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Niall Ferguson: Reith Lecture pt.2 - The Dawinian Economy

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Richard Fenton-Smith 08:30, Tuesday, 26 June 2012

Editor's note: In the Reith Lecture this week, Niall Ferguson talked about The Darwinian Economy. The programme is available to listen to online or to download and keep - PMcD

niall ferguson


There will always be greedy people around banks," says Niall Ferguson "after all they are where the money is - or should be."

"But greedy people will only commit fraud or negligence if they feel their misdemeanour is unlikely to be noticed or severely punished."

In the second Reith Lecture in his series The Rule Of Law And Its Enemies economic historian Prof Niall Ferguson tackles the subject of financial regulation - and the need to drastically prune it.

Prof Ferguson argues that the financial crisis that began in 2007 had its origins in over-complex regulation.

Many economists - and members of the public - disagree and believe lax regulation was a major cause of the financial crisis. They blame President Clinton's repeal of the restrictive Glass-Steagall Act in particular.

But they have misunderstood the problem, says Ferguson. He says the major events of the crisis would still have happened even with Glass-Steagall in place. Instead, he says, misconceived regulation was a large part of problem.

Because de-regulation is not bad. It is bad regulation that is bad. Banks were key to the financial crisis - and banks were regulated, he observes.

The more serious failing, Ferguson continues, is the feeling of impunity within the banking industry. This is not an issue of deregulation, but non-punishment. There was a failure to apply the law. The list of people jailed for their role in the USA's sub-prime crisis is "laughably short," says Prof Ferguson.

Extra compliance is not the solution, he says, because adding rules upon rules upon rules removes the need for banks to simply ask themselves "are we doing the right thing?"

Plus, the principal beneficiary of tighter regulation will not be the economy - but the legal profession. Lawyers, he says, will gain lucrative business explaining to financial institutions what the increasingly dense rules mean.

Simplicity is the best defence for taxpayers and citizens, says Niall Ferguson, as it is the only way to ensure a complex financial industry becomes less fragile. Discretion should replace compliance. Combined with this should be strong central banks, run by people of wisdom and experience - and proper punishment for those who break the rules.

  • Do you believe we should have more - or less - financial regulation?
  • Is enforcement of regulation a problem?
  • How do you prove an investment bank was knowingly irresponsible - versus making a bad investment decision?
  • Is it just too late to simplify the banking sector?


Listen to Niall Ferguson's Reith Lectures

Download Niall Ferguson's 2012 Reith Lectures

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Niall Ferguson's second lecture, The Darwinian Economy, will be repeated on Radio 4 on Saturday, 30 June at 22:15 BST.

The third lecture in the series, titled The Landscape of the Law, will explore the rule of law in comparative terms - and its role in the development of countries such as China. This will broadcast on Radio 4 on Tuesday, 3 July at 09:00 BST.


  • Comment number 1.

    Niall Ferguson's central thesis is that deregulation of banks did not cause the crash. However, he needs to establish this thesis in face of the work of David Moss at Harvard Business School. https://www.nytimes.com/2010/08/22/weekinreview/22story.html?_r=3&src=twt&twt=nytimesweek
    Moss' key finding is expressed in a graph here: https://www.tobinproject.org/sites/tobinproject.org/files/assets/BankFailures_ChartwithComments_Moss.pdf

    It relates income inequality measured as share of income held by the top 10% of the pile compared to bank failures going back to 1917. There is a very clear correlation between income inequality and bank failures. It is strong backing evidence for the position of the Equality Trust - that greater equality is better for social cohesion. https://www.equalitytrust.org.uk/why

    Of course, correlation is not causation, though causation must always be accompanied by correlation.

    Naturally Niall Ferguson will wish in to deny causation, because it negates his free market assumptions. He has an easy task, because it is always impossible to "prove" causation, because it is not a matter of irrefutable positive logical deduction, but rather a matter of inference, of pattern recognition. This recognition is very much related to our basic assumptions, as well as a mounting body of evidence. Neo-liberals will be far slower to recognise causation in David Moss' observation than someone who understand the scientific truth that man is a social animal.

    One of the elements necessary for recognising causation is finding a plausible mechanism to relate cause and effect. So the question is, how could income inequality cause bank crashes?

    There is a possible mechanism in the capacity of humans to suffer from biolar illness - manic depression as was. If we look at the financial markets through the lens of a psychiatrist, it is very easy to see the parity between the individual mood swings of the bipolar sufferer, and the boom-bust mood swings of the society of market traders.

    This idea is developed here: https://greenerblog.blogspot.co.uk/2012/06/how-could-income-inequality-causes-bank.html

    The root problem with Niall Ferguson's reasoning is trying to isolate the banking sector from the real economy, which is, or rather, ought to be, founded on ecology. He, as a free market fundamentalist, has come unstuck from reality, just as a bipolar sufferer comes unstuck from reality.

  • Comment number 2.

    First of all Niall Ferguson does not mention that salaries in the US have not gone up since 1973 and that for the past decades Americans have been dependent on ever cheaper Chinese imports and on the rise of property prices which allowed them to remortgage their houses annually. In fact it is estimated that the remortgaging of their homes pumped in 4 trillion dollars annually into their economy. So when the property crash happened suddenly many of the American's income were dramatically reduced.

    Now take Germany in the nineties and the reunion, and see how Germany coped with this challenge. See how it managed to be an world economic leader with I believe has no deficit, but with a great welfare system. Look at Finland that was in dire straits in 1992 and today also has an excellent welfare system and a AAA credit rating. Sweden is the fastest growing economy in Europe. Now, each one can draw their own conclusions.

    Countries usually grow out of debt, although cuts need be made, growth should always be the main objective, and the Tea Party folks never argue about fair pay, it seems they want the boss to get all the money because: "he/she is more developed according to Darwinian law , and therefore deserves so" All these Darwinian hypotheses smack of racism, classism and offer some a feeling of entitlement to be greedy and exploit people's labour for very little.

  • Comment number 3.

    When I heard the headlines of today's Reith Lecture I expected that I wouldn't agree with any of the content.

    However, I find that I agreed with quite a lot of what was actually said, especially about the need for action (of Central Banks - but I also assume all of the Banks) to be based on discretion and not a fixed set of complex rules; rules so complex that no-one really understands them and which requre an army of lawyers to help you find your way through

    I have always been against fixed rules, such as x% of GDP spent on public sector acceptable but x + 0.1% bad. What is required is judgement and understanding, and this is what makes someone worth their salary not knowing the ins and outs of a set of complicate rules which are applied without thought.

  • Comment number 4.

    In the part of the talk I bothered to listen, Ferguson seemed to be making bald statements without without backing them up in any way. I switched off since I must be the only person in the world who does not know anything about Mesopotamian economics. The talk was clearly not meant for me.

  • Comment number 5.

    No other Ferguson product better illustrates how emphatic but vacuous Ferguson is: he repeats his claims ad nauseam, that the economy is "complex" without ever describing that complexity, no evidence, no analysis, no understanding of economics, just anecdotes. Thanks BBC for wasting my license fee on an academic hack for your annual Reith lecture.

  • Comment number 6.

    The only reason Mr Ferguson got this gig must be as part of the Jubilee junket.
    He takes a long time to come to the wrong conclusion. He should start from peoples need instead of rich mens greed.

  • Comment number 7.

    For all his historical delving, Professor Ferguson appears not to have noticed the significance of the bottom line, in finance as in all of business and all of life.

    When, with Professor Challenger and party, Lord John Roxton escaped from The Lost World, he 'would not hear otherwise' than that a quantity of found diamonds should be shared equally, to the enrichment no doubt of the cultural roles of all.

    From the study of history and imagination, even of myth and theology, truth will eventually tell, but contradiction should warn of need for care. In Conan Doyle's tale an adventure was shared by characters of good heart, let down only by their supposed native guide.

    Professor Ferguson has noticed benefit to all from past extensions of liberty, from the recruitment to enterprise of ever more populous lower and lower tiers of the social pyramid. Perhaps over-conscious of the Burkean respect we owe to the past, the offered interpretation of Burkean 'care for the future' appears oddly pedestrian, simply that we should wish - against declared 'realist' expectation - to see the creation of numbers of 'new banks of old style', all to be overseen by a Central Bank, empowered by the commercially wise to be… wise.

    Remarkable in the context of care for 'institutions' as against personalities, mention was lacking of the institution of 'democracy', of the extension of liberty equally to all, and so of progress towards better representation of The People. With respect to the current still gathering financial and economic crisis, the professor's focus was rather on which 'personalities' might most be to blame for regulatory failure, naive borrowers, populist politicians or helpless bankers.

    We are invited to dismiss 'counsels of perfection', populist or academic or both, instead to put our trust in grey-haired discretion, success for all to be ensured by the existence of severe penalties for failure, as if such failure could not readily be excused 'in good faith'. Having 'someone to blame' will unfortunately again be of little help, the milk spilled and the cause being 'institutional'.

    So far, Professor Ferguson has presented only an 'end-on' view. Sue Lawley played down hope of support for Occupy Wall Street, but perhaps the professor will allow himself a look at one side or other of our actual problem: the inseparable duo of democratic deficit and incentive perversity.

  • Comment number 8.

    From some comments you'd be forgiven for thinking people hadn't even bothered to listen - or even kept an open mind.

    Clearly F was using his historical persepctive to contrast different periods of differing levels of financial regulation. His point being that over-complex regulation had made it harder to police the market. Lawyers continue to rule as politicians fail to create simple frameworks to allow the guilty crooks to be locked up. 'Sir' Fred doesn't need to worry.

    I think we can take the complex nature of the market as read - duh!

    What F presented was an intellegent analysis of the complete regulatory failure to identify, contain and punish greed. The failure to appreciate his explanation of this in the proper historical context - I can only put down to preconceptions about him.

    His previous lecture highlighted the democratic issue and the limits to our system - politicians competing with each other to spend our money and rob from our children - the result being bankruptcy all round. Democracy as the best of all bad forms of govt but clearly it has had a role in getting us into this mess with continual deficit spending levels that would even have Keynes spinning in his grave.

    'no understanding of economics' - perhaps Harvard or the LSE should employ you instead of a prof of economic history with umpteen books on the history of finance? I think I'd trust someone whom I heard predict the US crash a few years before it came first.

  • Comment number 9.

    ScottishTaxPayer @8
    "the democratic issue"

    Many have written "umpteen books", and we can be grateful for Professor Ferguson's contribution without necessarily agreeing with his analysis.

    There is more, much more, to "the democratic issue" than either the professor's observation or Churchill's "best of all bad forms".

    Neither Churchill as a practising politician, nor Ferguson as an employed academic with a certain lean, should be thought entirely free publicly to develop or to change their views on the state of our 'democracy'.

    Inconvenient though it might currently seem to some, dismissible on our behalf though it might seem to Professor Ferguson, 'democracy' does have a reachable meaning beyond 'that which we have' in such variety across the world.

    'Who or what governs us', is not a small issue: it would be very surprising not to find the answer relevant to an "intelligent analysis" of "the complete regulatory failure" that you believe the professor to have "explained".

    If you will accept Lincoln's democracy, "of, for, by The People", choice follows between the Equal People and the Unequal People, in the former case between the transiently or permanently Equal, and in the latter between Caste Inequality and Chaotic Inequality (called by some 'competitive').

    The best regulation, of course, will be by the best people for the job, free to act in conscience, meaning free from corrupting conflict of interest, not just in high finance but in every field, factory, office and pulpit in the land; a condition only to be met when we have understanding and agreement on income-share equality, as the essential basis of subjective trust and objective democracy.

    I 'predict' that without genuine democracy, we will struggle to reach Full Employment or a World at Peace, perhaps not even try.

    Is your faith really in the rule of Fear and Greed?

    Our academics need challenge, not easy rides.

  • Comment number 10.

    Can Niall please not wear so much makeup and stop turning his collar up? Looks like the victim of a severe mid-life crisis

  • Comment number 11.

    "Like Bagehot, I take the world as I find it"

    And so, advise extreme care in change?

    Or see urgent need for radical change?

    Or just use Bagehot as authority for… whatever?

    From amoebae we came, 'like amoebae' we find ourselves… and so?

    Just because we are 'born ignorant', because we can be misled in childhood, may spend our adolescence in denial, and like Ferguson may choose 'to accept' (a position on the world) 'as I find it'…

    Just because so many in the past were denied the opportunity of 'socialisation', denied the attitudes - to each other, to work, to wonder - that would have enriched their own lives and others…

    Just because 1-3% 'suffer' from 'psycho-sociopathy', an absent or lesser empathy, sometimes 'seeing them to the top in the rat-race'…

    Does that mean we, as adults, must 'believe in' and teach anti-socialisation?

    Should we not even mention equality, a choice, even if just for 'peace to be selfish'?

  • Comment number 12.

    Those who listened carefully to this lecture will have noted that it contains a fundamental self-contradiction. After claiming that "bad regulation" rather than "deregulation" is (was) responsible for the banking crisis, he then goes on to delineate a process that can only be described as....wait for it...deregulation. He doesn't say so, of course, because that would counter his purpose which is essentially political
    Krugman described Fergson as a "poseur...who hadn't bothered to understand the basics (of economics)". He is largely right.

  • Comment number 13.

    I’m disappointed at Niall’s pessimism regarding banking reform per Kotlikoff (see the UK campaigning website postivemoney.org which is more or less what Kotlikoff argues for). With this reform regulation becomes automatically simplified. Niall says he deals with the world as it is, well ok, but if he does think positvemoney type ideas have legs then a Reith lecture is a good platform to put them into the public arena as they still very much are not there. Too timid then.

    Tinkering and trusting in wise men (women) is not going to cut it - Niall must know that. He must also be aware, as a historian, that from time to time radical reform is possible and that sometimes there are revolutions – who’s to say the Europe’s revolutions are all behind it. Failing to put the alternatives out there when given the chance is disappointing. Of course I could be less charitable toward Niall and see him as a Neo-Classical Economist (NCE) apologist and appeaser and therefore part of the problem who should therefore have rocks hurled at him too.

    I agree that legislation and regulation around the banking system is hugely over complex and mainly benefits lawyers. But there is a parallel in the tax system too, maybe he’ll discuss that in one of the lectures that remains. For now I will speculate that Niall is an advocate of a flat tax +/or consumption tax regime. These probably will be simpler (than the present system) but I think are inherently unfair as they fall as heavily, indeed more heavily on the poor and than on the better off. In short they are regressive. So what we have is the complex tax systems of today which try to tax mobile individuals and ephemeral companies but are most successful at taxing ordinary working people. The attempt to make this system “fair”, given the political push and shove, within the NCE paradigm give us a Tolleys guide to the tax system over 11,500 pages long (in 2009 – longer now I believe – it’s not just us almost everywhere else has similarly complex tax systems – not least the US). Moreover this NCE mandated system taxes Economic activity and worse taxes it heaviest in the most marginal locations resulting, for example, in the UK’s London centric economy. This system is a charter for parasitic Tax Accountants and Lawyers and makes either liars or fools of all of us.

    Alternative tax system is Landvaluetax as proposed by Henry George in Progress and Poverty some 140 years ago and buried by the NCE consensus (Mason Gaffney - https://homepage.ntlworld.com/janusg/coe/%21index.htm Corruption of Economics). UK nearly got a landvaluetax in 1909/11, the attempt being thwarted by the House of Lords (I now understand the Liberals pre-occupation with changing that institution).

    Taken together these two reforms (postivemoney and landvaluetax) take the Ponzi and too big to fail problem out of the financial system and vastly simplify and regularise the tax system.

    Niall isn’t the only reasonable sounding man out there who thinks things should change he’s just one who perhaps has acceptable ideas for today’s plutocrats, timid politicians and lazy minded and confused voters (of course I know that's a terrible thing to say).

    Will they be allowed to get away with maintaining social order until the debt is paid down enough for the merry go round to start again and with just enough reform to limit the worst excesses, for a bit, when the upturn finally arrives. I hope not, but Niall may be right that that’s the best we can hope for – that seems to be what he’s offering us.

    I also like Steve Keen and his “Debunking Economics” and especially his idea for “the other jubilee” https://www.debtdeflation.com/blogs/.

  • Comment number 14.

    I find it strange that a Scotsman should think 'England' and 'Britain' are interchangeable.

  • Comment number 15.

    When organisations are in trouble, they often go back to first principles - as for example the Church did during the Reformation. Robert Townsend in his excellent management book "Up the Organisation" has a chapter on "The man from Mars"., in which he suggests looking at the situation as a complete outsider. Our Martian would start by asking why we have banks, capital markets and stock markets; the answer he would get is similar to Bob Diamond's responses in an interview with the BBC: to create a strong economy by financing individuals, companies and governments so that they can grow and prosper, thus creating wealth and better living conditions for all. (possibly rather simplistic but I'm sticking to very basis principles - Martians aren't very financially sophisticated)

    On that basis issuing, buying and selling bonds and shares is our way of doing that and it works well. But I fail to see how much of the dealing and the vast majority of financial instruments contribute to those objectives. How does short selling help a company? How do the computerised micro second share dealing programmes help the economy? I know little detail about derivatives but I'm aware that they are inherently unstable (ironically something that stock markets dislike) and that they played a major part in the recent crash. However I fail to understand how they do anything to help the real economy. By "real economy" I mean the one that grows, extracts, makes or sells real things - not the financial world of wheeling and dealing. So why are they allowed? They are simply there to make money. Of course companies make money as a result of what they do but there is a real product or service. The money that is made by the financial tacticians is either not there at all (too often in the recent past) or is taken out of the real economy, since you can't create money apart from by quantitative easing (now there's a euphemism). This is not what the banks and markets should be doing.

    I think our Martian might be rather puzzled to see that we have developed a financial system part of which now does the exact opposite of what is was set up for, and that we are not even talking about doing anything about it. Well that's not quite true; we are formalising it by suggesting that one part of a bank should be set up to meet the objectives of real wealth creation and the other part will be set up to trade, gamble and operate financial systems that give no help to the real economy and have recently helped to cause many of our problems. Unbelievable? No - it's what is proposed, and as was said by Merryn Somerset Webb, the firewalls won't work; so effectively we are doing nothing.

    A friend who works in the Merchant Banking sector told me that merchant banks are back operating in exactly the same way as they were before 1998 and I was interested to hear on the BBC programme "More or Less" that Goldman Sachs were called in by Greece to re-engineert their debt by hiding 75% so that they could gain entry to the Euro. Presumably the Germans and others put the telescope to their blind eyes when checking the documentation. With organisations set up to undertake that type of financial engineering and duplicity we are going to continue to have financial crises as long as they are allowed to do so. So at least part of my solution to the current problems is to ban derivatives and short selling (the latter I believe is sometimes done for short periods of time.)

    There was also an excellent BBC play about dead goat futures some time ago which was a brilliant allegory on the futility of what is happening in the financial world.

    Most of this was written before the Libor scandal which only underlines the need for radical reform and the futility of relying on firewalls.

    Am I the only person who has suggested such radical reform?

  • Comment number 16.

    Delighted to see Professor Ferguson give due weight and praise in his Lecture to the relevant work of the great Victorian, Walter Bagehot. For much more on the life and work of Bagehot, go to the new website: www.bagehotlangport.co.uk.

  • Comment number 17.

    Llistening to this second lecture a second time, I found, I have to admit, one or two things which, if I do not wholly agree with them, at least I incline more towards. Nevertheless, with both listenings, a nagging....something....intervened between the argument and my grasping of it. I thought at first it was a visceral dislike, on my part, of the Professor's dogmatic/pedantic spelling the message out, as if he were talking to uncomprehending children (I exclude from this, his more-normal tone when answering questions -apart from his needless rudness over Occupy). What coluld it be...? Gradually it dawned on me that what I was hearing was the tones of the National Theatre. The National Theatre of Brent. I began to expect that at any moment his alter ego would butt in with 'Wall-to-Wall Badgersett' (to be corrected by his stage-whispering original ego with: 'No! Walter Bagehot!!', only to persist in mispronunciation). He did, though, make one or two intentional pleasantries, witnessed by forced laughter from the audience.

  • Comment number 18.

    The financial crisis had its origins in the boom bust business cycle, the monopolisation of capital and the desire of governments to use credit, however dodgy, to get us out of the last crisis. Regulation would not have sorted this. To that extent alone Ferguson is right. The problem is that Capitalism has a shelf life and it is already past its sell by date for the majority of the worlds people. It is not environmentally sustainable either, a point that he glossed over in his first lecture. Neo liberal solutions have been throroughly debunked by more weighty intelectuals from Chomsky and Zizek to Klein. However, centrally managed economies have failed misserably. We can no longer sustain economic growth and survive as a species on this planet but we do need to manage an economy that delivers more equality of wealth and opportunity and a more even quality of life for all. How to do this should be the real debate. A market economy is clearly not the answer.

  • Comment number 19.

    I thought this lecture inconsequential and displaying the same hypocracy that the lecturer beleives is the root cause of the fall in standards of our leadership. For example, a celebrity's (Jimmy Carrs') taxation arrangements were mentioned. But it is a very obvious and simple fact that those taxation laws were completely legal and ridiculously over-complicated because our legislators have made them exactly that. But the media censure was directed at the celebrity, and not the legislators that enacted those exact regulations. The lecture then went on to state that it was up to us, the civil society, to bring about change, but then went on to state that it was not willing to criticise the prime minister or our legislators.
    Really? So, its up to the civil society to bring about change, but without directing censure towards those who are responsible for institutional failures. Such complacent hypocracy is startling coming from a lecturer who really should be sufficiently aware to know better.
    Perhaps the next lecture will describe how to bring about change by just wishing for it terribly hard.

  • Comment number 20.

    In one of Niall Ferguson`s lectures he says that the current debt situation was caused by the "Baby Boomers".
    Well I suppose I`m one of these as I`m 65 but as I`ve only ever borrowed a small amount of money for a mortgage (1974) I resent being included in the cause of UK`s debt crisis. When we were younger you had to jump through hoops to borrow money. It`s only this younger generation that borrow money for fun!!
    When Gordon (the pension thief) Brown became Chancellor and his side kick Ed Balls, suddenly we started being bombarded with leaflets through the door advertising easy money.
    Along with the greedy banks luring people into mortgages and loans that they could not afford, the younger lot fell for that hook line and sinker.
    Now it`s the baby boomers who are saving the day by reluctantly having record low interest on their life time savings and struggling to make ends meet.

  • Comment number 21.

    "throroughly debunked by more weighty intelectuals from Chomsky and Zizek to Klein."

    Klien an "intellectual" really. Her writing lacks intellectual rigour; instead she draws largely on fiction constructions and the building of conspiracy theories. Her analysis is absurdly flawed; almost laughable.


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