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How Economies Die

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DegenerationSamuel Gregg, Director of Research at Acton, recently reviewed Niall Ferguson’s latest, The Great Degeneration: How Institutions Decay and Economies Die. In the book, Ferguson discusses the symptoms of a decaying society and explains what causes rich economies to decline.

Though the book is a short one and written for a nonspecialist audience, Ferguson develops a very strong case to illustrate how the hollowing out of the rule of law, the deterioration of representative government into soft despotism, the increasingly crony-capitalist features of today’s market economies, and the ongoing implosion of civil society are now costing us dearly. Part of the problem, Ferguson makes clear, is that there is no easy fix to these particular problems. One cannot vote something like rule of law back into existence. A flourishing civil society does not simply spring forth ex nihilio. Unfettering the market from literally tens of thousands of regulations is no easy exercise and cannot be accomplished by the stroke of a pen.

In developing his argument, Ferguson begins by explaining just how bad the public finances of most Western countries are. The economic distress of so many nations in recent years, however, cannot be attributed, Ferguson suggests, solely to the relatively limited “deleveraging” that some countries have chosen to pursue in the wake of the 2008 financial crisis. Rather we find ourselves living in what Adam Smith called “the stationary state” in the Wealth of Nations. This state is characterized by two features. The first is terribly low wages for the majority of people. The second feature is what Ferguson summarizes as “the ability of a corrupt and monopolistic elite to exploit the system of law and administration to their own advantage” (p. 9).

Yet it is not enough, Ferguson claims, to think of this situation in terms of the different effects of “open” and “closed” sets of institutions, which is the way that many economists describe the reasons for institutional decline and success. Here, he maintains, “the historical approach reveals a point that is often overlooked” (p. 19). In this regard, Ferguson has in mind a type of comparative approach whereby one notices how some countries’ institutions seem to be becoming more conducive to growth, whereas countries whose institutions were once growth-friendly find the same institutions entering a spiral of decline from which it is difficult to escape.

Read Gregg’s full review at The Independent Review.

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Sarah Stanley

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