For example, in Why Nations Fail, MIT’s Daron Acemoglu and Harvard’s James Robinson present the results of 15 years of research into the rise and fall of countries and their economies. It is a far cry from the CEBR analysis, arguing that what differentiates countries is the quality and effectiveness of their economic and political institutions.
Capitalism has to be shaped and governed to allow the new to continually reshape and even destroy the old. It has to allow multiple runners and riders, lots of experimentation and harness whole societies into accepting and taking risks. This happens best when economic and political institutions do not fall into the hands of one party or a group of self-interested oligarchs who essentially extract value. They need to be open and inclusive, constantly pushing back against the wealth extractors.
Acemoglu and Robinson are right, although inclusiveness and accountability go well beyond the democratic political institutions on which they focus — and for whose lack they doubt predictions of China’s continuing inexorable rise. It extends to the integrity and soundness of the financial system, how effectively governments accept the risk of investing in frontier technologies that private entrepreneurs never undertake alone and how companies are prevented from falling into the hands of self-interested, overpaid boards and ensuring that workplaces are inclusive too.
However, they do recognize, along with the IMF and the Organisation for Economic Co-operation and Development, that growing inequality menaces vigorous societies. It is a proxy for how effectively an elite has constructed institutions that extract value from the rest of society. Professor Sam Bowles, also part of the INET network, goes further. He argues that inequality pulls production away from value creation to protecting and securing the wealthy’s assets: One in five of the British workforce, for example, works as “guard labor” — in security, policing, law, surveillance and forms of IT that control and monitor. The higher the inequality, the greater the proportion of a workforce deployed as guard workers, who generate little value and lower overall productivity.
The CEBR does warn that the breakup of Britain, if Scotland votes for independence, would qualify its optimistic predictions. However, it never asks why Scottish voters might be so disillusioned if the euro-skeptic, low-tax, low-regulation world it paints is so rosy. Perhaps the Scots understand better than conventional economists what is really going on.
More of what the CEBR recommends as the route to future riches — placing our faith in markets and individual incentives along with disregarding inequality and the dysfunctionality of our institutions — could break Britain up.
It is also reason to be sceptical about most of its projections. Will China, Russia and Mexico, governed by extractive elites, really do so well?
Is Europe such a write-off?
After all, Douglas McWilliams, the affable euro-skeptic who runs the CEBR, warned more than two years ago that European leaders had a month to save the euro.