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First way of understanding the financial market is a Darwinian evolutionary system as in the natural world where individuals and firms are in a constant struggle for existence, a contest over finite resources. The author illustrates six common features shared by the financial world and a true evolutionary system of the nature. Here, he also highlights the financial evolutionary process has been subject to big disruptions , as in the natural world, in the form of geopolitical shocks and financial crises. The difference is, of course, that whereas giant asteroids come from outer space, financial crises originate within the system.

Thing is, as per the author, this design in the financial market is not intelligent enough — even to make a fragile system even more fragile. Second way of understanding the financial market is as a highly complex system, made up of a very large number of interacting components that are asymmetrically organized in a network. Such complex systems can appear to operate quite smoothly for some time, apparently in equilibrium, in reality constantly adapting as positive feedback loops operate.

The author argues that financial crises are much the same. Brian Arthur has been arguing for years, a complex economy is characterized by the interaction of dispersed agents, a lack of any central control, multiple levels of organization, continual adaptation, incessant creation of new market niches and no general equilibrium.

And the combination of concentration, interbank lending, financial innovation and technological acceleration makes it a system especially prone to crash. And again, the difference between the natural world and the financial world is the role of regulation. Regulation is supposed to reduce the number and size of financial forest fires. Yet, it can quite easily have the opposite effect. This is because the political bodies can be captured by those whom they are supposed to be regulating, not least by the prospect of well-paid jobs should the gamekeeper turn poacher.


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They can also be captured in other ways — for example, by their reliance on the entities they regulate for the very data they need to do their work. A system that becomes stronger when subjected to perturbation is anti-fragile. In this sense, he argues that regulation should be designed to heighten anti-fragility. But the regulation we are contemplating today does the opposite: because of its very complexity — and often contradictory objectives — it is pro-fragile.

First, we must ensure that those who fall foul of the regulatory authority pay dearly for their transgressions. The author argues those who believe this crisis was caused by deregulation have misunderstood the problem in more than one way. Not only was misconceived regulation a large part of the cause.

There was also the feeling of impunity that came not from deregulation but from non-punishment. Following political and economic facets of institutional degeneration, the author discusses on the health of the Western legal system. The author quotes insights of Douglas North who highlighted the importance of the ability of societies to develop effective, low-cost enforcement of contracts and of enforcement of contracts by a third party.

His definition of the third-party enforcement is the development of the state as a coercive force able to monitor property rights and enforce contracts effectively. The author emphasizes that constraining the state to use its power of coercion in such as way as to respect private property rights is the essential function of the rule of the law in economic perspective. The author suggests, compared to the civil law, the common law system, despite its shortcomings, offers greater protection for investors and creditors, with its trait of adapting to changes over time.

He argues the authentically evolutionary character of the common law system is an advantage in terms of economic development. However, he identifies a few distinct threats to the rule of law in the West, such as civil liberties eroded by the national security state, the growing complexity and sloppiness of statute law, and the mounting costs of the law especially in the US.

What the author observes, especially in the US, is what Mancur Olsen argued: Over time all political systems are likely to succumb to sclerosis, mainly because of rent-seeking activities by organized interest groups. In this angle, the author claims that while the United States was the rule of law in the past boasting proudly of their system as the benchmark for the world, now what we see is the rule of lawyers.

He further argues that the system is facing challenges for reform because there is so much that is rotten within it: in the legislature, in the regulatory agencies, in the legal system itself.

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Book Review of The Great Degeneration: How Institutions Decay and Economies Die by Niall Ferguson

The answer is that the reform should come from outside the realm of public institutions — i. Is it possible for a truly free nation to flourish in the absence of the kind of vibrant civil society we used to take for granted? While Putnam saw the primary reason of the decline of the civil society and social capital being technology such as television and then internet, the author takes a different stance.

For example, the online community such as Facebook creates social networks that are huge but weak, and he believes they cannot be a substitute for traditional forms of association and are not the reason that hollowed out the civil society. He points out the public school system, as an example, that consequently deteriorated the competition and hence the quality of education, from which he sees that governments encroached too far on the realm of civil society for the past fifty years.

He argues that the 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. He believes that true citizenship is not just about voting, earning and staying on the right side of the law. To educate our children. To care for the helpless. To fight crime. To keep the streets clean. At the centre of the long debate among leaders was lost or disappeared productivity that was negatively affecting the growth. Has the West lost its edge in their workings of institution?

What is happening? The answers are exactly made by the author through this brilliant book. Especially so when we look into the post-crisis West, the US specifically, in terms of reduced social mobility, widened income distribution and stagnant growth. We are warned. Clearly, this book makes readers think. But more importantly, this book challenges readers especially when he shares his blunt criticisms in conservative narrative. I have experienced a bit of difficulty in building a balanced perspective. First, this book confirmed me that he is indeed a contrarian.

No beating around the bush. People may or may not agree on his viewpoints fully or even partially. But I believe he provides a valuable perspective that many or majority of influential minds may disregard. We always have to have diversity of opinions in order to view the situation correctly and this is exactly what the author is doing, hence what makes this book remarkable.

Second, his ability to weave ideas of great thinkers through long historical context is intellectually pleasing. His scope is far and wide.

His emphasis on why institution matters and his warnings on potential problems when the balanced self-reinforcing inner workings of the institutions fail again reminded me of the importance of the subject. Such a great insight. I thoroughly enjoyed this part. Also, his argument on why complex regulation is bad and can be counter-productive provided me another good chance to ponder on this issue.

Actually, this aspect has been raised by a few other authors as well such Mervin King and Dale Carnegie Training. Regardless of his conservative viewpoint, I believe this issue is something we can look into. One of critical aspects that makes me hesitate to call this book great, is his stances in seeing the world. He clearly divides the world: The West versus the Rest. The superior system versus the others, and so on. Can he provide more holistic viewpoint?

Not the evolution of the West versus the Rest but the evolution of humanity on the earth overall? If his view is rather pre-defined in certain frame, the world may fit into his own bias rather than as it is. That can be bad for readers. Another caveat I found is a bit personal. I tend to observe a dominant use of certain words. Disappointingly, the finding is not very attractive: Such words as colony, empire, superior, glory, etc. Are we living in the past? You should be prepared when reading this book.

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In the end, however, this very aspect is what challenges you, grows your ability to think critically and builds your own perspective. And it certainly helped me to see certain issues in new broadened perspective. Where is your country heading? The institution in our times, however, are out of joint. To restore them and hence to return to those first principles of a truly free society, the author guides us to look into four key institutions that clearly show signs of degeneration — the government, the financial market, the law and civil society.

Despite apparent shortfalls of this short book, his sharp insights and ability to juxtapose our times with those of Adam Smith in terms of the Stationary State function as a wake-up call to all of us. You are commenting using your WordPress. You are commenting using your Google account. You are commenting using your Twitter account. You are commenting using your Facebook account. Notify me of new comments via email.

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Great Degeneration: How Institutions Decay and Economies Die

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