CK, thank you for the link to the introduction. I liked it and will follow it.
I can see the rationale of what he is saying. In my opinion however and once again, Mr. Ferguson fails to identify the ultimate causes of the failure of institutions.
But to take it from the top. From the start of the lecture, 3:30 minutes in, Mr. Ferguson talks about the divide between the “rich” and the “not rich” although he does not give a definition of what “rich” may be. I live in the Middle East. By and large, societies in this part of the world are considered poor and under developed. But in talking to people, “poor” refers exclusively to a difference in income from an absolute point of view. Purchasing power never makes it into the discussion as, indeed, free time does not either. The average salary in Italy may be 1200 Euros as compared to the average salary in Egypt of 100 Euros but few discuss what you can do with each salary in its respective country. That is not to say that Egyptians are well off. Rather, it is to say that Europeans are not much better off.
A generally accepted definition of what constitutes wealth is sorely missing and what there is, is sorely lacking. Since you follow this blog, I hope you understand that money cannot be and is not wealth. Money is but the vehicle that could enable you to acquire wealth. In an environment where the creation of money and credit deliberately, consistently and aggressively outpaces the creation of wealth, the system is inherently destined to fail.
But I digress.
Mr. Ferguson’s central contention is that what makes the difference between a society becoming rich and another not becoming rich, lies in the institutions that are created. Extractive Institutions characteristics of developing societies hinder development whereas Inclusive Institutions facilitate the creation and accumulation of wealth.
But what is it that allowed Western societies to develop Inclusive Institutions? Emerging from the dark ages was not painless and came at a price. A steep price it was too. It was a multi-pronged process involving the arts as much as science and politics. It was an all encompassing intellectual effort borne of a set of social values and priorities that were not and are still not evident today in developing societies.
I cannot agree with Mr. Ferguson’s assertion that today’s Arab Spring is similar to the 1688 revolution in Great Britain. There are no grounds to compare neither the skill set nor the social values and priorities of English or French or German society then and Arab society today.
So, in my opinion, Mr. Ferguson is still analyzing what in fact are but the proximate causes of a social, industrial, scientific and economic development that allowed the West to gain preeminence over other societies.
What I found interesting in this introductory lecture is the comparison of Debt to GDP ratios of the then hegemon England and today’s Western hegemon. Namely, the part that interests me is the material advantage gained by a sovereign willing to spend in excess of tax revenue.
But here is the the interesting part.
We have established that, due to the debasement of the currency, deficit spending enabled by the expansion of money and credit in excess of the creation of wealth, brings forward in time consumption and production patterns. At the outset, this dynamic does appear to yield desirable results as deliberate and relentless debasing of the currency generates distorted signals resulting progressively in malinvestment, excess productive capacity, depletion of natural resources and a gradual impoverishment of society. (Two side notes here. First – the impoverishment of society is reflected in the fact that from being able to live on one salary, not only do households gradually require two incomes but, once savings are depleted, households must necessarily make use of credit to make ends meet. Second – the institutions that are created along the way though ostensibly serving the public good at the outset, must inevitably succumb to the monetary reality because as the currency is debased and monetary policy loses traction, these same institutions must be relied upon to first hide then gradually falsify reality in order to support the economic model imposed upon society.) As this dynamic develops, the limits of the system are quickly reached. As the monetary system threatens to collapse, the country making use of these policies faces a choice: write off debt or impose the same monetary policy unto other sovereigns. The only third choice available would be the abandonment of this type of monetary policy for another; though an unlikely choice this would be on the part of a hegemon.
So, Mr. Ferguson claims that although deficit spending did help England become the global hegemon, this policy came at no cost because eventually England post Waterloo went on to enjoy sustained growth and primary budget surpluses. Now, I don’t know enough about England post Waterloo to express a factual opinion. But I will say that economic and social dynamics are not events. Dynamics evolve over time and in the particular case of economics, these are dynamics that evolve over generations. England may well have enjoyed a spell of prosperity whilst it astrode the world then, but it clearly does not astride the world today.
Interestingly though, England has remained the beating heart of the global financial system since then. And it is from England that banks led a pitched fight against the then fledgling USofA for control of the monetary system which culminated first in the establishment of the National Bank Act in the early 1860s and then the Federal Reserve in 1913.
From the 1860s onwards, Western countries gradually moved from controlling people physically (slaves) to controlling the wages of society with, arguably and as is evident today, much the same result. Finance has played an increasingly important role since the post Waterloo world of Mr. Ferguson. Today we find ourselves in a situation where most of the productive capital of society belongs directly, or indirectly, to a very restricted group of financial entities and where society is thoroughly dependent on the monetary authority for their survival. At a time when the only solution to our predicament is to reduce spending at state level, society cannot possibly convert from full dependence do self sufficiency without tragic and dramatic dislocations.
A final note on deficit spending.
Deficit spending cannot by itself justify a rise in wealth and military might. Deficit spending can indeed help but in order for it to be successful a society must first possess significant intellectual capital and a set of social values and priorities that allow intellectual capital to be applied positively and effectively. If that were not the case, then Zimbabwe or Argentina or any number of developing countries could today be sovereigns with significant clout. But despite the gargantuan deficit spending engaged-in by most fringe countries over many decades and to the exclusion of some local realities, none today bears any significance either politically or economically on the global scene.
So, when all is said and done, in my opinion Mr. Ferguson still fails to identify the primary causes both for the rise to preeminence of Western society and for the failure of public institutions.