Lecture 1 The Human Hive
In the first 2012 Reith Lecture on ‘The rule of law and its enemies’, Professor Niall Ferguson’s thesis is that the growth of institutions was a major factor leading to the economic predominance of the west since 1500 but that now these institutions have degenerated and this is responsible for the west’s decline.
He shows how western countries began to outstrip the rest of the world after 1500 and how this led to the ‘great divergence’. Western countries moved from being slow-growing economies with few non-state organisations, small centralised non-representative governments and social relationships organised along personal and dynastic lines and became civil societies with many organisation, a larger decentralised government and social relationships governed by impersonal forces such as the rule of law which secured property rights and which encouraged the accumulation of capital.
The Glorious Revolution of 1688 and the Bill of Rights of 1689 began this trend. People won more political rights and used them to expand their economic opportunities. Individuals were protected from arbitrary expropriation by the Crown and parliaments passed legislation which led to the development of transport networks, the factory system and imperialism. The sequence is from the Glorious Revolution to agricultural improvement to imperial expansion to industrial revolution. None of these changes happened inChina, Asian countries or theOttoman Empire, which were characterised by central power, a lack of parliaments and laws which did not encourage private capital accumulation.
Professor Ferguson goes on to consider to what extent the current decline in the west is attributable to a deterioration in the very institutions which enabled the enrichment to happen in the first place. He believes that the problems of excessive debt, mismanaged banks and widening inequality are symptoms of an underlying institutional malaise and he points to the problem of uncontrolled public sector debt.
He begins by giving the historical perspective in which from the late 17th century onwards the English state was able to borrow an increasing amount but to keep interest rates low; this was because parliament protected private property rights and prohibited debt default. So the state began to borrow without defaulting or causing hyperinflation. But modern representative government has accumulated huge debts which are leading to an increasing inter-generational imbalance ie between present generations and future ones. He believes that the present generation has a duty to leave a legacy to those who come after but that modern levels of public spending are breaching that partnership. Uncertainty about the future is beginning to weigh on the present. He considers three scenarios which might deal with the problem.
The first is one where governments are compelled to cut their budget deficits constitutionally by instituting a balance budget amendment which reduces the discretion of lawmakers to practice deficit spending. But this is impossible to do during the current recession, when government spending is needed to stimulate the economy. This could be amplified by the public sector publishing an annual balance sheet which would show all of its assets and liabilities; and also generational accounts to show the inter-generational implications of current policy.
The second scenario is one where governments continue to spend until they get into a fiscal downward spiral, in which borrowing costs rise because of lost credibility and governments are forced to cut spending and raise taxes at the worst moment; the end-game is default and inflation.
The third possibility is one where debt continues to increase but fears of deflation, central bank bond purchases and a flight to safety from the rest of the world keeps government borrowing costs low. But this also implies low to zero growth over decades.
