The black swan event investors should fear is war, and the tapering that should concern them most is “geopolitical tapering.”
That was the impassioned message that economic historian and prominent conservative Niall Ferguson delivered on the closing day of Alegtris’ annual investment conference in San Diego, a tough hurdle, Ferguson quipped, saying “it’s hard to explain to people sitting in California that life can ever get bad.”
But noting that an act of state-sponsored terror in Sarajevo in 1914 precipitated World War I, the Harvard historian emphasized that investors in 2014 have more to worry about than a monetary taper that is often talked about but hasn’t actually happened.Sponsored Ads
To those who might argue that trade in the region is too important to yield to war, Ferguson quotes Japanese prime minister Shinzo Abe, who himself noted that the huge volume of trade between Britain and Germany in 1914 did not prevent those great powers from entering protracted military conflict.
After Ferguson’s prosecution and execution there isn’t really enough of Krugman left to bury. Yet in case you missed it … let us reprise, and celebrate, the event. The essence of Ferguson’s argument nicely is summed up in Part 3:
I am not an economist. I am an economic historian. The economist seeks to simplify the world into mathematical models – in Krugman’s case models erected upon the intellectual foundations laid by John Maynard Keynes. But to the historian, who is trained to study the world “as it actually is”, the economist’s model, with its smooth curves on two axes, looks like an oversimplification. The historian’s world is a complex system, full of non-linear relationships, feedback loops and tipping points. There is more chaos than simple causation. There is more uncertainty than calculable risk.
The most that we can do in this unpredictable world is read as widely and deeply as we can, think seriously, and then exchange ideas in a humble and respectful manner. Nobody ever seems to have explained this to Paul Krugman. There is a reason that his hero John Maynard Keynes did not go around calling his great rival Friedrich Hayek a “mendacious idiot” or a “dope”.
For too long, Paul Krugman has exploited his authority as an award-winning economist and his power as a New York Times columnist to heap opprobrium on anyone who ventures to disagree with him. Along the way, he has acquired a claque of like-minded bloggers who play a sinister game of tag with him, endorsing his attacks and adding vitriol of their own. I would like to name and shame in this context Dean Baker, Josh Barro, Brad DeLong, Matthew O’Brien, Noah Smith, Matthew Yglesias and Justin Wolfers. Krugman and his acolytes evidently relish the viciousness of their attacks, priding themselves on the crassness of their language.
He reprises the coup de grace — that Krugman is guilty of behavior unbecoming to a gentleman and a scholar — at Project Syndicate, in Civilizing the Marketplace of Ideas:
The decline of the West is something that has long been prophesied. Symptoms of decline are all around us today, it seems: slowing growth, crushing debts, aging populations, anti-social behaviour. But what exactly is amiss with Western civilization? The answer, Niall Ferguson argues, is that our institutions – the intricate frameworks within which a society can flourish or fail – are degenerating. Representative government, the free market, the rule of law and civil society: these were once the four pillars of West European and North American societies. It was these institutions, rather than any geographical or climatic advantages, that set the West on the path to global dominance after around 1500. In our time, however, these institutions have deteriorated in disturbing ways. Our democracies have broken the contract between the generations by heaping IOUs on our children and grandchildren. Our markets are increasingly distorted by over-complex regulations that are in fact the disease of which they purport to be the cure. The rule of law has metamorphosed into the rule of lawyers. And civil society has degenerated into uncivil society, where we lazily expect all our problems to be solved by the state. “The Degeneration of the West” a powerful – and in places polemical – indictment of an era of negligence and complacency. While the Arab world struggles to adopt democracy, and while China struggles to move from economic liberalization to the rule of law, Europeans and Americans alike are frittering away the institutional inheritance of centuries. To arrest the degeneration of the West’s once dominant civilization, Ferguson warns, will take heroic leadership and radical reform. This book is based on Niall Ferguson’s 2012 BBC Reith Lectures, which were broadcast under the title “The Rule of Law and Its Enemies”.
12 of 12 people found the following review helpful
5.0 out of 5 stars The partnership between the generations October 19, 2012
By Daniel Weitz VINE™ VOICE
This is a review of “The Great Degeneration: How Institutions Decay and Economies Die” which is the kindle title of this work, and is no longer available on kindle.
The author is concerned about the “Degeneration of the West” into a “Stationary State” similar to that of China during the previous centuries. This he believes is due to the weakening of traditional civil institutions, crony capitalism, inefficient bureaucracy, and the decay of our legal system. Needless to say, this has drastic political and economic consequences for our society, with the widening gap of economic inequality being a symptom of the problem. Other symptoms are the rise of a welfare state that exploits those who work for those that have become “entitled”. The abandonment of what Edmund burke called “The partnership between the generations”, is also the abandonment of what is our true social contract. The excessive public and private debt is a symptom of a deeper problem; the breakdown of the generational social order.
For the rise of Europe Ferguson rejects the theories of Diamond (geographic factors), North and Wallace (transition to open access society), Max Weber (Protestant Capitalism) and Pomerants (“ghost acres”). The author argues that it is not so much as geographic and cultural factors (citing the two Koreas and the city of Nogales on the US-Mexican border), but rather the role of an inclusive elite vs. an exclusive elite with extractive institutions. He agrees with the argument of De Soto that dysfunctional institutions force the poor to live outside the law without title to the property they often “own”. This is “dead capital” that cannot be used to increase wealth.
Ferguson argues that the cause of the economic meltdown of the banks was not lack of regulation but rather the inefficiency of the current laws and regulatory system that failed to give jail time to the miscreants that violated the laws. He also believes that greater expertise is needed by the regulators rather than strict rules; we need an experienced pilot with good judgment, not a mandatory auto-pilot that follows pre-programed rules and cannot adjust to changing conditions in an unknowable future.
Other chapters deal with the importance of a good legal system and the need to maintain a civil society. We seem to have done our best to kill a civil society by replacing it with a cradle to grave government welfare system, the danger of which was pointed out by the prescient De Tocqueville almost 200 years ago.
The author’s conclusions are troubling, with a final reference to President Obama, as the “stationary mandarin” (the famous “you didn’t build that” speech) who feels that government institutions and bureaucracies are the key to growth and not individual initiative supported by a good legal system, civil institutions, and competition. Other problematic issues raised is the enormous debt-burden in the West.
A major strength of this work is the extensive documentation cited in the notes.
The hardest question to answer, as the great tanker of history slowly turns, is whether the two dominant powers of the age, America and China, will be able to maintain what Henry Kissinger has called “co-evolution,” or whether they are doomed to re-enact the rise of the Anglo-German antagonism that culminated in world war nearly a century ago. Will it be Chimerica — or what Noah Feldman has christened “Cool War”?
Or blazing hot war? The approaching centenary of 1914 is a sobering reminder that, while elections may come and elections may go, it is wars that change history’s direction most decisively. World War I did not sink the human ship, but it certainly sank the first age of globalization. Should a similar conflict occur in our time, we shall know that world history has reached a turning point. We must hope it will only turn — and not keel right over.
Rise of Communist China – Why the West should be Concerned “Its not fine”
Niall Ferguson – April 2, 2012
Concerning China’s rise, “that is not fine.”
“Transitions in the balance of power are seldom peaceful.”
So no i don’t think we can simply say whatever that’s fine, it’s not fine. Leadership is passing to a society that is not based on individual freedom. That is not fine, and anybody who thinks its all gonna be okay doesn’t really understand historical process.
Transitions in the balance of power are seldom peaceful. That’s another important point i try to make in the book. We need to be very acutely aware of the dangers that lie ahead as this movement arrives when the u_s_ for the first time since the eighteen eighties ceases to be the dominant economy in the wall.
Niall Ferguson Complexity Theory Excellent video of Niall Ferguson, Harvard University Professor. Niall Ferguson Historical Cycles of Empire Decline. Australia Lachlan Macquarie Governor New South Whales Father of the Nation of Sydney Awards
Niall Ferguson – How western countries become so succesful
It is an astonishing yet scarcely acknowledged fact that on no fewer than 14 out of 15 issues relating to property rights and governance, the United States now fares markedly worse than Hong Kong. Even mainland China does better in two areas. Indeed, the United States makes the global top 20 in only one: investor protection, where it is tied for fifth. On every other count, its reputation is shockingly bad.
The implications are clear. If we are to understand the changing relationship between the state and the market in the world today, we must eschew crude generalizations about “state capitalism,” a term that is really not much more valuable today than the Marxist-Leninist term “state monopoly capitalism” was back when Rudolf Hilferding coined it a century ago.
No one seriously denies that the state has a role to play in economic life. The question is what that role should be and how it can be performed in ways that simultaneously enhance economic efficiency and minimize the kind of rent-seeking behavior — “corruption” in all its shapes and forms — that tends to arise wherever the public and private sectors meet.
We are all state capitalists now — and we have been for over a century, ever since the modern state began its steady growth in the late 19th century, when Adolph Wagner first formulated his law of rising state expenditures.
This article gives us an example of a power-law feedback loop that causes societies to crash. Positive feedback leads to more positive feedback, leading to even more positive feedback. Eventually everything just crashes.
Positive Feedback + Moral Hazard = Crash
There is dangerous positive feedback and moral hazard present in modern democracy, under which far too many people “demand” ever bigger government but contribute only sloth and indolence
One especially egregious modern example is “positive feedback”. It sounds pseudo-scientific and therefore breezily clever: “I put round my draft submission. Hey, it got some really positive feedback”.
In its correct meaning, of course, positive feedback is highly dangerous. It refers to “cumulative causation” in a loop system in which the system responds to perturbation in the same direction as the perturbation.
In other words, movement in one direction creates further movement in the same direction, which creates even more movement in the same direction and so on, to a potentially calamitous conclusion. The classic example is, indeed, a nuclear explosion.
“Negative feedback” sounds bad but is good: the system stays controlled (eg it has a safety valve).
My point is that when you look back on the history of past civilizations, a striking feature is the speed with which most of them collapsed, regardless of the cause.
The Roman Empire didn’t decline and fall sedately, as historians used to claim. It collapsed within a few decades in the early fifth century, …
The Ming dynasty’s rule in China also fell apart with extraordinary speed in the mid–17th century, …
A more recent and familiar example of precipitous decline is, of course, the collapse of the Soviet Union. …
What all these collapsed powers have in common is that the complex social systems that underpinned them suddenly ceased to function. One minute rulers had legitimacy in the eyes of their people; the next they didn’t.