How the Mighty Fall

How the Mighty Fall
The Roman empire eventually lost its economic vitality thanks to price controls, heavy taxes and state-sponsored debt relief.

Book Review: Balance - WSJ.com
By Matthew Rees

One of the underappreciated realities of history is that most of it has been lived in relative misery. From the Paleolithic era 2.5 million years ago up to the early 19th century, average life expectancy topped out at about 35. And for much of this period, there was no such thing as economic growth—humans subsisted on what they could kill or scratch from the ground or on the proceeds of a minimal barter economy. While some civilizations outperformed others, sooner or later the standouts fell into decline. The reasons why, and the lessons for the United States, are the subject of "Balance: The Economics of Great Powers From Ancient Rome to Modern America," by Glenn Hubbard and Tim Kane.

The great powers in their story are a mix of empires (Roman, British, Spanish, Ottoman), dynasties (Ming China), countries (post-1868 Japan), regions (the European Union) and even a U.S. state (California). According to Messrs. Hubbard and Kane (dean of Columbia's business school and chief economist of the Hudson Institute, respectively), the decline of these polities has tended to follow a template or sequence of error: "denying the internal nature of stagnation, centralizing power, and shortchanging the future to overspend on the present." When the inability to corral fiscal profligacy coincides with a breakdown of political institutions, a toxic imbalance ensues and decline follows.

Before the great powers could decline, of course, they had to rise. How and why they did has been the source of a long and lively debate. An abundance of labor, land and capital was once thought to be fundamental, only to be upstaged more recently by a focus on an abundance of people, ideas and things. Messrs. Hubbard and Kane argue, as do others, that certain policies and core principles are the key: property rights, flexible work rules, open markets. For the authors, such matters explain economic growth entirely.

To those who would cite the primacy of technological breakthroughs, Messrs. Hubbard and Kane assert that inventions only spark growth if there are systems in place (such as intellectual-property rights) that enable inventions to flourish and their value to spread. "The wheel and the windmill were invented many times," they write, "then forgotten, until finally one society had the institutional framework to implement them widely and pass them on permanently." In short, "institutions explain innovation."

The flip side is true as well. The failure of institutions to adapt to evolving realities brings about decline. The prosperity of Rome, the authors say, was a byproduct of material innovation (they highlight the development of concrete) and also the political kind: a professional army, federalist governance, property rights and a hostility to hereditary rule. Over time, however, Rome's rulers imposed measures that sapped the empire's vitality: price controls, heavy taxes and a ban on the free movement of rural Romans. Of no great help was the first recorded example of state-sponsored debt relief: Hadrian, as emperor, canceled the outstanding liabilities that individuals owed to the central government, going back 15 years, and had the loan records burned in a public ceremony.

Another example of a great power that rose and fell—and is now rising again—is China. From the years 400 to 1000, the authors say, it had an estimated per capita GDP of $450, a third higher than Western Europe's. It rose to $600 by 1300, thanks in part to a number of inventions, from paper making to shipbuilding. The ships, in turn, enabled an exchange of goods with people throughout Asia.

But such dynamism proved unsustainable. A version of civil war led to an erosion of China's fleet and a decline in trade voyages. That some coastal areas continued to profit from barter prompted the regime's leaders to criminalize large-boat construction in 1500 and eventually destroy all oceangoing ships. Such moves, the authors claim, were emblematic of China's turn inward and its failure to capitalize on its inventions. The result was stagnant living standards until 1800. An even more profound source of China's trouble was institutional: The Chinese emperorship "morphed into a zero-sum struggle for influence among interest groups."

"Balance" closes with an examination of the woes afflicting California—which, if a stand-alone country, would have the world's 10th largest GDP (down from fifth not long ago)—and of the woes afflicting the U.S. as a whole. Messrs. Hubbard and Kane note that California's tax climate is among the most hostile to business formation of any state in the country. And the dysfunctional political system has contributed to both crushing debt levels and an inability to do anything about them.

For America, Messrs. Hubbard and Kane see "the storm clouds of history" gathering on the horizon. The culprits are again internal: political inertia and, because of wayward policies, the erosion of economic vigor. The authors are particularly critical of the government's overspending and recommend a balanced-budget amendment to the Constitution. And yet they are optimistic. "American democracy," they write, "has proven itself more powerful than all of the skeptics' and cynics' concerns." Maybe so, but the history of economic folly that they skillfully recount in "Balance" is a timely reminder that societies that seem invincible are often anything but.

Mr. Rees, the head of the speechwriting firm Geonomica, is a senior fellow in the Center for Global Business and Government at Dartmouth's Tuck School of Business.