Interview with Niall Ferguson: Taking the long view

Interview by Gene Zasadinski, managing editor of View magazine.

In trying to make sense of the present, author and commentator Niall Ferguson gives a great deal of thought to the past—both the past as it was and the past as it might have been. “That’s what historians do,” he says. “That’s what sets historians apart from economists.” In this interview, Dr. Ferguson brings this unique perspective to the major issues of the day—financial, economic, and political. As a student of empire, he also offers his views on why civilizations rise, fall, and, possibly, rise again.

Niall Ferguson is a professor of history at Harvard University and a professor of business administration at Harvard Business School. He is also a senior research fellow at Jesus College, Oxford University and a senior fellow at the Hoover Institution, Stanford University. A prolific writer and sought-after commentator, Dr. Ferguson is a frequent contributor to major print and online publications, including Newsweek and thedailybeast.com. His most recent books are The Ascent of Money: A Financial History of the World, and Civilization: The West and the Rest (available in the US on November 1, 2011).

GZ: In your new book, Civilization: The West and the Rest,¹ you use a computer software metaphor to make the case that global Western dominance resulted from what you call six killer applications. Would you explain?

NF: Yes. The “killer apps” model as a metaphor is a very useful way to answer the big question about the history of the world after 1400: Why did the great civilizations of the East stagnate while a few little warring kingdoms in Western Europe took over the world? After a lot of thought and study, I concluded that there were really six factors, or applications, which, taken together, explain Western ascendancy: competition in both economics and politics; Newtonian science; the rule of law and, in particular, private property rights; modern medicine and the resulting increase in life expectancy; a consumer society that led to an Industrial Revolution; and, finally, a strong work ethic.

GZ: What about democracy?

NF: If by democracy you mean a system of government where elections are held regularly for legislatures or executives, I don’t think that’s actually a killer app. Lots of countries have elections with universal suffrage. Some do well, and some don’t. The critical things, in my view, are the rule of law and the notion of private property rights. Those are more important than democracy. In any case, democracy’s quite a late phenomenon. Great Britain didn’t achieve universal suffrage, including women, until well into the 20th century, by which time Western primacy had been long established. It’s way too late, really, to be that important.

GZ: Does the West still have exclusivity regarding these applications, or is it being challenged by other cultures?

NF: Part of the reason for writing the book was the growing sense that Western predominance was coming to an end on our watch, and it’s the peculiar fate of our generation to see that happen. I think there are two things going on here. One is that non-Western countries are replicating Western models. They are, in a sense, downloading these apps. The second point is that like real software, these apps can be deleted or corrupted. And when you look at some European countries and at certain aspects of the United States, you see a civilization in which there is at least some corruption on the hard drive. One sees that very clearly in a whole range of areas, including a decline in the work ethic and a rise in entitlements, for example. Such changes represent a fundamental shift in the West, away from the core institutions and values that lifted it into a position of power in the first place.

GZ: Is there any hope of getting that power back?

NF: Yes. To continue the metaphor, these applications can be upgraded. The antivirus software can be run. They don’t stop working by some natural process of decay, and I think reform is possible.

GZ: You define yourself as a historian rather than an economist, though your specialty is economic history. How does that shape your thinking and differentiate your perspectives on these and other matters?

NF: I think there’s an important intellectual difference between what economists do and what historians do. Economists are in the model-making business. That’s really what they do. Historians accept the complexity of the human world and doubt that it can be simplified into a model. And some historians—by no means all— engage in thought experiments in which they construct alternative histories—what-if scenarios, if you will—to try to understand the causal sequence of the one history that did happen.

GZ: So, let’s apply the economic historian’s perspective to events currently unfolding on the world stage. How is unrest in North Africa and the Middle East affecting American and other Western economies?

NF: At this point, the impact is fairly minimal in the US, although, of course, it is one reason that the price of gasoline is higher than it was a year ago. Its impact in Europe is more immediate, because two things are happening. One, people are leaving the region, so the migration problem has become very acute. And two, money is leaving as well. The wealthy of the Arab world are extremely nervous about what is happening, and we’re seeing enormous flows of capital out of countries like Egypt into Switzerland and into London. So there are impacts already, but my sense is that we haven’t yet seen the full impact, because this is a revolutionary crisis at a relatively early stage.

GZ: What do you mean?

NF: As history teaches us, most revolutions of this kind play out over years and take place in four phases. In phase one, there’s an almost festive air of excitement when the tyrant is toppled. In phase 2, the economies go into freefall, because the money is pouring out of the country, creating opportunities for political radicals. In phase 3, there either is a shift toward restoration, or the radicals manage to gain control of the political process. My outlook is somewhat pessimistic about this.

GZ: And what is the fourth phase?

NF: In the fourth phase, you end up with war. There’s already a war in Libya, but the war we really need to worry about is a Sunni-Shiite war. That could send oil prices skyrocketing, which would obviously have a serious impact on the global economy and on the strength of any economic recovery.

GZ: Political unrest aside, what else can history teach us about economic crisis and recovery? Is what we’re going through now similar to what has occurred in the past, say, Japan in the ’90s or even further back?

NF: Well, I think that’s exactly the right kind of question to ask because the best way to understand a financial crisis or an economic depression is by comparing it with others. Economists are generally fixated on a few well-known disasters, of which the Great Depression is the best known by far. My feeling is that it’s better to locate these events in a much longer-term perspective that can take you back at least as far as the late 19th century, which was the first great age of financial globalization. And we can learn as much from looking at the Great Depression of 1873 to 1878 as we can from looking at 1929 to 1932, in that the former is in many ways closer to our experience than the latter. In 1873, a huge financial crisis occurred on both sides of the Atlantic, and it had its origins in real estate. Many banks failed. But globalization didn’t break down. It slowed the growth of economies, but it didn’t cause anything like the collapse that occurred in the early ’30s.


The Tea Party is a classic populist movement, and it has much more in common with movements in the late 19th century than with what happened in the ’30s.

GZ: Are there other ways in which this earlier crisis was similar to our own?

NF: Yes. Like today, populism became a big part of politics after the 1870s, and the backlash against the crisis was very powerful in both Europe and the United States. The Tea Party is a classic populist movement, and it has much more in common with movements in the late 19th century than with what happened in the ’30s.

GZ: So from your perspective, are we in a recovery?

NF: I think we are. It’s a very fragile recovery in the United States, and it’s a very unimpressive one in Europe. And, again, much can be learned by looking back. In the 1870s, there was a five-year period of subpar growth that went on until 1878, and deflation continued after that for more than a decade. I think we should bear in mind, therefore, that this could all last longer than most of us are conditioned by our own life experiences to expect.

GZ: What are the key factors affecting the recovery?

NF: There are two problems. The first and most serious is the fiscal crisis that has been left in the wake of the banking crisis. And the second is the massive printing of money—the monetary stimulus that was given the appalling euphemism, quantitative easing.

GZ: What are your concerns regarding the fiscal crisis?

NF: My concern is that we’re only at the beginning of a very painful process in the United States—that of addressing this problem, which is partly structural and partly cyclical, but very large and very politically intractable. Europeans are further down this road, and some European countries have come spectacularly to grief.

GZ: And quantitative easing?

NF: The problem is that if you print money almost without limit and hold interest rates at zero, you will get inflation. And that is happening. It’s hard to detect, because inflation doesn’t begin with a bang. It’s very stealthy. It creeps up on you. But a moment of truth is coming. It’s going to be a moment when we decide either to go further down the inflationary road, or we apply the brakes, both fiscally and in monetary terms, and experience a fading of the recovery.

GZ: Can inflation ever be a good thing?

NF: It was certainly the belief of a generation of Keynesians in the 1950s and ’60s that a little inflation would oil the wheels of the system. What they were really saying implicitly was that it would be better to have negative real rates and transfer resources stealthily from savers to borrowers. But the benefits of inflation are usually outweighed by the costs as the inflation problem builds. Everything that we know about the history of inflation says it’s hard to stop, though it’s easy to start.

GZ: Is it right to equate inflation to the Consumer Price Index (CPI) or core CPI?

NF: I think that your readers need to ponder how anachronistic our thinking is when we define inflation as the Consumer Price Index, or, possibly, core CPI.

GZ: Why is that?

NF: The experience of inflation differs between those whose expenditures are not, in fact, concentrated that much on essentials, and those whose expenditures are. For example, the dramatic fall in the cost of personal computing might lead some to conclude that inflation is really low. But those who are relatively poor and worried about food would conclude the opposite because they’ve been hit by a doubling of prices in many foodstuffs in the last two years. Also, the CPI deliberately ignores the extraordinary ups and downs in the asset markets—housing prices, for example. In the very blinkered world of monetary policymaking, CPI or core CPI is the thing that you implicitly target. And if somebody says, “Hey, what about asset prices?” the answer is, “Get thee behind me, Satan!” I sense a growing disbelief in the official mantra that inflation is low, possibly even too low.

GZ: A debate going on in the US right now concerns the magnitude of spending in light of growing deficits. What are your views?

NF: For the last seven or eight years, I have been warning that the United States was on an unsustainable fiscal trajectory, particularly because of unfunded liabilities in Medicare and Social Security. If Americans are to keep federal expenditures at 18 or 19 percent of gross domestic product, significantly below the comparable figures for Europe, then government will have to shrink. But here’s the bad news. You are going to have to dismantle Medicare as it’s currently constituted, and a whole bunch of other discretionary and nondiscretionary programs will have to be drastically reduced. The debate between big and small government is beginning, and I think that’s great.

GZ: So what should Americans be doing?

NF: I think Americans should fundamentally rethink their welfare model, their approach to Social Security, and healthcare reform. And Americans should be worried that they have such large, long-term unemployment. My own view is that the United States would be making a big mistake by becoming a European country. And that’s a real risk. This country is not a kind of giant transatlantic European Union. Its energy and its success have derived in large measure from the dynamism of its private sector. It’s really something quite different.


Perspectives

Niall Ferguson on . . .

Money and trust

I associate money and trust with a particular way of running financial institutions. In the 19th century the prudence of the banker and the privacy of the client were givens, and the relationship between banker and client was based on mutual trust. We’ve come a long way from that world. I think the breakdown of trust in financial institutions is a huge problem. If the banks are no longer trustworthy, then it’s very hard for the financial system to function. But we have to recognize that trust has implicitly shifted to the governments that bailed out the banks. The problem is, if you can’t trust the banks and you can’t trust the government, what’s left? I think there is a kind of simmering disillusionment with the system that is partly what fuels populism. Many people feel that the system is, in some measure, corrupt and that’s a very unhealthy state of affairs.

Tax reform

We urgently need tax reform in almost all Western countries, and we should aim for simplicity, clarity, and equity. Currently, there are all kinds of absolutely unjustifiable loopholes and deductions, and these have to go. It would be tremendously good to have a simpler system in which the form that you fill out is a couple of pages long, and everybody understands it. I think that would unleash two percentage points of GDP growth and help solve the fiscal problem in its own right.

Social networking

There’s a default assumption that social networking is good, and in particular, that it is an agent of Westernization or of democratization. The problem with that assumption is that at best this technology is politically neutral. It can be used equally well by those who are profoundly hostile to freedom. Further, networks aren’t always social. You could have a sociopathic network that serves to promote the cause of political violence. But the worst danger is that the networks on which we grow so reliant are vulnerable to cyber attack. And an attack on the network is a perfectly credible scenario and the kind of thing that, if I were targeting an enemy, I would be aiming to do. Ironically, history teaches us that the status quo power is generally not that good at exploiting new information technology and tends to use it for trivial purposes. The established authorities in France in 1789 had no idea how to manage the press, but the revolutionaries did. So I think, rather than just being neutral, new communication networks, broadly speaking, favor revolutionaries, because the revolutionaries have an aim.

Clash—or mash—of civilizations

Some think we are experiencing a clash of civilizations. But I don’t agree. Such thinking assumes that there is only one modern civilization. It does not account for the fact that the advances of a modern civilization, particularly in technology, can and are being co-opted by the less modern. So I prefer the word “mash” to “clash.” I think what’s really impressive about the 21st century scene is that most all civilizations now have access to powerful tools for communication. So, the differentiating factor is not so much about modernity. Rather, it is about how and to what purpose these tools are being used.


1 Available in the US on November 1, 2011.