Niall Ferguson on Why Nations Fail
How are we to explain 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 (of the world)? It seems implausible that it was due to some innate superiority of Europeans, as the racial theorists of the nineteenth and twentieth centres often argued….Nor can we explain the great divergence in terms of imperialism; the other civilizations did (lent?) of that before Europeans began crossing oceans and conquering. For the historian Kenneth Pomeranz, who coined the phrase “the real 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… the best answers to the question of what caused the great divergence focus on the role of institutions. … (There are ) two phases or patterns of human organization. The first is…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 a 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.”
…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.” These three components came together for the first time in Western Europe, with England once again the trailblazer…
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.”
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.
…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, nheritance, questions of debt and corporate personalities from the legal systems that developed in Western Europe,. Islam has waqfs, unincorporated trusts established by individuals, but not banks.
Niall Ferguson on The Place of Debt in a National Economy
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 credibillity 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 n a scale that had previously been possible because of the sovereign’s habit of defaulting or arbitrarily taxing or expropriating. The late seventeenth and early eighteenth century thus inaugurated a period of rapid accumulation of pubic 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, ironwork 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 percent 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.
Contemporary National Income Accounting
The present system is, to put it bluntly, fraudulent. There are no regularly published and accurate official balance sheets. Huge liabilities are simply hidden from view. Not even the current income and expenditure statements can be relied upon. No legitimate business could possibly carry on in this fashion. The last corporation to publish financial statements this mislead was Enron.