘sunset provisions’ (expiry dates) in new laws. We must also seek to persuade legislators that there role is not to write an ‘instructions manual’ for the economy that covers every eventuality, right down to the remotest imaginable risk to our health and safety.”

“A fourth threat….especially apparent in the United States….is the mounting cost of the law. By this I do not mean the $94.5 billion a year the U.S. federal government spends on law making, law interpretation, and law enforcement…It is the cost of the consequences of their work that is truly alarming: an estimated $1.75 trillion a year, according to a report commissioned by the U.S. Small Business Administration, in additional business costs arising from compliance with regulations. On top of that are the $865 billion in costs arising from the U.S. system of tort law, which gives litigants far greater opportunities than in England to seek damages for any ‘wrongful act, damage, or injury done willfully, negligently, or in circumstances involving strict liability, but not involving breach of contract, for which a civil suit can be brought.’”

“….the tort system costs a sum ‘equivalent to an eight percent tax on consumption or thirteen percent tax on wages. The direct costs arising from a staggering 7,800 new cases a day were equivalent to more than 2.2 percent of U.S. GDP in 2003, double the equivalent figure in any other developed economy, with the exception of Italy.”

“…my own personal experience tells a similar story: merely setting up a new business in New England involved significantly more lawyers and much more in legal fees than doing so in England.”

“Experts on economic competitiveness…..define the term to included the ability of the government to pass effective laws; the protection of physical and intellectual property rights and lack of corruption; the efficiency of the legal framework, including modest costs and swift adjudication; the ease of setting up a new business; and effective and predictable regulations. It is startling to find how poorly the United States now fares when judged by these criteria.”

“(Harvard Professors) asked HBS alumni about 607 instances of decisions on whether or not to offshore operations. The United States retained the business in just ninety-six cases (16 percent) and lost it in all the rest.”

“Evidence that the United States is suffering some kind of institutional loss of competitiveness can be found not only (in this work) but in the World Economic Forum’s annual Global Competitiveness Index, and in particular, the Executive Opinion Survey….The survey includes fifteen measures of the rule of law, ranging from the protection of private property rights to the policing of corruption and 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 fares markedly worse than Hong Kong. Taiwan outranks the U.S. in nine out of fifteen…..Indeed, the United States makes the global top twenty in only one area. On every other count, its reputation is shockingly bad.”

“The World Justice Project’s Rule of Law 2011 index ranks the United States twenty-first out of sixty-six in terms of access to civil justice, nineteenth for fundamental rights, sixteenth for the limiting of government powers, fifteenth for regulator enforcement, and twelfth for the openness of government…”

“..the World Bank’s indicators on World Governance, suggest that since 1996 the United States has suffered a decline in the quality of its governance in four different dimensions: government accountability and effectiveness, regulatory quality and control of corruption. Compared with Germany and Hong Kong, the U.S. is manifestly slipping behind. This is a remarkable phenomenon. Even more remarkable is that it is happening almost unnoticed by Americans.”

“…the rule of law, broadly defined, is deteriorating in the United States…..All over the developing world, countries are seizing the opportunity to improve their chances of attracting foreign and domestic investment and raising the growth rate by reforming their legal and administrative systems. The World Bank now does a very good job of keeping tabs on the progress of such reforms.”

“Another approach I have taken is to look at the IFC’s ‘Doing Business’ reports since 2006 to see which developing countries have seen the biggest reduction in the number of days it takes to complete seven procedures: starting a business, getting a construction permit, registering a property, paying taxes, importing goods, exporting and enforcing contracts.”

“Mancur Olson used to argue that, over time, all political systems are likely to succumb to sclerosis, mainly because of rent-seeking activities by organized interest groups. Perhaps that is what we see at work in the United States today.”

“Americans could once boast proudly that their system set the benchmark for the world; the United States WAS the rule of law. But now what we see is the rule of LAWYERS, which is something different. It is no coincidence that lawyers are so over-represented in the U.S. Congress.”

“Olson also argued that it can require an external shock….like a lost war….to sweep away the stifling residues of cronyism and corruption, and allow the rule of law in Bingham’s and Dworkin’s senses of the term to be re-established. It must fervently be hoped that the United States can avoid such a painful form of therapy. But how is the system to be reformed if, as I have argued, there is so much that is rotten within it: in the legislature, in the regulatory agencies, in the legal system itself?”

“The answer, as I shall argue in the next and final chapter is that reform….must come from outside the realm of public institutions. It must come, in short, from us: the citizens.”

Civil and Uncivil Societies

“My Welsh experience taught me the power of the voluntary association as an institution. Together, spontaneously, without any public sector involvement, without any profit motive, without any legal obligation or power, we had turned a depressing dumping ground back into a beauty spot. And every time I wonder down for a swim, I ask myself: how many other problems could be solved in this simple and yet satisfying way?”

“In this final chapter, I want to unlock the black box labeled ‘civil society’. I want to ask how far it is possible for a truly free nation to flourish in the absence of the kind of vibrant civil society we used to take for granted. I want to suggest that the opposite of civil society is uncivil society, where even the problem of anti-social behavior has become a problem for the state. And I want to cast doubt on the idea that the new social networks of the internet are in any sense a substitute for the real networks of the sort that helped me clear my local beach.”

“’America is, among the countries of the world,’ declared Alexis de Tocqueville in the first book of his Democracy in America: the one where they have taken the most advantage of association and where they have applied that powerful mode of action to a greater diversity of objects. Independent of the permanent associations created by law under the names of townships, cities, and counties, there is a multitude of others that owe their birth and development only to individual will. The inhabitant of the United States learns from birth that he must rely on himself to struggle against the evils and obstacles of life: he has only a defiant and restive regard for social authority and he appeals to its authority only when he cannot do without it…In the United States, they associate for the goals of public security, of commerce and industry, of morality and religion. There is nothing the human will despairs of attaining by the free action of the collective power of individuals.’”

“Tocqueville saw America’s political associations as an indispensible counterweight to the tyranny of the majority in modern democracy. But it was the non-political associations that really fascinated him: ‘Americans of all ages, all conditions, all minds constantly unite. Not only do they have commercial and industrial associations in which all take part, but they also have a thousand other kinds: religious, moral, grave, futile, very general and very particular, immense and very small; Americans use associations to give fetes, to found seminaries, to build inns, to raise churches, to distribute books, to send missionaries to the antipodes; in this manner they create hospitals, prisons, schools,. Finally, if it is a question of bringing to light a truth or developing a sentiment with the support of a great example, they associate.’”

“…organizations like the Elks, the Moose, the Rotarians and indeed the my friends the Lions…which once did so much to bring together Americans of different income groups and classes….are in decline in the United States. In a similar vein, Charles Murray’s superb 2012 book Coming Apart makes the argument that the breakdown of both religious and secular associational life in working-class communities is one of the key drivers of social immobility and widening inequality in the United States today.”

“If the decline of American civil society is so far advanced, what hope is there for Europeans?”

“The implementation of Beveridge’s recommendation for a centrally administered system of national insurance and healthcare radically altered the role of many British ‘friendly societies’, either turning them into agencies of government welfare or rendering them obsolete.”

“What is happening? For Putnam, it is primarily technology…first television, then the internet….that has been the death of traditional associational life in America. But I take a different view. Facebook and its ilk create social networks that are huge but weak.”

“It is not technology that has hollowed out civil society. It is something Tocqueville himself anticipated, in what is perhaps the most powerful passage in Democracy in America. Here he vividly imagines a future society in which associational life had died: ‘I see an innumerable crowd of like and equal men who revolve on themselves without repose, procuring the small and vulgar pleasures with which they fill their souls. Each of them, withdrawn and apart, is like a stranger to the destiny of all others: his children and his particular friends form the whole human species for him; as for dwelling with his fellow citizens, he is beside them, but he does not see them; he touches them an does not feel them; he exists only in himself and for himself alone….Above these and immense and tutelary power is elevated, which alone takes charge of assuring their enjoyments and watching over their fate. It is absolute, detailed, regular, far-seeing, and mild. It would resemble paternal power if, like that, it had for its object to prepare men for manhood; but on the contrary, it seeks only to keep them fixed irrevocably in childhood…Thus, after taking each individual by turns in its powerful hands and kneading him as it likes, the sovereign extends its arms over society as a whole; it covers its surface with a network of small, complicated, painstaking, uniform rules through which most original minds and most vigorous souls cannot clear a way to surpass the crowd; it does not break wills, but it softens them, and directs them; it rarely forces one to act, but it constantly opposes itself to one’s acting; it does not tyrannize, it hinders, compromises, enervates, extinguishes, dazes, and finally reduces each nation to being nothing more than a herd of timid and industrious animals of which the government is the shepherd.’”

“Tocqueville was surely right. Not technology, but the state….with its seductive promise of ‘security from the cradle to the grave’….was the real enemy of civil society.”

“Even as he wrote, he recorded and condemned the first attempts to have ‘a government,…take the place of some of the greatest American associations’. ‘But what political power would ever be in a state to suffice for the innumerable multitude of small undertakings that American citizens execute every day with the aid of association?……The more it puts itself in the place of associations, the more particular persons, losing the idea of associating with each other, will need to come to their aid….The morality and intelligence of a democratic people would risk no fewer dangers than its business and its industry if the government came to take the place of associations everywhere. Sentiments and ideas renew themselves, the heart is enlarged, and the human mind is developed only by the reciprocal action of men upon one another.’”

“…I elicited gasps of horror when I uttered the following words: in my opinion, the best institutions in the British Isles today are the independent schools. (Needless to say, those who gasped loudest had all attended such schools.)”

“But we need to recognize the limits of public monopolies in education, especially for societies that have long ago achieved mass literacy. The problem is that public monopoly providers of education suffer from the same problems that afflict monopoly providers of anything: quality declines because of lack of competition and the creeping power of vested ‘producer’ interests. We also need to acknowledge, no matter what our ideological prejudices, that there is a good reason why private educational institutions play a crucial role in setting and raising educational standards all over the world.”

“A mix of public and private institutions with meaningful competition favours excellence. That is why American universities (which operate within an increasingly global competitive system) are the best in the world….twenty-two out of the world’s top thirty….while American high schools (in a localized monopoly system) are generally rather bad…”

“Would Harvard be Harvard if it had at some point been nationalized by the State of Massachusetts or the federal government? You know the answer.”

“All over the world, smart countries are moving away from the outdated model of state education monopolies and allowing civil society back into education, where it belongs.”

“..Sweden and Denmark have been pioneers of educational reform. Thanks to a bold scheme of decentralization and vouchers, the number of independent schools has soared in Sweden. Denmark’s ‘free’ schools are independently run and receive a government grant per pupil, but are able to charge fees and raise funds in other ways if they can justify doing so in terms of results.”

“Today in the U.S., there are more than 2,000 charter schools…like English academies, publicly funded but independently run…bringing choice in education to around 2 million families in some of the country’s poorest urban areas. Organizations like Success Academy have had to endure vilification and intimidation from the U.S. teachers’ unions precisely because the higher standards at their charter schools pose such a threat to the status quo of under-performance and under-achievement. In New York City’s public schools, 62 percent of third, fourth, and fifth graders passed their math exams last year. The latest figure at Harlem Success Academy was 99 percent. For science it was 100 percent. And this is not because the charter schools cherry-pick the best students or attract the most motivated parents. Students are admitted to Harlem Success by lottery. They do better because the school is both accountable and autonomous.”

“If you want to know one of the reasons why Asian teenagers do so much better than their British and American peers in standardized tests, it is this: private schools educate more than a quarter of the pupils in Macao, Hong Kong, South Korea, Taiwan, and Japan. The average PISA score for those places is 10 percent higher than for the UK or US.”

“The education revolution of the twentieth century was that basic education became available to most people in democracies. The education revolution of the twenty-first century will be that good education will become available to an increasing proportion of children. If you are aginst that, you are the true elitist: you are the one who wants to keep poor kids in lousy schools.”

“The larger story I am telling, using education as the example, is that over the past fifty years governments encroached too far on the realm of civil society.”

“Like Tocqueville, I believe that spontaneous local activism by citizens is better than central state action not just in terms of results, but more importantly in terms of its effect on us as citizens. For true citizenship is not just about voting, earning and staying on the right side of the law. It is also about participating in the ‘troop’….the wider group beyond our families…which is precisely where we learn how to develop and enforce rules of conduct: in short, to govern ourselves. To educate our children. To care for the helpless. To fight crime. To keep the streets clean.”

“It will be clear by now that I am much more sympathetic than these gentlemen to the idea that our society…and indeed most societies…would benefit from more private initiative and less dependence on the state. If that is now a conservative position, so be it. Once, it was considered the essence of true liberalism.”

Conclusion

“I have represented the crisis of public debt, the single biggest problem facing Western politics, as a symptom of the betrayal of future generations: a breach of Edmund Burke’s social contract between the present and future.”

“I have suggested that the attempt to use complex regulation to avert future financial crises is based on a profound misunderstanding of the way a market economy works..”

“I have warned that the rule of law, so crucial to the operation of both democracy and capitalism, is in danger of degenerating into the rule of lawyers….”

“And finally, I have proposed that our once vibrant civil society is in a state of decay, not so much because of technology, but because of the excessive pretensions of the state….”

“We humans live in a complex matrix of institutions. There is government. There is the market. There is the law. And there is civil society….this matrix worked astonishingly well, with each set of institutions complementing and reinforcing the rest. That, I believe was the key to Western success in the eighteenth, nineteenth, and twentieth centuries. But the institutions in our times our out of joint.”

“You Didn’t Build That”

“Countries arrive at the stationary state, as Adam Smith argued, when their ‘laws and institutions’ degenerate to the point that elite rent-seeking dominates the economic and political process. I have tried to suggest that this is the case in important parts of the Western world today. Public debt…stated and implicit….had become a way for the older generation to live at the expense of the young and unborn. Regulation has become dysfunctional to the point of increasing fragility of the system. Lawyers, who can be revolutionaries in a dynamic society, become parasites in a stationary one. And civil society withers 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.”

“On July 13, 2012, as I was completing this book, the President of the United States gave a speech that neatly illustrated the point: ‘If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in the roads and bridges. If you’ve got a business….you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet…..There are some things, just like fighting fires, we don’t do on our own….So we say to ourselves, ever since the founding of this country, you know what, there are some things we do better together. That’s how we funded the GI Bill. That’s how we created the middle class. That’s how we built the Golden Gate Bridge or the Hoover Dam. That’s how we invented the Internet. That’s how a man was sent to the moon.’”

“This surely is the authentic voice of the stationary state: the chief mandarin, addressing his distant subjects in the provinces. It is not that the implied interdependence of the private sector and the state is wrong. It is the overstatement of the case that is disquieting, as if it took government to build every small business or, indeed, to ‘create the middle class’. Also striking is the conspicuous absence from the speech of any future project comparable with those cited from the past (the Manhattan Project would have been an even better example, but presumably it is not politically correct).”

“In the same way, President Obama’s second inaugural address suggested that the appropriate yardstick for an effective government was ‘whether it helps families find decent wage, care they can afford, a retirement that is dignified’. By contrast, ‘without a watchful eye, the market can spin out of control’. The words ‘debt’ and ‘deficit’ were not mentioned. The dangers of excessive regulation and litigation were ignored. And civil society scarcely featured at all, as if the hallowed phrase ‘we the people’ is now synonymous with ‘the government’.”

“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 United States as a rhetorical trope nearly devoid of practical content makes this writer, for one, pine for the glad, confident morning of 1989….when it really seemed the West had won, and a great regeneration had begun.”

Posted on September 19, 2013, in Postings. Bookmark the permalink. Leave a comment.

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