1 . The Human Hive

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.

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 twentytwo 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 threequarters 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.

Figure 1.1

Source: Angus Maddison, ‘Historical Statistics of the World Economy:1~2008 ad’ : http://www.ggdc.net/MADDISON/oriindex.htm .

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 superiority 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 it 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 socalled ‘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 slowgrowing economy;

• relatively few nonstate 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 fastergrowing 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 intraelite 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 rentcreation through privileges to the open access logic of renterosion 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 openaccess 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, too, 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 diff erence 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 world 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 ‘JudaeoChristian culture’. But there is a real risk of cherrypicking here. Somehow no really terrible Western ideas like, say, witchburning 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 diff erently depending on whether they emigrated to New England or joined the East India Company. 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 nonWestern 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 we divided them in two. South Koreans and West Germans got essentially 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 subSaharan 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 postcolonial 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, PortauPrince, 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 ‘extralegally’. This is not because the poor are taxdodgers. 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 wellnigh 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 stateowned 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 extralegal 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.

Since de Soto published The Mystery of Capital, revolutions in countries like Tunisia and Egypt have provided compelling evidence in support of his approach. He sees the ‘Arab Spring’ primarily as a revolt by frustrated wouldbe entrepreneurs against corrupt, rentseeking regimes that preyed on their efforts to accumulate capital. The prime example is the story of the twentysixyearold Tarek Mohamed Bouazizi, who burned himself to death in front of the governor’s offices in the town of Sidi Bouzid in December 2010.12 Bouazizi killed himself precisely one hour after a policewoman, backed by two municipal officers, had expropriated his two crates of pears, a crate of bananas, three crates of apples and a secondhand electronic weight scale worth $ 179 . Those scales were his only capital. He did not have legal title to his family home, which might otherwise have served as collateral for his business. His existence as a businessman depended on the ‘fees’ he paid to officials to allow him to operate his fruitstand on two square yards of public land. Their arbitrary act of expropriation cost Mohamed Bouazizi his livelihood and his life. But his selfimmolation sparked a revolution – though how glorious a revolution remains to be seen. It will depend on how far new constitutional arrangements in countries like Tunisia and Egypt achieve the shift from an extractive to an inclusive state, from the arbitrary power of rentseeking elites to the rule of law for all.

If de Soto’s approach is right, then it does make a great deal of sense to explain the success of the West after the 1500s in terms of institutions, and particularly the rule of law. For what was at the heart of England’s seventeenthcentury battles over Parliamentary power was surely the protection of individuals from arbitrary expropriation by the Crown. To specialist historians, of course, all this smacks suspiciously of the old Whig interpretation of history that Herbert Butterfield once held up to ridicule. Yet none of the authors I have been quoting takes a naively determinist view of the historical process. Far from being a story of teleological inevitability, these are authentically evolutionary narratives, in which contingency plays a major role. England was not preordained by Providence to become (as in 1066 and All That) ‘top nation’. Only a series of nearrun things averted an absolutist outcome in the seventeenth century. There were, after all, rebellions in 1692,1694,1696,1704,1708 and 1722, and a civil war in 1715 – not forgetting the Jacobite Rising of 1745.13

The real question is how decisive an institutional break occurred in 1688. The majority of historians would say: not very. The Glorious Revolution, they argue, was backward looking, ‘conservationist’, with minimal consequences outside the narrow sphere of aristocratic power and patronage.14 I think this is too parochial a view. The 1689 Bill of Rights – the Act Declaring the Rights and Liberties of the Subject – states (among other things):

• that levying money for or to the use of the Crown by pretence of prerogative, without grant of Parliament, for longer time, or in other manner than the same is or shall be granted, is illegal;

• that election of members of Parliament ought to be free;

• that the freedom of speech and debates or proceedings in Parliament ought not to be impeached or questioned in any court or place out of Parliament;

•and that for redress of all grievances, and for the amending, strengthening and preserving of the laws, Parliaments ought to be held frequently.

With all due respect to the specialists, I think this does deserve to be seen as an historical turning point, even if religious prejudice (antiCatholicism) loomed as large as constitutional principle at the time.

True, the ‘rights and liberties of the subject’set out in the 1689 Bill of Rights were conceived at the time as ancient rather than novel. But the consequences of the Glorious Revolution really were new, not least in the way Parliaments after 1689 set about energetically legislating for economic development, protecting the infant textile industry, encouraging the enclosure of common land, promoting turnpike roads and canals. Even war became an increasingly profitable activity as the Whigs launched their bid for global commercial supremacy.15 The sequence is clear: first the Glorious Revolution, then agricultural improvement, then imperial expansion, then industrial revolution.

The institutional argument is even more compelling when we take a comparative approach. None of the institutional changes I am talking about happened in Ming or Qing China, where the power of the Emperor and his officials remained unrestrained by semiautonomous corporate bodies or representative assemblies. Asia had merchants; it did not have companies, much less parliaments.16 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 diff erent approach to partnership, inheritance, questions of debt and corporate personalities from the legal systems that developed in Western Europe. Islam had waqfs, unincorporated trusts established by individuals, but not banks.

The Inglorious Revolution

So if institutional evolution is the key to understanding Western ascendancy as well as enduring poverty in Africa and elsewhere, is this also how should we understand what is surely the most astonishing trend of our lifetimes: the end of the great divergence, and the advent of a great reconvergence between West and East? I think it is. What we need to do is to apply the insights of the institutional school of economic history to our own time – indeed, to our own Western societies.

Writing in the 1770s, it seemed obvious to Adam Smith that the reasons for China’s puzzling ‘stationary state’ of economic stagnation lay in its ‘laws and institutions’. Could it be, by the same token, that the economic, social and political difficulties of the Western world today reflect a de -generation of our once worldbeating institutions? There certainly seems little doubt that the West is experiencing a relative decline unlike anything we have seen in half a millennium. Having been more than twenty times richer than the average Chinese in 1978, the average American is now just five times richer. In a whole range of dimensions, the gap between the West and the Rest has narrowed dramatically. In terms of life expectancy and educational attainment, for example, some Asian countries are now ahead of most in the West. According to the 2009 OECD PISA study, the gap in mathematical attainment between the teenagers of the Shanghai district of China and those of the United States is now as big as the gap between American teenagers and Tunisians.18

In some ways, it is easy to explain nonWestern success. China has belatedly followed a number of other East Asian countries – the first was Japan – in downloading most (not all) of what I have called the ‘killer applications’ of Western civilization: economic competition, the scientific revolution, modern medicine, the consumer society and the work ethic.19 Copying the Western model of industrialization and urbanization tends to work if your entrepreneurs have the right incentives, your labour force is basically healthy, literate and numerate, and your bureaucracy is reasonably efficient. So in what follows I am going to say relatively little about what has gone right in the rest of the world. What interests me here is what has gone wrong in the West.

Most commentators who address this question tend to concern themselves with phenomena like excessive debt, mismanaged banks and widening inequality. To my mind, however, these are nothing more than symptoms of an underlying institutional malaise: an Inglorious Revolution, if you like, which is undoing the achievements of half a millennium of Western institutional evolution.

Debt and the English

The title of this chapter.–‘The Human Hive’ – is an allusion to Mandeville’s poem, The Fable of the Bees . Mandeville’s central point was that societies with the right institutions can flourish even when the individuals who live in them misbehave. It was not biblical virtue that made eighteenthcentury England richer than almost anywhere in the world, but rather secular vices. It was just that these vices had what economists like to call ‘positive network externalities’ precisely because the institutions of British society at that time were favourable to saving, investment and innovation.

After the Glorious Revolution of 1688, as we have seen, the monarch was subordinated to Parliament. Not only did the Whigs who dominated the new regime usher in an age of agricultural improvement, commercial growth and imperial expansion. Financial institutions also developed rapidly: William of Orange brought more than just Protestantism with him from Holland; he also brought templates for a central bank and a stock market. Meanwhile, numerous associations, societies and clubs encouraged scientific and technological innovation. As Robert Allen has shown, the specifically British combination of cheap coal and dear labour encouraged innovation in productivityenhancing technologies, especially in textile production.20 But the institutions provided the indispensable framework for all this. Here is Mandeville’s version:

A Spacious Hive well stock’ d with Bees,

That lived in Luxury and Ease;

And yet as fam’ d for Laws and Arms,

As yielding large and early Swarms;

Was counted the great Nursery

Of Sciences and Industry.

No Bees had better Government,

More Fickleness, or less Content.

They were not Slaves to Tyranny,

Nor ruled by wild Democracy;

But Kings, that could not wrong, because

Their Power was circumscrib’ d by Laws.

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 credibility 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 ‘selfenforcing’, not least because property owners were overwhelmingly the class represented in Parliament. As a result, the English state was able to borrow money on a scale that had previously been impossible because of the sovereign’s habit of defaulting or arbitrarily taxing or expropriating.21 The late seventeenth and early eighteenth century thus inaugurated a period of rapid accumulation of public 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, ironworks 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 per cent 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-.nanced 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.

The Partnership between the Generations

In the rest of this chapter, I want to make an argument about our modern representative government – and what ails it. My starting assumption is the conventional one that it is generally better for government to be in some way representative of the governed than not. This is not just because democracy is a good thing per se, as Amartya Sen has argued, but also because a representative government is more likely than an authoritarian government to be responsive to shifting popular preferences and is therefore less likely to make the kind of horrendous mistakes authoritarian rulers often make. Those today who dismiss Western democracy as ‘broken’ – and I hear their lamentations with growing frequency – are wrong to yearn for some kind of Beijing model of a oneparty state in which decisions are taken by technocrats on the basis of fiveyear plans. It was the same system that gave China both Special Economic Zones and the OneChild Policy: the former a success, the latter a disaster, the full costs of which are as yet incalculable.

But the critics of Western democracy are right to discern that something is amiss with our political institutions. The most obvious symptom of the malaise is the huge debts we have managed to accumulate in recent decades, which (unlike in the past) cannot largely be blamed on wars. According to the International Monetary Fund, the gross government debt of Greece will reach 153 per cent of GDP in 2012 . For Italy the figure is 123, for Ireland 113, for Portugal 112 and for the United States 107. Britain’s debt is approaching 88 per cent. Japan – a special case as the first nonWestern country to adopt Western institutions – is the world leader, with a mountain of government debt approaching 236 per cent of GDP, more than triple what it was twenty years ago.^b Even more striking are the ratios of debt to government revenue, which after all is where the interest and redemption payments must come from (see Figure 1.2).

Figure 1.2

Source: International Monetary Fund, World Economic Outlook Database,

April 2012 : http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx

Often these debts get discussed as if they themselves are the problem, and the result is a rather sterile argument between proponents of ‘austerity’ and ‘stimulus’. I want to suggest that they are a consequence of a more profound institutional malfunction.

The heart of the matter is the way public debt allows the current generation of voters to live at the expense of those as yet too young to vote or as yet unborn. In this regard, the statistics commonly cited as government debt are themselves deeply misleading, for they encompass only the sums owed by governments in the form of bonds. The rapidly rising quantity of these bonds certainly implies a growing charge on those in employment, now and in the future, since – even if the current low rates of interest enjoyed by the biggest sovereign borrowers persist – the amount of money needed to service the debt must inexorably rise. But the official debts in the form of bonds do not include the often far larger unfunded liabilities ofwelfare schemes like – to give the biggest American programmes.– Medicare, Medicaid and Social Security.

The best available estimate for the diff erence between the net present value of federal government liabilities and the net present value of future federal revenues is $ 200 trillion, nearly thirteen times the debt as stated by the US Treasury. Notice that these figures, too, are incomplete, since they omit the unfunded liabilities of state and local governments, which are estimated to be around $ 38 trillion.22 These mindboggling numbers represent nothing less than a vast claim by the generation currently retired or about to retire on their children and grandchildren, who are obliged by current law to find the money in the future, by submitting either to substantial increases in taxation or to drastic cuts in other forms of public expenditure.

To illustrate the magnitude of the American problem, the economist Laurence Kotlikoff calculates that to eliminate the federal government’s fiscal gap would require an immediate 64 per cent increase in all federal taxes or an immediate 40 per cent cut in all federal expenditures.23 When Kotlikoff compiled his ‘generational accounts’ for the United Kingdom more than a decade ago, he estimated (on what proved to be the correct assumption that the then government would increase welfare and healthcare spending) that there would need to be a 31 per cent increase in income tax revenues and a 46 per cent increase in national insurance revenues to close the fiscal gap.24

In his Reflections on the Revolution in France (1790), Edmund Burke wrote that the real social contract is not JeanJacques Rousseau’s contract between the sovereign and the people or ‘general will’, but the ‘partnership’ between the generations. In his words:

one of the first and most leading principles on which the commonwealth and the laws are consecrated is, lest the temporary possessors and liferenters in it, unmindful of what they have received from their ancestors or of what is due to their posterity, should act as if they were the entire masters, that they should not think it among their rights to cut off the entail or commit waste on the inheritance by destroying at their pleasure the whole original fabric of their society, hazarding to leave to those who come after them a ruin instead of an habitation – and teaching these successors as little to respect their contrivances as they had themselves respected the institutions of their forefathers … S OCIETY is indeed a contract … the state … is … a partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born.

In the enormous intergenerational transfers implied by current fiscal policies we see a shocking and perhaps unparalleled breach of precisely that partnership.

I want to suggest that the biggest challenge facing mature democracies is how to restore the social contract between the generations. But I recognize that the obstacles to doing so are daunting. Not the least of these is that the young find it quite hard to compute their own longterm economic interests. It is surprisingly easy to win the support of young voters for policies that would ultimately make matters even worse for them, like maintaining defined benefit pensions for public employees. If young Americans knew what was good for them, they would all be in the Tea Party.. A second problem is that today’s Western democracies now play such a large part in redistributing income that politicians who argue for cutting expenditures nearly always run into the wellorganized opposition of one or both of two groups: recipients of public sector pay and recipients of government benefits.

Is there a constitutional solution to this problem? The simplistic answer – which has already been adopted in a number of American states as well as in Germany – is some kind of balancedbudget amendment, which would reduce the discretion of lawmakers to engage in deficit spending, much as the practice of giving central banks independence reduced lawmakers’ discretion over monetary policy. The trouble is that the experience of the financial crisis has substantially strengthened the case for using the government deficit as a tool to stimulate the economy in times of recession, to say nothing of the wider case for deficit financed public investment in infrastructure. In 2011, following a German lead, continental European leaders sought to solve that problem by resolving to limit only their structural deficits, leaving themselves room for manoeuvre for cyclical deficits as and when required. But the problem with this ‘fiscal compact’ is that only two Eurozone governments are currently below the mandated 0.5 per cent of GDP ceiling, most have structural deficits at least four times too large, and experience suggests that any government that tries seriously to reduce its structural deficit ends up being driven from power.

It is perhaps not surprising that a majority of current voters should support policies of intergenerational inequity, especially when older voters are so much more likely to vote than younger voters. But what if the net result of passing the buck for the babyboomers’ profligacy is not just unfair to the young but economically deleterious for everyone? What if uncertainty about the future is already starting to weigh on the present? As Carmen Reinhart and Ken Rogoff have suggested, it is hard to believe that developedcountry growth rates will be unaffected by mountains of debt in excess of 90 per cent of GDP.25 Anxiety about a fastapproaching ‘fiscal cliff’ may have been one reason why the US economy did not achieve ‘escape velocity’ in 2012.

Unsettling Accounts

It seems as if there are only two possible ways out of this mess. In the good but less likely scenario, the proponents of reform succeed, through a heroic effort of leadership, in persuading not only the young but also a significant proportion of their parents and grandparents to vote for a more responsible fiscal policy. As I have already explained, this is very hard to do. But I believe there is a way of making such leadership more likely to succeed, and that is to alter the way in which governments account for their finances.

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 misleading was Enron.

There is in fact a better way. Public sector balance sheets can and should be drawn up so that the liabilities of governments can be compared with their assets. That would help clarify the difference between deficits to finance in -vestment and deficits to finance current consumption. Governments should also follow the lead of business and adopt the Generally Accepted Accounting Principles. And, above all, generational accounts should be prepared on a regular basis to make absolutely clear the intergenerational implications of current policy.

If we do not do these things – if we do not embark on a wholesale reform of government finance – then I am afraid we are going to end up with the bad, but more likely, second scenario. Western democracies are going to carry on in their current feckless fashion until, one after another, they follow Greece and other Mediterranean economies into the fiscal death spiral that begins with a loss of credibility, continues with a rise in borrowing costs, and ends as governments are forced to impose spending cuts and higher taxes at the worst possible moment. In this scenario, the endgame involves some combination of default and inflation. We all end up as Argentina.

There is, it is true, a third possibility, and that is what we now see in Japan and the United States, maybe also in the United Kingdom. The debt continues to mount up. But deflationary fears, central bank bond purchases and a ‘flight to safety’ from the rest of the world keep government borrowing costs down at unprecedented lows. The trouble with this scenario is that it also implies low to zero growth over decades: a new version of Adam Smith’s stationary state. Only now it is the West that is stationary.

As our economic difficulties have worsened, we voters have struggled to find the appropriate scapegoat. We blame the politicians whose hard lot it is to bring public finances under control. But we also like to blame bankers and financial markets, as if their reckless lending was to blame for our reckless borrowing. We bay for tougher regulation, though not of ourselves. This brings me to the subject of my second chapter. In it, I shall turn from the realm of politics to the realm of economics – from the human hive of democracy to the Darwinian jungle of the market – to ask if here, too, we are witnessing a tendency towards institutional degeneration in the Western world.

In this chapter, I have tried to show that excessive public debts are a symptom of the breakdown of the social contract between the generations. In my next I shall ask if excessively complex government regulation of markets is in fact the disease of which it purports to be the cure. The rule of law has many enemies, as we shall see. But among its most dangerous foes are the authors of very long and convoluted laws.

b Note that I leave aside the very large private debts that have been incurred by households and by fi nancial and non-financial corporations. If one adds these together with the government debts, the burdens have no precedent in history: Japan 512 per cent of GDP , Britain 507 per cent, France 346 per cent, Italy 314 per cent, the United States 279 per cent, Germany 278 per cent.