The Great Degeneration: How Institutions Decay and Economies Die (11 page)

There is, however, a further step that still needs to be taken. That step is to increase the number of schools that are truly independent, in the sense of being privately funded; and truly free, in the sense of being free to select pupils. Significantly, six out of ten UK academy heads said in a March 2012 survey that the national agreement on pay and conditions prevents them from paying effective teachers more money, or extending the school day to give weaker pupils extra tuition.
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There are no such inhibitions about private education elsewhere. In Sweden companies like Kunskapsskolan (‘The Knowledge School’) are educating tens of thousands of pupils. In Brazil, private school chains like Objetivo, COC and Pitágoras are teaching literally hundreds of thousands of students. Perhaps the most remarkable case, however, is India. There, as James Tooley has shown, the best hope of a decent education in the slums of cities like Hyderabad comes from private schools like the imaginatively named Royal Grammar School, Little Nightingale’s High School or Firdaus Flowers Convent School.
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Tooley and his researchers have found similar private schools in parts of Africa too. Invariably, they are a response to atrociously bad public schools, where class sizes are absurdly large and teachers are frequently asleep or absent.

The problem in Britain is not that there are too many private schools. The problem is that there are too few – and if their charitable status is ultimately revoked, there will be even fewer. Only around 7 per cent of British teenagers are in private schools, about the same proportion as in the United States. If you want to know one of the reasons why Asian teenagers do so much better than their British and American peers in standardized tests, it is this: private schools educate more than a quarter of pupils in Macao, Hong Kong, South Korea, Taiwan and Japan. The average PISA maths score for those places is 10 per cent higher than for the UK and the US. The gap between them and us is as large as the gap between us and Turkey. It is no coincidence that the share of Turkish students in private schools is below 4 per cent.

Private education benefits more people than just the elite. In a 2010 article, Martin West and Ludger Woessmann demonstrated that ‘a 10 per cent increase in enrolment in private schools improves a country’s mathematics test scores . . . by almost half a year’s worth of learning. A 10 per cent increase in private school enrolment also reduces the total educational spending per student by over 5 per cent of the OECD average.’
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In other words, more private education means higher-quality and more efficient education for everyone. A perfect illustration is the way Wellington College is now sponsoring a publicly funded academy. Another is the way schools like Rugby and Glasgow Academy are expanding their bursary schemes, aiming to increase the proportion of pupils whose fees are covered from the school’s own resources.

The education revolution of the twentieth century was that basic education became available to most people in democracies. The education revolution of the twenty-first century will be that good education will become available to an increasing proportion of children. If you are against that, then you are the true elitist: you are the one who wants to keep poor kids in lousy schools.

A Bigger Society

The larger story I am telling, using education as the example, is that over the past fifty years governments encroached too far on the realm of civil society. That had its benefits where (as in the case of primary education) there was insufficient private provision. But there were real costs, too.

Like Tocqueville, I believe that spontaneous local activism by citizens is better than central state action not just in terms of its results, but more importantly in terms of its effect on us as citizens. For true citizenship is not just about voting, earning and staying on the right side of the law. It is also about participating in the ‘troop’ – the wider group beyond our families – which is precisely where we learn how to develop and enforce rules of conduct: in short, to govern ourselves. To educate our children. To care for the helpless. To fight crime. To keep the streets clean.

Since the phrase ‘big society’ entered the British political lexicon, abuse has been heaped upon it. In the same month that I delivered the lectures on which this book is based (June 2012), the Archbishop of Canterbury called it ‘aspirational waffle designed to conceal a deeply damaging withdrawal of the state from its responsibilities to the most vulnerable’.
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Even Martin Sime, the chief executive of the Scottish Council of Voluntary Organizations – who claims to believe in ‘self-help’ – has described the big society as a ‘toxic brand . . . a Tory con trick and a cover for cuts’.
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It will be clear by now that I am much more sympathetic than these gentlemen to the idea that our society – and indeed most societies – would benefit from more private initiative and less dependence on the state. If that is now a conservative position, so be it. Once, it was considered the essence of true liberalism.

In the preceding pages, I have tried to argue that we are living through a profound crisis of the institutions that were the keys to our previous success – not only economic, but also political and cultural – as a civilization. I have represented the crisis of public debt, the single biggest problem facing Western politics, as a symptom of the betrayal of future generations: a breach of Edmund Burke’s social contract between the present and the future.

I have suggested that the attempt to use complex regulation to avert future financial crises is based on a profound misunderstanding of the way the market economy works: a misunderstanding into which Walter Bagehot never fell.

I have warned that the rule of law, so crucial to the operation of both democracy and capitalism, is in danger of degenerating into the rule of lawyers: a danger Charles Dickens well knew.

And, finally, I have proposed that our once vibrant civil society is in a state of decay, not so much because of technology, but because of the excessive pretensions of the state: a threat that Tocqueville presciently warned Europeans and Americans against.

We humans live in a complex matrix of institutions. There is government. There is the market. There is the law. And then there is civil society. Once – I’m tempted to date it from the time of the Scottish Enlightenment – this matrix worked astonishingly well, with each set of institutions complementing and reinforcing the rest. That, I believe, was the key to Western success in the eighteenth, nineteenth and twentieth centuries. But the institutions in our times are out of joint.

It is our challenge, in the years that lie ahead, to restore them – to reverse the Great Degeneration – and to return to those first principles of a truly free society which I have tried to affirm, with a little help from some of the great thinkers of the past.

It is time, in short, to clear up the beach.

Inequalities Explained

Why are some countries so much richer than others? To be precise, why are real wages – wages adjusted for the cost of living – higher in some countries than in others? Real wages in London were more than seven times higher than in Canton on the eve of the First World War, whereas they had been roughly comparable (allowing for differences in patterns of consumption) 200 years before.
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This was despite the fact that between 1700 and 1900 the world economy became far more integrated, with unprecedented flows of capital, goods and labour. Today, in another age of globalization, we encounter similar differentials. Manufacturing wages in China are no longer one-twentieth of the US level, as they were in 2005; indeed, they are projected to rise from one-tenth to one-fifth of American wages between 2012 and 2015. In purchasing-power parity terms, the gap is already even narrower. The number of Big Macs an employee of McDonald’s can buy with an hour of work is just four times higher in the United States than in China.
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Yet that is still a significant gap.

While there is a consensus that such differentials are related to differences in ‘total factor productivity’, there is little agreement as to what is responsible for such differences. Explanations that emphasize the role of geography, climate, disease or natural-resource endowments are less convincing today than they seemed in the eighteenth century. Scientific knowledge, technological innovation and market integration have greatly reduced the significance of distance, weather and germs, while mineral wealth has been revealed to be as much a curse as a blessing. Explanations that assert racial differences in intelligence or industriousness are no longer taken seriously. There are pronounced differences in IQ between genetically indistinguishable populations, such as West and East Germans before 1991, or the Irish and Irish-Americans in around 1970. We can also trace far more rapid changes in average IQ over time than can be explained in terms of biology.
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The roles of religion, culture or ‘national character’ have also long intrigued sociologists. But the evidence of economic history is that shifts from poverty to prosperity generally happen too suddenly and in too many different cultural milieus to be explained in such terms.

In any case, the differences in economic welfare within countries are in some ways just as big as the differences between them. In 2007 the average income of Americans in the top 1 per cent in terms of income was thirty times that of the average income of Americans in the remaining 99 per cent. This is another differential that has changed rapidly in recent years – but, unlike inter-country inequality, intra-country inequality has been increasing rather than diminishing. In 1978 the top percentile was just ten times richer than everyone else. By most measures, American society is as unequal today as it was in the late 1920s.
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Another way of putting this is that a massive proportion of the benefits of the last thirty-five years of economic growth has gone to the super-elite. That was not true in the period between the Great Depression of the 1930s and the Great Inflation of the 1970s. Between 1933 and 1973 the average real income of the 99 per cent rose (before tax) by a factor of four and a half. Yet from 1973 until 2010 it actually fell.
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So what exactly is going on? As we have seen, narrowly economic explanations that focus on the impact of financial forces (‘deleveraging’), international integration (‘globalization’), the role of information technology (‘offshoring’ and ‘outsourcing’) or fiscal policy (‘stimulus’ versus ‘austerity’) do not offer sufficient explanations. We need to delve into the history of institutions to understand the complex dynamics of convergence and divergence that characterize today’s world. The democratic deficits of Chapter 1, the regulatory fragility of Chapter 2, the rule of lawyers of Chapter 3 and the uncivil society of Chapter 4: these offer better explanations of why the West is now delivering lower growth and greater inequality than in the past – in other words, why it is now the West that finds itself in Adam Smith’s stationary state.

The Urban Future

In these concluding pages, I want to ask what my diagnosis of a great institutional degeneration in the Western world implies about the future. To answer that question it is helpful to borrow former US Defense Secretary Donald Rumsfeld’s famous typology of ‘known knowns’, ‘known unknowns’ and ‘unknown unknowns’ – but to add a fourth category: ‘unknown knowns’. These are the future scenarios that are quite well known to students of history, but which are ignored by everybody else.

Let us begin with the known knowns. Aside from the laws of physics and chemistry, the following things are unlikely to change significantly in the foreseeable future: the normal (or bell-curve) distribution of intelligence in any population, the cognitive biases of the human mind, and our evolved biological behaviours. We can also assume that the global population will continue to rise towards nine billion, though with nearly all of the increase concentrated in Africa and South Asia, and that in the rest of the world the age structure will tilt further in the direction of the elderly. On the other hand, at least some key commodities – base metals and rare earths in particular – will remain in finite supply. However, the pace of global technological diffusion seems likely to remain high and this will encourage the continued migration of people from the country to the cities. The developing world’s new ‘megacities’ – conurbations with populations of more than ten million – will thus play a defining role in the twenty-first century. There are already twenty of these: six (led by Shanghai) in China, three (led by Mumbai) in India, along with Mexico City, São Paolo, Dhaka, Karachi, Buenos Aires, Manila, Rio de Janeiro, Moscow, Cairo, Istanbul and Lagos. They, along with 420 other non-Western cities, could generate close to half of all the growth between 2012 and 2025, according the McKinsey Global Institute.
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In many ways, this is an exciting prospect. The physicist Geoffrey West has shown that there are both economies of scale (in infrastructure) and increasing returns to scale (in human creativity) from the process of urbanization. In his words: ‘Cities are . . . the cause of the good life. They are the centres of wealth creation, creativity, innovation, and invention. They’re the exciting places. They are these magnets that suck people in.’ West and his colleagues at the Santa Fe Institute have identified two remarkable statistical regularities. First, ‘every infrastructural quantity . . . from total length of roadways to the length of electrical lines to the length of gas lines . . . scaled in the same way as the number of gas stations.’ That is to say, the bigger the city, the fewer gas stations were needed per capita, an economy of scale with a fairly consistent exponent of around 0.85 (meaning that, when a city’s population increases by 100 per cent, it needs to increase the number of gas stations per capita by only 85 per cent). Secondly, and more surprisingly:

Socioeconomic . . . things like wages, the number of educational institutions, the number of patents produced, et cetera . . . scaled in what we called a super-linear fashion. Instead of being an exponent less than one, indicating economies of scale, the exponent was bigger than one, indicating . . . increasing returns to scale . . . That says that systematically, the bigger the city, the more wages you can expect, the more educational institutions in principle, [the] more cultural events, [the] more patents are produced, it’s more innovative and so on. Remarkably, all to the same degree. There was a universal exponent which turned out to be approximately 1.15, which . . . says something like the following: If you double the size of a city from 50,000 to a hundred thousand, a million to two million, five million to ten million . . . systematically, you get a roughly 15 per cent increase in productivity, patents, the number of research institutions, wages [per capita] . . . and you get systematically a 15 per cent saving in length of roads and general infrastructure.
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People even walk disproportionately faster in big cities than in small ones. There is a disproportionately wider range of possible jobs to do. All this is best explained in terms of network effects. True, there are equally large negative externalities: bigger cities have disproportionately bigger problems with crime, disease and pollution. But provided we can innovate fast enough, West argues, our megacities can avoid – or at least postpone – the moment of collapse.
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West’s analysis explains why the process of urbanization – which is in many ways at the heart of the history of civilization – is more than exponential. Although his data are drawn from all over the world, however, we know that there is a major difference in the benefits of urbanization between New York or London, on the one hand, and Mumbai or Lagos, on the other. In late July 2012, a massive failure of the power grid in northern India – which deprived 640 million people of electricity – provided a reminder that megacities are very fragile networks. We know, too, that at times in New York’s history – notably the late 1980s, when violent crime peaked – the negative externalities of urban networks came close to outweighing the positives.

The argument of this book implies that the net benefits of urbanization are conditioned by the institutional framework within which cities operate. Where there is effective representative government, where there is a dynamic market economy, where the rule of law is upheld and where civil society is independent from the state, the benefits of a dense population overwhelm the costs. Where these conditions do not pertain, the opposite applies. Put differently, in a secure institutional framework, urban networks are what Nassim Taleb calls ‘anti-fragile’: they evolve in ways that are not only resilient in the face of perturbations, but actually gain strength from them (like London during the Blitz). But where that framework is lacking, urban networks are fragile: they can collapse in the face of a relatively small shock (like Rome when attacked by the Visigoths in
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410).

Shooters and Diggers

In the Spaghetti Western
The Good, the Bad and the Ugly
, there is a memorable scene that sums up the world economy today. Blondie (Clint Eastwood) and Tuco (Eli Wallach) have finally found the cemetery where they know the gold they seek is buried – a vast Civil War graveyard. Eastwood looks at his gun, looks at Wallach and utters the immortal line: ‘In this world, there are two kinds of people, my friend. Those with loaded guns . . . and those who dig.’

In the post-crisis economic order, there are likewise two kinds of economies. Those with vast accumulations of assets, including sovereign wealth funds (currently in excess of $4 trillion) and hard-currency reserves ($5.5 trillion for emerging markets alone), are the ones with loaded guns. The economies with huge public debts (which now total nearly $50 trillion worldwide), by contrast, are the ones that have to dig. In such a world, it pays to have underground resources. But these are not distributed at all fairly. By my calculations, the estimated market value of the world’s proven subsoil mineral reserves is around $359 trillion, of which over 60 per cent is owned by just ten countries: Russia, the United States, Australia, Saudi Arabia, China, Guinea (which is rich in bauxite), Iran, Venezuela, South Africa and Kazakhstan.
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Now we enter the realm of the known unknowns. We do not know by how much resource discoveries (especially in unsurveyed Africa) and technological advances (such as hydraulic fracturing) will increase the supply of natural resources in the years to come. Nor do we know what impact financial crises will have on commodity prices and therefore the incentive to exploit new sources of fuel and material. Finally, we do not know with any certainty how politics will affect a sector that is more vulnerable to expropriation and arbitrary taxation than any other because of the immobile nature of its assets. We know that the unrestricted burning of fossil fuels is likely to lead to changes in the earth’s climate, but we do not know exactly what these will be or when they will be disruptive enough to generate a meaningful policy response. Until then, the West will indulge itself with fantasies about ‘green’ energy, and the Rest will continue to burn coal as fast as it can be dug up, instead of doing the things that would really reduce carbon dioxide emissions: building nuclear and clean-coal power-plants, converting vehicles to natural gas and increasing the energy efficiency of the average home.
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All these known unknowns explain the extraordinary whipsaw movements in commodity prices that we have witnessed since 2002.

Also in the category of known unknowns belong two distinct kinds of natural disaster: earthquakes and the associated tsunamis they cause, which are randomly generated by the movements of the earth’s tectonic plates (so we know their location but not their timing or magnitude), and pandemics, which arise from the similarly random mutation of viruses like influenza. The most that can be said about these two threats to humanity is that they will kill many more people in the future than in the past because of the increasing concentration of our species in cities in the Asia-Pacific region which, perversely, are often located close to fault lines because of the human fondness for coastal locations. Add to this the problem of nuclear proliferation, and it does not seem unreasonable to regard the world as a more dangerous place than it was during the Cold War, when the principal threat to mankind was the calculable risk of a worst-case outcome to a simple two-player game. Today we face more uncertainty than calculable risk. Such is the result of exchanging a bipolar world for a networked one.

By their very nature, the unknown unknowns are impossible to anticipate. But what of the unknown knowns – the insights that history has to offer, which most people choose to ignore? Asked in late 2011 to name ‘the key risks that could derail growth in fast-growth markets over the next three years’, nearly a thousand global business executives identified asset-price bubbles, political corruption, inequality of income and failure to tackle inflation as the four biggest.
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By 2014, these fears may seem misplaced. From an historian’s point of view, the real risks in the non-Western world today are of revolution and war. These are precisely the events we should expect under the circumstances described above. Revolutions are caused by a combination of food-price spikes, a youthful population, a rising middle class, a disruptive ideology, a corrupt old regime and a weakening international order. All these conditions are present in the Middle East today – and of course the Islamist revolution is already well under way, albeit under the misleading Western label of the ‘Arab Spring’. The thing to worry about is the war that nearly always follows a revolution of such magnitude. For despite Steven Pinker’s optimistic claim that the long-run trend of human history is away from violence, the statistical incidence of war exhibits no such pattern.
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Like earthquakes, we know where wars are likely to occur, but we cannot know when they will break out or how big they will be.