Books: “Why Nations Fail”

Daron Acemoglu and James A. Robinson’s Why Nations Fail: The Origins of Power, Prosperity, and Poverty is in many ways a liberal response to Jared Diamond’s biogeographical explanations for unequal economic development in Guns, Germs, and Steel: The Fates of Human Societies, but along the way they provide biting criticism of the Washington consensus and truisms of development policy. Contra the Washington Consensus, for example, they make the point that (despite the virtuous circle of inclusive political and economic institutions) economic growth should not be expected to lead to political liberalization, since inclusive political institutions are fundamental to economic development, not the consequence of it. Their book is heavily rooted in economics and political economy while remaining a very accessible read, although some of the importance of private property rights, free markets, technological innovation, and creative destruction may escape readers who do not have a solid foundation in economics. The book offers a broad historical overview of development in dozens of modern historical societies. Occasionally, Acemoglu and Robinson apply their theory to some prehistoric societies, where the results are overly speculative and unconvincing—Jared Diamond may be more convincing in the premodern era, whereas Acemoglu and Robinson shine when explaining contemporary inequality. This is a fine explanation of contemporary differences in economic circumstances, although at times it seems overly broad.

Central to our theory is the link between inclusive economic and political institutions and prosperity. Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few and that fail to protect property rights or provide incentives for economic activity. Inclusive economic institutions are in turn supported by, and support, inclusive political institutions, that is, those that distribute political power widely in a pluralistic manner and are able to achieve some amount of political centralization so as to establish law and order, the foundations of secure property rights, and an inclusive market economy. Similarly, extractive economic institutions are synergistically linked to extractive political institutions, which concentrate power in the hands of a few, who will then have incentives to maintain and develop extractive economic institutions for their benefit and use the resources they obtain to cement their hold on political power.

…Extractive institutions that have achieved at least a minimal degree of political centralization are often able to generate some amount of growth. What is crucial, however, is that growth under extractive institutions will not be sustained, for two key reasons. First, sustained economic growth requires innovation, and innovation cannot be decoupled from creative destruction, which replaces the old with the new in the economic realm and also destabilizes established power relations in politics. Because elites dominating extractive institutions fear creative destruction, they will resist it, and any growth that germinates under extractive institutions will ultimately be short lived. Second, the ability of those who dominate extractive institutions to benefit greatly at the expense of the rest of society implies that political power under extractive institutions is highly coveted, making many groups and individuals fight to obtain it. As a consequence, there will be powerful forces pushing societies under extractive institutions toward political stability.

The synergies between extractive economic and political institutions create a vicious circle, where extractive institutions, once in place, tend to persist. Similarly, there is a virtuous circle associated [with inclusive economic and political institutions].

These vicious circles motivate the iron law of oligarchy, and can be avoided when broad-based diverse coalitions come to power at critical junctures and enable new groups to prosper.

Why Nations Fail also skirts around a few issues. First, there appears to be a tradeoff with political centralization: too little and the state cannot provide basic safety or property rights; too much and it is easy for a narrow elite to seize the entire state. But it appears that a state can be both too centralized and too small: unable to secure the nation’s entire territory while at the same time being easy to monopolize.

Also, much of what extractive economic and political institutions do is labor exploitation. These institutions are constantly trying to erode the social position of labor, to make extraction easier and cheaper. In some cases, they are exploiting cheap labor to extract agricultural or mineral goods, but in other cases, they are simply expropriating resources from the population itself.

The most memorable moments of the book were the profiles of diverse individual states, and it is astonishing to see historical leaders as diverse as the Roman emperor Tiberius and England’s Queen Elizabeth punishing or executing people who dared to dream up a technological innovation, in the fear that it might put people out of work and thus cause social instability:

During the reign of the emperor Tiberius, a man invented unbreakable glass and went to the emperor anticipating that he would get a great reward. He demonstrated his invention, and Tiberius asked him if he had told anyone else about it. When the man replied no, Tiberius had the man dragged away and killed, ‘lest gold be reduced to the value of mud.’

[William] Lee became obsessed with making a machine that would free people from endless hand-knitting. …Finally, in 1589, his ‘stocking frame’ knitting machine was ready. He traveled to London with excitement to seek an interview with Elizabeth I to show her how useful the machine would be and to ask her for a patent that would stop other people from copying the design. …[the Queen’s Privy Council member Henry] Carey arranged for Queen Elizabeth to come see the machine, but her reaction was devastating. She refused to grant Lee a patent, instead observing, ‘Thou aimest high, Master Lee. Consider thou what the invention could do to my poor subjects. It would assuredly bring to them ruin by depriving them of employment, thus making them beggars.” …Elizabeth’s successor…James I also refused, on the same grounds as Elizabeth. Both feared that the mechanization of stocking production would be politically devastating. It would throw people out of work, create unemployment and political instability, and threaten royal power. The stocking frame was an innovation that promised huge productivity increases, but it also promised creative destruction.