Niall Ferguson on #regulation

Beijing 812 9  (Beijing, 2012)

If, 500 years ago, you had gone on a world tour, you would not have been especially struck by western Europe compared with some of the other great civilisations you could have visited… Ming China was in many ways the most sophisticated civilisation in the world… Between the 1600s and the 1970s, a great divergence occurred that saw living standards, on almost any conceivable measure, improve dramatically in western Europe and in places where western European settled in large numbers. notably north America, and the rest of the world. This great divergence is the most striking feature of modern history… In our lifetime, however, the great divergence stopped and went into reverse. Back in the late 1970s, when the People’s Republic of China first began to reintroduce market forces into the planned economy, its GDP was a small percentage of the world’s total: around 2 per cent. But last year China’s GDP (adjusted for differences in domestic purchasing power) exceeded that of the United States at more than 16 per cent of global output. 

What has driven this shift?… The good news is that China and other countries have adopted the things that after 1500 made Europe so successful. First, was the idea of competition in economic as well as political life. Second, the notion of science that underpinned the scientific revolutions of the 17th and 18th centuries. Third, was the notion of the rule of law based on private property rights. Fourth, modern medicine, the branch of the scientific revolution that doubled and more than doubled life expectancy. Fifth, was the consumer society, and sixth, the work ethic… 

The bad news is that even as the rest of the world is getting better institutionally, we in Europe and the west appear to be getting worse. We are suffering from a strange institutional degeneration. This has four aspects. 

The first is generational, in that policies in nearly all European states are set to create enormous imbalances between the generations. The way welfare states and pension systems work, in the context of an ageing population, is bound to create burdens for the next generation that they will have to shoulder in order to finance our retirements… 

The second way in which we are denerating as a society is through excessive regulation of the economy. In the EU, bureaucrats like nothing better than to draw up enormously complicated directives and impose them on the rest of us. We all have our favourite examples of absurd regulations devised by Eurocrats to govern the size of bananas or the minimum distance that must separate a wall from a newly planted tree (1.4 metres). [I set out to post these excerpts from Ferguson’s article because I find it interesting. But this topic I know about. And here his argument is poorly related to fact. I wonder if that defect does not apply to the rest.]


[The picture shows our crab apple tree. It’s new. When we moved to the house we now live in we took down two trees that were close to the garden wall. Too late – the wall, undermined, fell down one February morning, luckily not on anybody. Regulations required us, reasonably I think, to plant a tree to replace those we took down. We planted it far from the surrounding walls because that made sense.]

Since the financial crisis of 2008, the idea has taken root that the crash happened because of deregulation. As a result, the bureaucrats reason that we now need regulation, and plenty of it, to prevent another crisis from occurring… The more we regulate our financial system, ironically, the more complex and therefore unstable it becomes. The lesson has not yet sunk in that it was the most regulated entities in the financial system – banks – that were at the epicentre of the financial crisis. 

Third, the rule of law is something less good when it becomes the rule of lawyers… The one part of every business that is rapidly expanding at the moment in Europe and the US is the compliance department, staffed by people with law degrees. 

Fourth… I think we see a degeneration of the institutions of civil society. By civil society I mean the voluntary non-governmental agencies that used to do so much in western civilisation, and which today have largely been marginalised by the ever-expanding public sector, the all-powerful state. – Niall Ferguson, The degeneration of Europe, Prospect, November 2015

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Paul Hodson

Head of Unit "EnergyEfficiency" at European Commission, Directorate-General for Energy

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