The Great Degeneration: How Institutions Decay and Economies Die (3 page)

Since de Soto published
The Mystery of Capital
, revolutions in countries like Tunisia and Egypt have provided compelling evidence in support of his approach. He sees the ‘Arab Spring’ primarily as a revolt by frustrated would-be entrepreneurs against corrupt, rent-seeking regimes that preyed on their efforts to accumulate capital. The prime example is the story of the twenty-six-year-old Tarek Mohamed Bouazizi, who burned himself to death in front of the governor’s offices in the town of Sidi Bouzid in December 2010.
¹²
Bouazizi killed himself precisely one hour after a policewoman, backed by two municipal officers, had seized from him two crates of pears, a crate of bananas, three crates of apples and a second-hand electronic weight scale worth $179. Those scales were his only capital. He did not have legal title to his family’s home, which might otherwise have served as collateral for his business. His economic existence depended on the ‘fees’ he paid to officials to allow him to operate his fruit-stand on two square yards of public land. Their arbitrary act of expropriation cost Mohamed Bouazizi his livelihood and his life. But his self-immolation sparked a revolution – though how glorious a revolution remains to be seen. It will depend on how far new constitutional arrangements in countries like Tunisia and Egypt achieve the shift from an extractive to an inclusive state, from the arbitrary power of rent-seeking elites to the rule of law for all.

If de Soto’s approach is right, then it does make a great deal of sense to explain the success of the West after the 1500s in terms of institutions, and particularly the rule of law. For what was at the heart of England’s seventeenth-century battles over Parliamentary power was surely the protection of individuals from arbitrary expropriation by the Crown. To specialist historians, of course, all this smacks suspiciously of the old Whig interpretation of history that Herbert Butterfield once held up to ridicule. Yet none of the authors I have been quoting takes a naively determinist view of the historical process. Far from being a story of teleological inevitability, these are authentically evolutionary narratives, in which contingency plays a major role. England was not preordained by Providence to become (as in
1066
and All That
) ‘top nation’. Only a series of near-run things averted an absolutist outcome in the seventeenth century. There were, after all, rebellions in 1692, 1694, 1696, 1704, 1708 and 1722, and a civil war in 1715 – not forgetting the Jacobite Rising of 1745.
¹³

The real question is how decisive an institutional break occurred in 1688. The majority of historians would say: not very. The Glorious Revolution, they argue, was backward looking, ‘conservationist’, with minimal consequences outside the narrow sphere of aristocratic power and patronage.
¹⁴
I think this is too parochial a view. The 1689 Bill of Rights – the Act Declaring the Rights and Liberties of the Subject – states (among other things):

• that levying money for or to the use of the Crown by pretence of prerogative, without grant of Parliament, for longer time, or in other manner than the same is or shall be granted, is illegal;
  
• that election of members of Parliament ought to be free;
  
• that the freedom of speech and debates or proceedings in Parliament ought not to be impeached or questioned in any court or place out of Parliament; and
  
• that for redress of all grievances, and for the amending, strengthening and preserving of the laws, Parliaments ought to be held frequently.
  

With all due respect to the specialists, I think this does deserve to be seen as an historical turning point, even if religious prejudice (anti-Catholicism) loomed as large as constitutional principle at the time.

True, the ‘rights and liberties of the subject’ set out in the 1689 Bill of Rights were conceived at the time as ancient rather than novel. But the consequences of the Glorious Revolution really were new, not least in the way Parliaments after 1689 set about energetically legislating for economic development, protecting the infant textile industry, encouraging the enclosure of common land, promoting turnpike roads and canals. Even war became an increasingly profitable activity as the Whigs launched their bid for global commercial supremacy.
¹⁵
The sequence is clear: first the Glorious Revolution, then agricultural improvement, then imperial expansion, then industrial revolution.

The institutional argument is even more compelling when we take a comparative approach. None of the institutional changes I am talking about happened in Ming or Qing China, where the power of the Emperor and his officials remained unrestrained by semi-autonomous corporate bodies or representative assemblies. Asia had merchants; it did not have companies, much less parliaments.
¹⁶
Institutions as they evolved in the Ottoman Empire were also significantly different in ways that hampered capital formation and economic development, as Timur Kuran has argued. This was because Islamic law took a fundamentally different approach to partnership, inheritance, questions of debt and corporate personalities from the legal systems that developed in Western Europe. Islam had
waqfs
, unincorporated trusts established by individuals, but not banks.
¹⁷

The Inglorious Revolution

So if institutional evolution is the key to understanding Western ascendancy as well as enduring poverty in Africa and elsewhere, is this also how we should understand what is surely the most astonishing trend of our lifetimes: the end of the great divergence, and the advent of a great reconvergence between West and East? I think it is. What we need to do is to apply the insights of the institutional school of economic history to our own time – indeed, to our own Western societies.

Writing in the 1770s, it seemed obvious to Adam Smith that the reasons for China’s puzzling ‘stationary state’ of economic stagnation lay in its ‘laws and institutions’. Could it be, by the same token, that the economic, social and political difficulties of the Western world today reflect a degeneration of our once world-beating institutions? There certainly seems little doubt that the West is experiencing a relative decline unlike anything we have seen in half a millennium. Having been more than twenty times richer than the average Chinese in 1978, the average American is now just five times richer. In a whole range of dimensions, the gap between the West and the Rest has narrowed dramatically. In terms of life expectancy and educational attainment, for example, some Asian countries are now ahead of most in the West. According to the 2009 OECD PISA study, the gap in mathematical attainment between the teenagers of the Shanghai district of China and those of the United States is now as big as the gap between American teenagers and Tunisians.
¹⁸

In some ways, it is easy to explain non-Western success. China has belatedly followed a number of other East Asian countries – the first was Japan – in downloading most (not all) of what I have called the ‘killer applications’ of Western civilization: economic competition, the scientific revolution, modern medicine, the consumer society and the work ethic.
¹⁹
Copying the Western model of industrialization and urbanization tends to work if your entrepreneurs have the right incentives, your labour force is basically healthy, literate and numerate, and your bureaucracy is reasonably efficient. So in what follows I am going to say relatively little about what has gone right in the rest of the world. What interests me here is what has gone wrong in the West.

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.

Debt and the English

The title of this chapter –‘The Human Hive’ – is an allusion to Mandeville’s poem,
The Fable of the Bees
. Mandeville’s central point was that societies with the right institutions can flourish even when the individuals who live in them misbehave. It was not biblical virtue that made eighteenth-century England richer than almost anywhere in the world, but rather secular vices. It was just that these vices had what economists like to call ‘positive network externalities’ precisely because the institutions of British society at that time were favourable to saving, investment and innovation.

After the Glorious Revolution of 1688, as we have seen, the monarch was subordinated to Parliament. Not only did the Whigs who dominated the new regime usher in an age of agricultural improvement, commercial growth and imperial expansion. Financial institutions also developed rapidly: William of Orange brought more than just Protestantism with him from Holland; he also brought templates for a central bank and a stock market. Meanwhile, numerous associations, societies and clubs encouraged scientific and technological innovation. As Robert Allen has shown, the specifically British combination of cheap coal and dear labour encouraged innovation in productivity-enhancing technologies, especially in textile production.
²⁰
But the institutions provided the indispensable framework for all this. Here is Mandeville’s version:

A Spacious Hive well stock’d with Bees,

That lived in Luxury and Ease;

And yet as fam’d for Laws and Arms,

As yielding large and early Swarms;

Was counted the great Nursery

Of Sciences and Industry.

No Bees had better Government,

More Fickleness, or less Content.

They were not Slaves to Tyranny,

Nor ruled by wild Democracy;

But Kings, that could not wrong, because

Their Power was circumscrib’d by Laws.

There was one particular institution that decisively altered the trajectory of English history. In a seminal article published in 1989, North and Weingast argued that the real significance of the Glorious Revolution lay in the credibility that it gave the English state as a sovereign borrower. From 1689, Parliament controlled and improved taxation, audited royal expenditures, protected private property rights and effectively prohibited debt default. This arrangement, they argued, was ‘self-enforcing’, not least because property owners were overwhelmingly the class represented in Parliament. As a result, the English state was able to borrow money on a scale that had previously been impossible because of the sovereign’s habit of defaulting or arbitrarily taxing or expropriating.
²¹
The late seventeenth and early eighteenth century thus inaugurated a period of rapid accumulation of public debt without any rise in borrowing costs – rather the reverse.

This was in fact a benign development. Not only did it enable England to become Great Britain and, indeed, the British Empire, by giving the English state unrivalled financial resources for making – and winning – war. By accustoming the wealthy to investment in paper securities, it also paved the way for a financial revolution that would channel English savings into everything from canals to railways, commerce to colonization, ironworks to textile mills. Though the national debt grew enormously in the course of England’s many wars with France, reaching a peak of more than 260 per cent of GDP in the decade after 1815, this leverage earned a handsome return, because on the other side of the balance sheet, acquired largely with a debt-financed navy, was a global empire. Moreover, in the century after Waterloo, the debt was successfully reduced with a combination of sustained growth and primary budget surpluses. There was no default. There was no inflation. And Britannia bestrode the globe.

The Partnership between the Generations

In the rest of this chapter, I want to make an argument about our modern representative government – and what ails it. My starting assumption is the conventional one that it is generally better for government to be in some way representative of the governed than not. This is not just because democracy is a good thing
per se
, as Amartya Sen has argued, but also because a representative government is more likely than an authoritarian government to be responsive to shifting popular preferences and is therefore less likely to make the kind of horrendous mistakes authoritarian rulers often make. Those today who dismiss Western democracy as ‘broken’ – and I hear their lamentations with growing frequency – are wrong to yearn for some kind of Beijing model of a one-party state in which decisions are taken by technocrats on the basis of five-year plans. It was the same system that gave China both Special Economic Zones and the One-Child Policy: the former a success, the latter a disaster, the full costs of which are as yet incalculable.

But the critics of Western democracy are right to discern that something is amiss with our political institutions. The most obvious symptoms of the malaise are the huge debts we have managed to accumulate in recent decades, which (unlike in the past) cannot largely be blamed on wars. According to the International Monetary Fund, the gross government debt of Greece will reach 182 per cent of GDP in 2013. For Italy the figure is 128, for Ireland 119, for Portugal 124 and for the United States 112. Britain’s debt is approaching 93 per cent. Japan – a special case as the first non-Western country to adopt Western institutions – is the world leader, with a mountain of government debt approaching 245 per cent of GDP, more than triple what it was twenty years ago.
*
Even more striking are the ratios of debt to government revenue, which after all is where the interest and redemption payments must come from (see Figure 1.2).

Often these debts get discussed as if they themselves are the problem, and the result is a rather sterile argument between proponents of ‘austerity’ and ‘stimulus’. I want to suggest that they are a consequence of a more profound institutional malfunction.

Figure 1.2

Source: International Monetary Fund, World Economic Outlook Database, April 2012: http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx.