Economics is a subject that frequently adopts such absurd notions that one can gain great acclaim simply by debunking them. This is a possibility which Niall Ferguson exploits to the full in his brilliant new book. Ferguson, Professor of Political and Financial History at Oxford, introduces his book as a critique of economic determinism. He sets out to disprove the idea that economic change is the motor of history, that economic growth promotes democratisation, that economic success ensures reelection and that economic strength is the key to international political power. In challenging the reality of homo economicus, Ferguson's guiding assumption is that conflicting human impulses - sex, violence and power - are individually and collectively capable of overriding the economic motive.
The central argument of the book, which was assessed in the Business This Week section of The Irish Times earlier this month, is that political events, above all, wars, have shaped the four key institutions of modern economic life: the tax collection bureaucracy, central banks, bond markets and stock exchanges. Moreover, it has been domestic political conflicts - often over non-economic issues like religion and national identity - that have driven the evolution of modern political institutions: above all, parliaments and parties. Ferguson explicitly claims, but does not demonstrate here, that it was these fiscal and financial institutions, initially created to serve the state by financing war, that also fostered the development of the economy as a whole. In this regard, it is revealing that the book contains almost no mention of another key institution, the company. Overall, his work can be seen as a significant contribution to the "new institutionalism" in economics and the other social sciences. Ferguson is at his best on the history of the fiscal and financial systems. He traces the evolution of taxation to the demands of war and shows the gradual transformation of the warfare state into the welfare state. But tax alone was not enough. To smooth out the costs of wars, to spread the expense into the years of peace, a system of sustainable government borrowing was necessary. He provides a brilliant account of how the bond market developed and the factors which determine a state's ability to service its debts. A state like Hanoverian Britain could sustain a very large national debt provided the interest on the debt was kept down. Where excessive indebtedness was incurred, states took recourse to default and inflation. Ferguson traces the evolution of central banks - and debates on the economics of money and inflation - from indiscretion in the 1920s and 1960s, to independence in the 1990s, and suggests that they are heading towards irrelevance.
In the third part of the book, Ferguson examines the political dimension of public finance and the economic dimension of elections and political parties. Here he is less persuasive. After an excellent discussion of how the conflicting interests of the rentier, business and worker played out in the 19th and 20th centuries, he argues that these conflicts are being replaced by a conflict between generations. Using the recently invented "generational accounting", he claims that most European countries have a system of universal entitlements, particularly pensions, that is unsustainable.
Ferguson adopts the theory of generational conflict with typical zest and confidence. But recent research, which takes account of private as well as public transfers between generations, suggests that European society shows little sign of generational conflict. Pensions have not set the young against the old. Indeed, it can be argued that it is precisely because of welfare systems that relations between the generations have been reinforced, despite the increase in life expectancy. While some of the absurdities of welfare and pension provision in some EU countries should clearly be corrected, it is possible that a large-scale erosion of welfare would provoke precisely the kind of conflict which Ferguson sees arising because of universal entitlement.
Finally, Ferguson turns his attention to the interaction of money and power in the international system. He restates the wellknown observation that current globalisation scarcely exceeds that between 1870 and 1914. His interest, however, is in the fact that the first financial globalisation collapsed and the lessons this might contain for the present. In particular, he is concerned that the US, which might play a hegemonic role underwriting international financial stability, is not an exporter but an importer of capital.
He offers a disappointingly conventional analysis of European Monetary Union, dressed up with an unconvincing twist of his own. Apparently the historical antecedents of EMU lie in the Austro-Hungarian Monetary Union after 1867, the Latin Monetary Union (1865-1927), and three short-lived recent monetary unions: in the Confederation of Independent States of the former Soviet Union, the former members of the Federal Republic of Yugoslavia and that between the Czech Republic and Slovakia. All these demonstrate that "asymmetric fiscal problems quickly cause monetary unions between politically independent states to dissolve". Comparing European Monetary Union to these is faintly ridiculous and suggests that Ferguson has little feel for the political economy of European integration. In addition, to get mileage from the comparison, Ferguson invokes his dubious theory of unsustainable generational transfers: "In the case of present-day Europe, it seems quite possible that the strains caused by unaffordable social security and pensions systems could have a similar centrifugal effect: the Hapsburg scenario, with welfare substituting for war as the fatal solvent". This approach is unfortunate, since European economic and monetary management faces real issues, which could be illuminated by history. It reflects the one weakness of Ferguson's extremely readable book, the occasional tendency for brilliant analysis to descend into mere cleverality. But he does open his discussion of Europe by noting that "From conception, through gestation, birth and into its early infancy, the euro has consistently proved the sceptics wrong".
Rory O'Donnell is Jean Monet Professor of European Business in the Department of Business Administration at University Col- lege Dublin. His book, Europe's Experimental Union (with Brigid Laffan and Michael Smith) was published by Routledge last year