The Great Degeneration: How Institutions Decay and

Economies Die by Naill Ferguson. ( Penguin Press 2013)

The book is written to answer the question: what exactly has gone
wrong in the Western world in our time?

To understand the true nature of degeneration is important before

we can come up with remedies to cure the problem. Without this the
economic stationary state would have dangerous dynamic political
consequences.

Ferguson refered to Adams Smiths blamed China stasis on its

bureaucracy due to defective laws and institutions. Smith
advised free trade, encouragement for small businesses, less
bureaucracy and less crony capitalism as the prescription, having
witnessed how the British and American economies boomed from
Free Trade. The stationary state mentioned in The Wealth of
Nations was characterized by socially regressive characteristics of
miserably low wages nad a corrupt and monopolistic elite willing to
exploit the law and administration to their advantage.

The West today is stagnating whilst China is growing four times

faster than US and Europe. By 2017 the International Monetary Fund
predicts Chinas GDP will overtake that of US. China in 2010 had
800,000 dollar millionaires and sixty-five billionaires. Of the global
1 % in 2010 1.6 million were Chinese

This great reconvergence cannot be explained due simply the

result of deleveraging: the process of debt reduction that has the
governments and central banks to step into fiscal and monetary
stimulus with the risk of turning a crisis of excess private debt into a
crisis of excess public debt.

For highly indebted economy there are three options:

1. raise the rate of growth above the rate of interest thanks to

technological innovation and a judicious use of monetary
stimulus.
2. Defaulting on larger proportion of the public debt and going
into bankruptcy to escape the private debt
3. Wipe out debts via currency depreciation and inflation

However, in 2010 the debt crisis was facing one of the largest
capitalist economies in the world: USA. The problem is not unique to
America. Japan, Greece, Italy, Ireland and Portugal have debts of
over 100 percent of their GDP.

Conservatives in the US see the problem as being the result of

globalization and technological change, whilst liberals see
widening inequality as the result of insufficient investment in public
education, and the Republicans point to the reduction in
taxation that favors the wealthy as the blame.
The financial crisis has raised the worrying point of excessively large
and leveraged financial institutions deemed too big to fail.
Despite four years of debt, there are still ten highly diversified
financial institutions responsible for three-quarters of total financial
assets under management in the United States. The countrys
largest bank are short of $50bn of meeting the capital requirements
under the new Basel III accord governing bank capital adequacy.

To highlight the problems of modern laws Ferguson highlighted that

it is more expensive to bring a new medicine to the market than 60
years ago and the Bureaucracy behind organizations such as the
Food and Drug Administration would prohibit the sale of table salt if
it was put forward as a new drug on the ground that it is toxic if
consumed in large quantities.

The lack of social mobility is also blamed. Charles Murray called the
Cognitive elite, educated in private universities, intermarried
and congregated in a few super zip codes act as a new caste,
equipped with wealth and power that ensures their progeny will
inherit their lifestyles.

Fergussons Four Black Boxes includes democracy, capitalism,

the rule of law and civil society linked by a complex interlocking
system of institutions similar to bees in a bee-hive. We are one and
at the same time citizens, residents and taxpayers of states,
shareholders, managers or employees; litigants, defendants, judges,
jurors, club members, officials and trustees. Homo economicus is
only one of the many parts we play. Essentially these institutions are
not equal. There are good and bad institutions both with incentives
to reward good and bad behavior. An optimal framework is more
difficult to achieve. Turning bad institutions into good one is easier
than to prevent good ones from deteriorating.