The Great Degeneration: How Institutions Decay and Economies Die (2 page)

Perhaps, on reflection, that electronic metaphor is the wrong one. After all, most institutions evolve organically; they are not designed in California by the historical equivalent of Steve Jobs. A better analogy might be with the collective structures we see in the natural world. Beehives are the classic example. Ever since the satirist Bernard Mandeville’s book
The Fable of The Bees: or, Private Vices, Public Benefits
, published in 1714, people have drawn parallels between humans in a market economy and bees in a hive. The parallel has its merits, as we shall see, though it is actually in our political organization rather than our economic organization that we most closely resemble bees (a point Mandeville well understood). The simple point is that institutions are to humans what hives are to bees. They are the structures within which we organize ourselves as groups. You know when you are inside one, just as a bee knows when it is in the hive. Institutions have boundaries, often walls. And, crucially, they have rules.

For some readers, I dare say, the word ‘institution’ still conjures up a Victorian vision of lunatic asylums: poor old Niall, he’s in an
institution
now. That is not the kind of institution I mean. I am talking about, for example, political institutions, like the British Parliament or the American Congress. When we talk about ‘democracy’, we are in fact referring to a number of different interlocking institutions. People sticking pieces of paper into ballot boxes, yes. Their elected representatives making speeches and voting in a large assembly hall, yes. But those things alone do not automatically give you democracy. Outwardly, the legislators of countries like Russia and Venezuela are elected, but neither qualifies as a true democracy in the eyes of impartial observers, not to mention those of local opposition leaders.

Just as important as the act of putting crossed or stamped papers in ballot boxes are the institutions – usually parties – that nominate candidates for election. Just as important as the parties are the officials – civil servants, judges or ombudsmen – whose responsibility it is to ensure that the elections are fair. And then it matters hugely how the legislature itself actually operates. A body of elected representatives can be anything from a wholly sovereign entity, as the British Parliament was until European law began to encroach on it, to an impotent rubber stamp, like the old Supreme Soviet. Its members can stoutly uphold the interests of their constituents (including those who voted against them), or they can be in hock to the vested interests that financed their election campaigns.

In August 2011, as Colonel Gaddafi’s regime in Libya was falling apart, a BBC correspondent in Benghazi spotted some remarkable graffiti on a wall. On the left side of the wall there was a classically straightforward revolutionary message: ‘The tyrant should fall, he’s a monster.’ Direct and to the point. But on the right side, the message was anything but simple. It read: ‘We want constitutional rule and for the president to have less authority and the four-year presidential term should not be extended.’
¹⁷
As that (quite correctly) suggests, the devil in any political transition lies in the detail of the constitution, not to mention the rules governing the constituent assembly that designs it.

How does the legislature stand relative to the executive and the judiciary? Most constitutions spell that out. But how do the organs of civilian government relate to the military, a question of burning importance in Egypt? Nor can one stop there. Modern nation-states have developed a whole range of institutions that were undreamed of as recently as a hundred years ago, dedicated to regulating economic and social life and redistributing income. The welfare state is not part of democracy as the ancient Athenians conceived of it. In bee terms, the welfare state seems to create an ever increasing number of dependent drones whom the worker-bees have to support. It also employs a great many bees simply to transfer resources from the workers to the drones. And it seeks to finance itself by accumulating claims on future bees, in the form of public debt. In Chapter 1, I will consider this and other distributional aspects of democracy. In particular, I will ask if we are witnessing a fundamental breakdown in what Edmund Burke called the partnership between the generations.

These days, nearly everyone claims to be democratic. I have even heard it claimed that the Chinese Communist Party is democratic. ‘Capitalist’, by contrast, is a word too often used as a term of abuse to be much heard in polite company. How do the institutions of the democratic state and those of the market economy relate to one another? Do corporations play an active part in politics, through lobbyists and campaign contributions? Do governments play an active part in economic life, through subsidies, tariffs and other market-distorting devices, or through regulation? What is the right balance to be struck between economic freedom and government regulation? Chapter 2 will address these issues. The specific question I ask is how far very complex regulation has become the disease of which it purports to be the cure, distorting and corrupting both the political and the economic process.

A crucial institutional check on both political and economic actors is the rule of law. It is inconceivable that either democracy or capitalism could function without an effective system of justice, where the rules devised by the legislature can be enforced, where the rights of the individual citizen can be upheld and where disputes between citizens or corporate entities can be resolved in a peaceful and rational manner. But which system of law is better: common law? or some other form? The rule of
sharia
is clearly very different from the rule of law as the English political philosopher John Locke understood it.

In some ways, the key to comparing different codes of law is what might be called ‘the law of rules’: the way that law itself is made. In some systems, like Islam, the rules have been prescribed in considerable detail, for eternity, by a divinely inspired prophet. According to the stricter schools of Muslim thought, they cannot be changed. In others, like the English common law, the rules evolve organically, as judges weigh up the competing claims of precedent and the changing needs of society. Chapter 3 will ask the question whether one system of law – in particular, the common law – is superior to the others. I will also ask how far the English-speaking world still enjoys an advantage in this respect. In particular, I want to warn that the rule of law is in danger – at least in parts of the ‘Anglosphere’ – of degenerating into something more like the rule of
lawyers
. Are Americans really better served by their legal system than Englishmen were by theirs at the time of Dickens’s
Bleak House
?

Finally, there is civil society. Properly understood, it is the realm of voluntary associations: institutions established by citizens with an objective other than private profit. These can range from schools – although in modern times most educational institutions have been absorbed into the public sector – to clubs dedicated to the full range of human activities, from aeronautics to zoology. Once again we encounter the importance of rules, though here they may seem trivial, like the obligation on members of most London clubs to wear ties and keep their jackets on at dinner, even on a sweltering-hot evening.

There was a time when the average Briton or American belonged to a startlingly large number of clubs and other voluntary societies. It was one of the features of the English-speaking world that most impressed the great French political theorist Alexis de Tocqueville. But in Chapter 4 I shall ask why that is no longer true, and how far it is possible for a truly free society to flourish in the absence of the kind of vibrant civil society we used to take for granted. Are the new social networks of the internet in any sense a substitute for traditional associational life? I shall argue that they are not.

Why Institutions Fail

If we are like bees in the realm of politics, playing our assigned parts in an essentially hierarchical hive, we have more freedom of action in the economic sphere. There, our institutions recall the wildlife of the Serengeti, the ‘endless plains’ of northern Tanzania and southern Kenya. Some of us are wildebeest, grazing as we move in the herd. Others of us (rather fewer) are predators. I am afraid there are some scavengers and parasites, too. The whole thing is an ecosystem in which Darwinian forces are constantly at work, naturally selecting the fittest from the unfit. Likewise, in civil society, we form our groups and bands rather in the way that chimpanzees and baboons do. Like the clubs we humans used to be so fond of joining, a baboon troop has its rules and its hierarchies.

Of course, there is no law governing the wild animals of Africa other than the proverbial law of the jungle. We humans are different. While part of our lives may be spent in a Darwinian struggle, we do expect there to be rules: rules to constrain our rulers; rules to constrain the predators and parasites who prey on the herbivores. The rule of law, properly understood, has no real analogue in the non-human world. The nearest I can think of is the man-made infrastructure that surrounds us, shaping the landscape, sheltering us and constraining us. The law sets parameters in the same way that walls and fences do. This way is much too steep; that way you risk drowning. Some systems of law resemble centrally planned cities: like Moscow, with its over-wide avenues and homogenizing apartment blocks. Others are more like London: an unplanned complex of irregular streets and idiosyncratic buildings, the organic product of centuries of building and rebuilding by private and public property owners.

What makes humans so very interesting to study – the reason I am an historian and not a zoologist – is that our lives combine all of these elements. We exist, simultaneously, in a bewildering number of institutions. We are at one and the same time citizens, residents and taxpayers of states; shareholders, managers or employees; litigants, defendants, judges and jurors; club members, officials and trustees.
Homo economicus
is only one of the many parts we play.

The key point is that not all sets of institutions, when you add up the sum of the parts, are equal. There are good and bad combinations. In some sets of institutions, people can flourish freely as individuals, as families, as communities. That is because the institutions effectively incentivize us to do good things – like, for example, inventing new and more efficient ways of working, or co-operating with our neighbours rather than trying to murder them. Conversely, there are institutional frameworks that have the opposite effect: incentivizing bad behaviour like killing people who annoy us, or stealing property we covet, or idling away our time. Where bad institutions pertain, people get stuck in vicious circles of ignorance, ill health, poverty and, often, violence. Unfortunately, history suggests that there are more of these suboptimal frameworks than there are optimal frameworks. A really good set of institutions is hard to achieve. Bad institutions, by contrast, are easy to get stuck in. And this is why most countries have been poor for most of history, as well as illiterate, unhealthy and bloody.

I admire contemporary social scientific work that distinguishes between ‘open’ and ‘closed’ sets of institutions,
¹⁸
but as an historian I find that distinction too simplistic. For one of the puzzles of modern history is that successful societies – like eighteenth-century England – often had institutions that today most people would be inclined to condemn. Already by the time of the Victorians, Hanoverian England looked shockingly corrupt in retrospect. And even in the 1850s, to Dickens, England’s rule of law was still an object of derision, not admiration. Moreover, the historical approach reveals a point that is often overlooked. It is certainly desirable that societies with bad institutions should get better ones. We see that process going on today all over the world, in much of Asia, in parts of South America and even in Africa. But there is a more insidious process that is going on at the same time, whereby societies with good institutions gradually get worse ones. Why is this? Who exactly are the enemies of the rule of law, the people responsible for the marked deterioration that I detect in our institutions on both sides of the Atlantic?

My answers to these questions owe a considerable debt to a now large body of academic literature. Major influences on my thinking include Douglass North, who won the Nobel Prize for Economics for his work on institutions; the pre-eminent economist of modern Africa, Paul Collier, author of
The Bottom Billion
and
Plundered Planet
; Hernando de Soto, the Peruvian economist and author of
The Mystery of Capital
; Andrei Shleifer and his numerous co-authors, who have pioneered an economic approach to the comparative study of legal systems; and Jim Robinson and Daron Acemoglu, whose book
Why Nations Fail
asks similar questions to the ones that interest me. I owe these and the other scholars acknowledged in the notes a deep intellectual debt.

However, they would be the first to agree that much more attention has been paid to the question of why poor nations stay poor, as opposed to the question of why rich nations revert to poverty, a somewhat less common phenomenon. My concern here is not with economic development but rather with the opposite process of institutional degeneration. My over-arching question is: what exactly has gone wrong in the Western world in our time? I answer that question in the belief that, until we understand the true nature of our degeneration, we will be wasting our time, applying quack remedies to mere symptoms. I am also actuated by the fear that, paradoxically, the economic stationary state may have dangerously dynamic political consequences.

Explaining the Great Divergence

‘Nature . . . is a thynge of great myghte and efficacye,’ wrote the English humanist Richard Taverner in his
Garden of Wysdome
, ‘but surely institution or bringynge up, is moche mightier, whiche is hable to amende, reforme & strengthen a croked and evyll nature, and turn the same into a good nature.’
¹
Taverner’s words sum up what is fast becoming a compelling consensus: that institutions – in the broadest sense of the term – determine modern historical outcomes, more than natural forces like the weather, geography or even the incidence of disease.

Figure 1.1

Source: Angus Maddison, ‘Statistics on World Population, GDP and Per Capita GDP, 1–2008
AD
’: http://www.ggdc.net/MADDISON/Historical_Statistics/vertical-file_02-2010.xls.

Why, after around 1500, did Western civilization – as found in the quarrelsome petty states of Western Eurasia and their colonies of settlement in the New World – fare so much better than other civilizations? From the 1500s until the late 1970s, there was an astonishing divergence in global living standards, as Westerners became far richer than, well, Resterners. As recently as 300 years ago, the average Chinese was probably still a bit better off than the average North American. By 1978, the average American was at least twenty-two times richer than the average Chinese (see Figure 1.1).
²
History’s great divergence was not just economic. It was also a divergence in terms of longevity and health. As recently as 1960, life expectancy in China was in the low forties, whereas already in the United States it had reached seventy.
³
Westerners dominated the realm of science, as well as that of popular culture. To an astonishing degree they also continued to rule the world even after the demise of the dozen or so formal empires which, at their zenith, had covered nearly three-fifths of the world’s land surface and population and accounted for at least three-quarters of global economic output. It was a conceit of the Cold War to refer to the Soviet empire as ‘the East’; in reality it was the last European empire to rule over large tracts of Asia.

How are we to explain this, the ultimate global imbalance, which placed a minority of mankind – at most a fifth – in such a position of material and political dominance over the rest? It seems implausible that it was due to some innate superiority of Europeans, as the racial theorists of the nineteenth and twentieth centuries often argued. The gene pool was surely not so different in the year 500, when the western end of Eurasia was entering a period of nearly a thousand years of relative stagnation. Likewise, the climate, topography and natural resources of Europe were much the same in 1500 as they had been in 500. Throughout the Dark Ages and medieval period, European civilization showed no obvious sign of outperforming the great Oriental empires. With all due respect to Jared Diamond, geography and its agricultural consequences may explain why Eurasia did better than other parts of the world; but they can’t explain why the western end of Eurasia did so much better than the eastern end after 1500.
⁴

Nor can we explain the great divergence in terms of imperialism; the other civilizations did plenty of that before Europeans began crossing oceans and conquering. For the historian Kenneth Pomeranz, who coined the phrase ‘the great divergence’, it was really just a matter of luck. Europeans were fortunate enough to stumble on the so-called ‘ghost acres’ of the Caribbean, which were soon providing the peoples of the Atlantic metropoles with abundant sugar, a compact source of calories unavailable to most Asians. Europeans were also fortunate to have more readily accessible deposits of coal.
⁵
Yet this argument leaves unanswered the questions of why the Chinese were not as assiduous as Europeans in the search for colonial ghost acres overseas; and why they were unable to solve the technical challenges of mining coal the way the British did.

I believe the best answers to the question of what caused the great divergence focus on the role of institutions. For example, Douglass North, John Wallis and Barry Weingast distinguish between two phases or patterns of human organization.
⁶
The first is what they call the natural state or ‘limited access pattern’, characterized by:

• a slow-growing economy;
  
• relatively few non-state organizations;
  
• a small and quite centralized government, operating without the consent of the governed; and
  
• social relationships organized along personal and dynastic lines.
  

The second is the ‘open access pattern’, characterized by:

• a faster-growing economy;
  
• a rich and vibrant civil society with lots of organizations;
  
• a bigger, more decentralized government; and
  
• social relationships governed by impersonal forces like the rule of law, involving secure property rights, fairness and (at least in theory) equality.
  

In their account, West European states – led by England – were the first to make the transition from ‘limited access’ to ‘open access’. In order to do this, a country has to ‘develop institutional arrangements that enable elites to create the possibility of impersonal intra-elite relationships’ and then to ‘create and sustain new incentives for elites to successfully open access within the elite’. At this point, ‘Elites transform their personal privileges into impersonal rights. All elites are given the right to form organizations . . . at that point, the logic . . . has changed from the natural state logic of rent-creation through privileges to the open access logic of rent-erosion through entry.’

Between the Conquest and the Glorious Revolution, England went from being a ‘fragile’ natural state to being a ‘basic’ one and then a ‘mature one’, characterized by an ‘extensive set of institutions governing, regulating, and enforcing property rights in land capable of supporting impersonal exchange among elites’. The rule of law for elites was one of the three ‘doorstep conditions’, prior to the transition to an open-access system, the others being the emergence of ‘perpetually lived organizations in the public [and] private sphere[s]’ and the ‘consolidated control of the military’. For North, Wallis and Weingast, the decisive breakthrough to open access came with the American and French Revolutions, which saw the spread of incorporation in various forms, and the legitimation of open competition in both the economic and political spheres. At each stage of the argument, then, their emphasis is on institutions, beginning with changes in English land law after the eleventh century, and culminating with changes in the legal treatment of corporate entities in the nineteenth century.

In a similar vein, Francis Fukuyama’s
Origins of Political Order
defines ‘the three components of a modern political order’ as ‘a strong and capable state, the state’s subordination to a rule of law and government accountability to all citizens’.
⁷
These three components came together for the first time in Western Europe, with England once again the trailblazer (though Fukuyama gives credit to the Netherlands, Denmark and Sweden for not being far behind). Why Europe and not Asia? Because, says Fukuyama, the idiosyncratic development of Western Christendom tended to undercut the importance of extended families or clans.

In their book
Why Nations Fail
, Daron Acemoglu and Jim Robinson make a striking comparison between Egypt today and England in the late seventeenth century:

The reason that Britain is richer than Egypt is because in 1688 . . . England . . . had a revolution that transformed the politics and thus the economics of the nation. People fought for and won more political rights and used them to expand their economic opportunities. The result was a fundamentally different political and economic trajectory, culminating in the Industrial Revolution.
⁸

In their terms, England was the first country to move to having ‘inclusive’ or ‘pluralistic’ rather than ‘extractive’ political institutions. Note that other West European societies – for instance, Spain – failed to do this. As a result, the outcomes of European colonization in North and South America were radically different. The English exported inclusive institutions; the Spaniards were content to superimpose their extractive ones on top of those they took over from the Aztecs and Incas.

The imperial context also reveals the difference between the institutional argument and the older cultural interpretation – first formulated by Max Weber, later revived by David Landes – that there was some link between Protestantism and the ‘spirit of capitalism’. Unlike the Nazi in Hanns Johst’s play
Schlageter
, I do not reach for my revolver when I hear the word culture, but I do issue a polite health warning. It is very tempting to attribute historical agency to an amalgam of ideas and norms – Greek philosophy, the Hebrew Commandments, Roman law, Christ’s ethics, the doctrine of Luther and Calvin – called something like ‘Judaeo-Christian culture’. But there is a real risk of cherry-picking here. Somehow no really terrible Western ideas like, say, witch-burning or communism ever get mentioned, though they seem just as plausibly the products of Judaeo-Christian culture as the spirit of capitalism. In any case, while culture may instil norms, institutions create incentives. Britons versed in much the same culture behaved very differently depending on whether they emigrated to New England or worked for the East India Company in Bengal. In the former case we find inclusive institutions, in the latter extractive ones.

Glorious Institutions

The debate about the causes of the great divergence is of more than merely historical interest. Understanding Western success helps us to frame some rather more urgent questions about the recent past, the present and possible futures. One reason the institutional argument is so compelling is that it also seems to offer a good explanation for the failure of most non-Western countries, until the later twentieth century, to achieve sustained economic growth. Acemoglu and Robinson illustrate the power of institutions relative to geography and culture by describing the city of Nogales, which is bisected by the US–Mexican border. The difference in living standards between the two halves is shocking.
⁹
The same point can be made with regard to the two great experiments run during the Cold War. Essentially, we took two peoples – the Koreans and the Germans – and divided them in two. South Koreans and West Germans got capitalist institutions; North Koreans and East Germans got communist ones. The divergence that occurred in the space of just a few decades was enormous. Their analysis makes Acemoglu and Robinson sceptical that China has yet made the decisive breakthrough to sustainable growth. In their view, Chinese market reforms remain subject to the decisions of an exclusive and extractive elite, which continues to determine the allocation of key resources.

Development economists – notably Paul Collier – have been thinking in these terms for some time.
¹⁰
The case of Botswana seems to illustrate the point that even a sub-Saharan African economy can achieve sustained growth if its people are not plagued by chronic corruption and/or civil war like, say, the Democratic Republic of Congo. Unlike most post-colonial African states, Botswana succeeded in establishing inclusive not extractive institutions when it gained its independence. The Peruvian economist Hernando de Soto is another who has been arguing for years that institutions are what matter.
¹¹
By slogging away in the shanty towns of Lima, Port-au-Prince, Cairo and Manila, he and his researchers established that, though their incomes are low, the poor of the world have a surprisingly large amount of property. The problem is that this property is not legally recognized as theirs. It is nearly all held ‘extra-legally’. This is not because the poor are tax-dodgers. As de Soto makes clear, the black economy has its own kind of taxation – protection rackets and the like – which make legality positively attractive. It is just that getting legal title to a house or a workshop is well-nigh impossible.

As an experiment, de Soto and his team tried to establish a small garment workshop on the outskirts of Lima on a legal basis. It took them a staggering 289 days to do so. And when they tried to secure legal authorization to build a house on state-owned land, it took even longer: six years and eleven months, during which they had to deal with fifty-two different government offices. Dysfunctional institutions like these, de Soto argues, are what force the poor to live outside the law. We should not imagine that the extra-legal economy is marginal. One of the most memorable findings of de Soto’s book
The Mystery of Capital
is that the total value of the real estate held (but not legally owned) by the poor of developing countries amounts to $9.3 trillion. Yet, in the absence of legal titles and a working system of property law, this is all so much ‘dead capital’: ‘like water in a lake high up in the Andes – an untapped stock of potential energy’. It cannot be efficiently used to generate wealth. Only with a working system of property rights can a house become collateral, can its value be properly established by the market, can it easily be bought and sold.