A short read, The Great Degeneration goes into the convergence between the West and the rest of the world. Ferguson’s underlying argument is that institutions, political, economical, and social, degenerate over time which is causing countries like the US to come down while other countries rise up and even jump ahead of the US. I’ll go into a few interesting points made in the book and add my own thoughts.
Ferguson argues that the reason the West was able to advance so much faster than the rest of the world was because of its institutions. These institutions include things like getting property rights, time required to set up a new business, time required to get certain permits, and political trustworthiness. Many poor countries today are plagued by institutional inefficiency and corruption. An interesting comparison is between West Germany vs. East Germany and South Korea vs. North Korea. Within a few decades, you saw stark contrasts between the two countries because of their institutions. Furthermore, through central planning, it’s impossible to model and predict an entire modern economy, since every single thing down to the smallest widget must be predicted and accounted for. In central planning, it appears the only way to make the system better is to layer on more oversight.
This is exactly the road which many Western countries, including the US, are going down, especially when it comes to financial oversight. The 2008 financial crisis would have happened regardless of the deregulation which occurred decades ago, as separate banking entities (investment banks: Lehman Brothers, Bear Stearns; retail banks: Washington Mutual, Countrywide) not the mega integrated banks played big roles. “Complex regulation is the disease of which it pretends to be a cure.” One such example is the Dodd-Frank Act. Financial crises will always happen throughout history – regulation already exists and always will exists. It’s a matter of what’s the right amount, and unfortunately, it’s becoming more complex when it should actually go the other direction. It’s impossible to predict and protect from future crises. Rather than constantly lagging behind the industry and adding layer after layer, regulation needs to take a step back and approach the issue from an institutional standpoint.
Walter Bagehot in Lombard Street written in 1873 suggests that the central bank should lend freely during crisis at a high penalty rate. The key is to give discretion rather than coming up with rules and more rules. This goes to my core belief that humans are governed by incentives, in the markets, life, everything. It’s prudent to use incentives to shape regulatory oversight.
Ferguson writes that layers are revolutionaries in dynamic society but become parasites in a stationary one. Civil society withers into a mere no man’s land between corporate interests and big government. Together, Ferguson writes that this is the great degeneration. The US has become a stationary state with a crushing amount of debt. The British had debt of 250% GDP at the end of the Napoleonic Era and managed to get it down to 25% GDP, not through inflation or defaults, but with surpluses and a growth rate which exceeded the interest rate. For the US to do the same, it can’t rely on near 0% interest rates forever. However, for an impressive growth rate, it’s going to need historical innovations (splitting the atom, landing man on moon, computers, internet) which have actually slowed down and decreased in magnitude. When we focus so much on the smaller details like jobs and wages, it’s often hard to take a step back and look at the institution as a whole, and realize that wholesale changes in our system are needed. Otherwise, the US will continue to stall as a stationary state, and possibly, collapse in on itself in the near future.
JL Nexus 